Entrepreneurs often labour over which Tax classification best suits their work situation; here we offer a thorough analysis of the implications of the 7 criteria that should be considered prior to making a decision.
Before creating your business it is important to know the different legal options available.
In this article, we explain everything you need to know about the two most common legal forms in Spain.
Although there are other legal formulas, in this article we explain the criteria that you should consider when choosing between the two most popular choices in the country: the limited company (SLU) and the individual or sole trader (Autonomo).
Also, we analyze alternatives involving the Unipersonal Limited Company (SLU) and the entrepreneur limited liability (ERL).
¿Autonomo or SL? 7 criteria
There is no mathematical formula to determine with precision the type of company constitution that will best suited to your company.
The choice can depend on a number of economic, personal and commercial factors.
However, there are certain guidelines and criteria that can help you in choosing the kind of society that best suits your needs.
7 main criteria to consider are:
1) Liability: The main disadvantage of the individual entrepreneur regarding the SL is their unlimited liability.
The Autonomo´s (self employed individual) personal assets are drawn on for third party debts while the SL, as its name suggests, is limited and therefore only draws on the assets of the company.
2) Establishment of the company: the procedures and costs of setting up as an autonomo are much cheaper and simpler than those of an SL and the process is much faster.
You can become Autonomo in a single day, whereas becoming a limited company can take between 4 and 6 weeks.
3) Management costs: the cost of accounting for an Autonomo is often much lower when compared to that of the SL because the accounts are much simpler.
Furthermore, since the adoption of the flat rate for the first year and a half, the cost of being Autonomo is considerably lower.
4) Financial contribution: the creation of an SL requires the contribution of a share capital of 3,000 euros, while as Autonomo any input is not necessary.
However, that capital must be deposit into the bank, you must obtain the corresponding receipt and then you can dispose of the funds for business expenses and investments.
5) Tax: Autonomo contributions for IRPF is a progressive tax, so with great benefits the rate to be applied is greater than in the case of corporation tax, a fixed tax rate, namely 25 %.
But beware, this advantage is really only of value if the benefits are to be left as assets of the company.
If you want to take home the full benefit of your personal expenses, you have to pay tax on your salary or dividends; the end result is more or less the same.
6) Access to bank financing: In principle limited partnerships have easier access to bank loans, as the accounts of these business formations are clear and precise.
So the fact SL will always have greater economic confidence.
However, in both cases what is important in the end is the guarantee or warranty.
7) Business Image: the SL offers a more professional image of a larger and most reliable company, so commercially are often the most suitable option.
Many individuals start their business as an Autonomo and take advantage of the flat fee, the easier and cheaper option for doing business in Spain.
Once the business enterprise takes off and is achieving a high turnover, it is possible to switch to a limited company (SL) or limited company with sole owner (SLU).
¿SLU or ERL?
These new trading models stem from the need to create two new types of legal formats that conform to the current economic market.
To establish yourself as an entrepreneur with limited liability (ERL) you have certain advantages over the figure of the individual entrepreneur.
The most important is that you do not front your debts with your wealth, or at least your personally owned home.
Conditions of establishing oneself as ERL are similar to those of the Autonomo, except you are required to indicate in the Mercantile Registry and land Registry which property you wish to isolate from your economic activity.
Importantly, the property must meet certain requirements to be exempt from your corporate responsibility.
First, the value of the home cannot exceed €300,000 and if the house is located in a population of over 1,000,000 inhabitants, may not exceed €450,000.
This option is very advantageous for those individuals who want to start a business without having to risk personal property.
As for the Limited Shareholder Company, SLU, since the SL can also be formed by a single member, the only difference between these two types of companies is that SLU is expressed in all acts by the sole-shareholder of the society.
When the company is registered in the Mercantile register, it is important to ensure the difference is noted because if you do not the unique partner will be personally responsible, unlimited, jointly and severally to settle debts, as if they were an individual entrepreneur.
There is no difference between a SL and SLU with regards tax treatment.
This type of company is very advantageous for entrepreneurs who have or want to create a company that is expected to earn substantial profits, but without having to risk their own personal property.
Contact us for further information on Spanish taxation services.