Self-Employed or Limited Company? Key Factors to Consider

If you are thinking about starting a business, you are probably wondering which option is more suitable for you: becoming self-employed or setting up a limited liability company (LLC).

Both legal structures have their pros and cons, and the choice will depend on several factors, such as the type of activity you plan to carry out, your growth expectations, the level of legal liability you are willing to assume, and the tax structure that best suits your needs.

Do you already have it clear and just need a final push? We can help you.

Should I set up an LLC or become self-employed?

One of the first aspects to consider is the level of liability you are willing to assume.

The main disadvantage of being self-employed compared to an LLC is unlimited liability; in other words, you are personally liable for any debts that may arise with third parties.

On the other hand, a limited liability company is only liable with its own assets (although there are certain exceptions depending on each specific case).

We have a very detailed post where we explain everything you need to know about LLCs: Limited Company: characteristics and advantages.

Set up a company or register as self-employed?

Another key factor is that the process and formalities to register as self-employed are cheaper and simpler than those required to set up a company.

Here is more information for further reading:

1. Documents and procedures to create an LLC in Spain
2. How to register as self-employed without complications

In fact, becoming self-employed is completely free (registering with the Tax Agency and Social Security does not involve any cost). However, setting up a company does involve associated costs, in addition to the initial share capital contribution.

Limited company or self-employed: where do you pay more taxes?

Another key aspect to consider is taxation, as it can vary significantly depending on the chosen structure.

Self-employed individuals pay taxes through Personal Income Tax (PIT), in addition to VAT, of course. Meanwhile, LLCs are taxed through Corporate Income Tax (generally at 25%, or 23% for companies with turnover below €1 million during the first year).

Which option is better? It depends on the profits generated by the business, so it is advisable to consult a tax advisor.

In general, self-employed individuals tend to pay more taxes when profits are high.

As a rule of thumb, when income and turnover increase significantly, it is often a sign that it may be the right time to transition from self-employed status to a company structure.

 

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When is it more beneficial to be self-employed?

Registering as self-employed is recommended in the following cases:

• If your income is not high, as lower PIT brackets are more favourable than the flat Corporate Tax rate
• If you are starting a small or freelance activity with low expenses and no employees
• If you do not need significant initial investment or external financing
• If you prefer simple management with fewer administrative burdens
• If you want to avoid complex accounting requirements, as companies have more demanding accounting obligations

For more details: What are the accounting obligations of a company?

When should you switch from self-employed to a limited company?

Setting up an LLC may be the best option if:

• You have growth plans and want to protect your personal assets
• You want to distribute ownership, shares, and responsibilities among partners
• You expect to generate high income in the medium or long term, as Corporate Tax is often more favourable than PIT in such cases. Additionally, there are various deductions and tax benefits depending on the business activity
• You plan to make significant investments or seek partners or external funding
• You want to project a more formal and professional image to attract clients or suppliers
• You intend to apply for bank financing, as LLCs generally have easier access

In addition to LLCs, there are other types of legal structures. For more information: What types of companies exist in Spain?

Ultimately, there is no single answer to the question “which is better: being self-employed or running a company.” The right choice depends on each specific business. For example, some businesses may take years to generate profits, in which case operating as a self-employed individual may be more advantageous.

Do you need advice?

With our corporate advisory services, we can help turn your business vision into reality.

Do you have doubts about whether to become self-employed or set up a company? We can help you decide. Contact our team for more information.