Commercial Activities

I want to start a business activity: is it better for me to be self-employed or to set up a Limited Company?

In order to make this decision, it is important to individually assess the responsibilities and benefits of each of these possibilities:

One of the things to take into account is the type of taxation.

• A company is normally taxed at a fixed rate of 25%. Although some under the provisions of art. 29.1 of Law 27/2014 on Corporation Tax can apply for the reduced rate of 15%.
• An individual trader or legal person will be taxed based on their profits, and the taxation rate can range between 15% and 45%.

Another issue to consider is liability.

• The individual entrepreneur (self-employed) will respond to both third parties and any possible debt with all their assets, both present and future.
• In a limited liability company (SL) the liability is limited to the contributed capital, and in the event that debts are contracted, they are not liable with the personal assets of the partners, but rather with those contributed by said company.

A priori we could say that the figure of the individual entrepreneur is perfect for small businesses that are just starting out because it does not entail as many formalities or paperwork as a company, and is therefore cheaper. Hence, once the individual entrepreneur is consolidated as a company, they can adopt the corporate form that most interests them.

How to make a decision: self-employed or Limited Company

Normally, before registering you should analyse the different legal options you have.

It is necessary to study each case separately and decide what is best for the client.

The criteria to be taken into account will be the following:

Incorporation.

Usually, the costs of creating a company are higher than those of registering as an individual entrepreneur.

At the same time, the constitution of a company (CIF application, IAE registration, etc.), can take between 5 and 15 days more than when doing so as a natural person.

The difficulty of setting up a company is greater than that of registering as self-employed.

Capital

To set up a company you need an initial payment of 3,000 euros. Amount that will be allocated in the future to meet expenses of the entity as we will see.

As an individual or self-employed entrepreneur, no type of initial outlay is required.

Responsibility

The self-employed or individual entrepreneur is responsible for all of their activity’s debts with their own assets. His liability is unlimited.

In a company, liability is limited to its assets. With rare exceptions, neither the administrator nor the partners will ever respond if they have not personally endorsed it. Their liability is limited to the estate.

Accounting costs

In the case of a self-employed person, the management costs (accounting, consultancy, etc.) are usually lower than those of a company.

Social security costs

The difference is important with the appearance of the flat rate. If a self-employed person can take advantage of the flat rate, they pay €50/month, if they are self-employed, they can pay more than €360/month.

The company pays corporate income tax at a rate of 25%.

However, there is an important exception for entrepreneurs or newly created companies.

Royal Decree Law 4/2013 approved a series of incentives to promote the activity of entrepreneurs:

• A Corporate Tax at the reduced rate of 15% applicable during the first two years of creation of the SL. for tax bases of up to 300,000 euros. The excess will be taxed to the 20%.
• An exemption from personal income tax on the single payment (unemployment capitalization).

The individual or self-employed entrepreneur pays personal income tax, a progressive tax that is usually greater than 15%.