When starting a business in Spain, choosing the right legal structure is one of the most important decisions an entrepreneur can make. The choice often boils down to two popular options: sole proprietorship (autónomo) or SL company (Sociedad Limitada). Each structure has its own set of advantages, drawbacks, and legal implications, which can significantly impact your business operations, taxes, and liability.
In this article, we’ll dive into the key differences between these two business structures and help you determine which might be the best fit for your entrepreneurial journey in Spain.
Understand the basics between Sole Proprietorship vs. SL Company in Spain
Sole Proprietorship (Autónomo)
A sole proprietorship, known in Spain as “autónomo,” is the simplest business structure available. It’s ideal for individual entrepreneurs or freelancers who want to start their business quickly and with minimal formalities.
- Who is it for?
This structure suits small-scale businesses, freelancers, and solo entrepreneurs who don’t need to raise significant capital or hire many employees. - Key Features:
- No separate legal entity: The business and the owner are the same.
- Full personal liability for business debts.
- Simplified registration process.
- Lower initial costs.
SL Company (Sociedad Limitada)
An SL company is a limited liability company, similar to an LLC in other countries. It’s a separate legal entity, which means the business has its own legal rights and obligations independent of its owner(s).
- Who is it for?
This structure is popular among entrepreneurs looking to scale their business, share ownership, or limit their personal liability. - Key Features:
- Limited liability: Owners are only liable up to their capital contribution.
- Separate legal entity.
- More complex setup process.
- Minimum capital requirement of €3,000.
Registration Process
Sole Proprietorship
Starting as an autónomo is relatively quick and straightforward:
- Register with the Spanish Tax Agency (Agencia Tributaria) by filing Form 037 or 036.
- Enroll in the Social Security system for autónomos (RETA).
- Choose your tax activity group (IAE code).
You can usually complete the process within a few days, making it a great option for those eager to start working immediately.
SL Company
Registering an SL company is more formal and involves multiple steps:
- Choose a unique company name: Reserve your name through the Central Commercial Registry (Registro Mercantil Central).
- Draft the Articles of Association: This outlines the company’s rules, ownership structure, and business purpose.
- Open a business bank account: Deposit at least €3,000 as the minimum share capital.
- Sign a public deed: Register the company with a notary.
- Register with the tax authorities and social security.
The entire process can take a few weeks and may require professional assistance from a lawyer or gestor.
Taxation
Sole Proprietorship Taxes
- Income Tax (IRPF):
As an autónomo, your business profits are taxed as personal income. Spain uses a progressive tax rate for IRPF, ranging from 19% to 47%, depending on your income level. - VAT (IVA):
If your business activities require VAT collection, you must charge and remit it. - Social Security Contributions:
Autónomos pay a flat monthly fee to the Social Security system, starting at around €230 per month under the reduced rate (Tarifa Plana), with higher rates as your business grows.
SL Company Taxes
- Corporate Tax (Impuesto de Sociedades):
An SL company pays a flat corporate tax rate of 25% on its profits. - VAT (IVA):
Similar to sole proprietorships, SL companies are required to collect and remit VAT for taxable activities. - Social Security Contributions:
As the owner and potential director of an SL company, you must contribute to social security, either as an autónomo or as an employee, depending on your role.
Liability
One of the most critical differences between these structures is the level of liability.
- Sole Proprietorship:
You are personally responsible for all debts and obligations of the business. If the business fails, creditors can pursue your personal assets, including your home or savings. - SL Company:
As an SL is a separate legal entity, your liability is limited to the amount of capital you invest in the business. This separation provides a safety net, making it a preferred option for higher-risk ventures.
Costs and Maintenance
Sole Proprietorship
- Initial Costs: Minimal, mostly limited to registration fees and any gestor assistance.
- Ongoing Costs:
- Social security contributions (RETA).
- Simplified bookkeeping (although some taxes require professional help).
SL Company
- Initial Costs: Higher, including:
- Notary fees.
- Registration with the Commercial Registry.
- Minimum capital requirement of €3,000.
- Ongoing Costs:
- Social security contributions.
- Accounting and legal compliance fees, as SL companies are required to maintain detailed financial records and file annual accounts.
Scalability and Growth
- Sole Proprietorship:
While autónomos can grow their business, scaling is more challenging due to personal liability and the difficulty of raising external funding. - SL Company:
An SL structure is better suited for growth, as it allows for multiple shareholders, easier access to bank loans, and external investment. Additionally, the limited liability feature makes it more attractive to potential investors.
Flexibility
- Sole Proprietorship:
Autónomos have full control over their business operations but may struggle with work-life balance due to the hands-on nature of this structure. - SL Company:
While the SL structure introduces more administrative overhead, it offers greater flexibility in terms of ownership transfer, partnerships, and employee hiring.
Which is better for entrepreneurs in Spain?
The choice between a sole proprietorship and an SL company ultimately depends on your business goals, risk tolerance, and long-term vision.
Choose Sole Proprietorship if:
- You are a freelancer or solo entrepreneur.
- Your business involves minimal financial or legal risks.
- You want a quick and cost-effective setup.
Choose SL Company if:
- You plan to grow or scale your business.
- You want to protect your personal assets.
- You anticipate the need for external investment or partners.
Conclusion
Both sole proprietorships and SL companies have their merits and drawbacks. For many entrepreneurs in Spain, the choice boils down to the size, scope, and risk level of their business. While autónomos offer simplicity and affordability, SL companies provide a solid foundation for growth and liability protection. Assess your business needs carefully, and if in doubt, seek advice from a legal or financial professional to ensure you make the best decision for your entrepreneurial journey in Spain.
If you are planning to set up your company in Spain, book a consultation call with our Spanish incorporation expert today.
