To answer this question, we need to distinguish between several levels.

In addition to the different taxation regimes, which is the decisive factor for many, the administrative burden also varies, and while the requirements for starting a business as a sole trader are easy to meet, setting up a company requires a much more costly and time-consuming investment. The same applies to the administrative requirements that arise during the course of business. Sociedad Limitada

To set up a Spanish limited liability company, the company must be established before a notary and the appropriate articles of association must be drawn up.

The fee payable varies depending on the share capital, the use of standardised or individual articles of association, the number of certified copies required, etc. However, on average, costs of around €300 can be expected.

In addition to the notary fees, there are further expenses for the name certification of the future company (the Central Commercial Register must certify that the name intended for the company may be used) and its entry in the Commercial Register. The books to be kept by the company must also be certified. An average amount of 250 euros must be budgeted for these items.

In addition to the unavoidable start-up costs, the most important item is, of course, the share capital. Although there is a theoretical possibility of paying the share capital in instalments, we will assume the normal case here. The minimum share capital for an S.L. is 3,000 euros.

Previously, a tax of 1% of the share capital was also payable (i.e. 30 euros for 3,000 euros). At present, there is an exemption (Article 88.I.B.18 Reglamento del Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados), although the relevant tax return must be filed in order to obtain registration in the Commercial Register (TSJ Madrid, judgment of 6 June 2012).

There must be at least one shareholder. However, there are usually several shareholders. In this standard case, there are no special features to note; the company name is simply followed by the company form, i.e. XYZ Sociedad Limitada, or abbreviated to XYZ S.L. However, if the company has only one shareholder, it must also bear the designation ‘Unipersonal’, i.e. in our example XYZ Sociedad Limitada Unipersonal, or simply XYZ S.L.U. Otherwise, the shareholder is liable alongside the S.L.

Anyone wishing to set up an S.L. must therefore have at least this amount, i.e. approximately £3,600, including formation costs and share capital.

If you require the advice of service providers or wish to have individual tasks carried out by third parties, their fees will be added, but these are usually deductible as start-up costs.

After its formation, the company is represented by the managing director. A company may also have several managing directors who may act separately or jointly on behalf of the company.

The advantages of a limited liability company over a sole trader are, in particular:

– Liability limited to the assets of the company
– More professional appearance
– Generally easier access to credit and financing
– Possibility of quickly and easily taking on new shareholders through the sale or transferring shares to quickly and easily take on new shareholders, which promotes cooperation and growth, as it also facilitates a binding and verifiable division of the respective rights and obligations.
– Extensive legal regulations and adaptability to specific needs, which guides the shareholders’ dealings with each other in a more orderly manner and thus creates legal certainty.
– Possibly more favourable taxation.

The following aspects must be considered disadvantages:

– Absolute transparency towards third parties (due to the obligation to file annual financial statements with the commercial register, third parties can access this information)
– Administrative work and costs (holding shareholders’ meetings, preparing annual financial statements correctly, filing them with the commercial register, etc. inevitably lead to additional work and costs)

Since both sole traders and managing directors are regularly subject to social security contributions (exceptions are liberal professions in which no commercial activity is carried out), both types of company usually have the same obligations towards the Seguridad Social (social security).

The decisive factor is therefore ultimately the tax treatment, because as soon as the savings achievable through a Sociedad Limitada exceed its operating costs, there are practically only advantages.

An S.L. pays corporation tax of 25% on its profits (in exceptional cases 10, 15, 20 or 30%). In the Canary Islands, this is only 4%.

A sole trader has to pay a progressive tax on their profits depending on the amount and their place of residence (the ‘Comunidades Autónomas’, i.e. autonomous communities, can subject their share of income tax to special regulations), which, after deduction of the general allowances and benefits for minor children, in the 2015 tax year, ranging from 24.4% to 56% (in Madrid and La Rioja, the top rate was 51.9%, and in Catalonia, it was 56%). In exceptional cases, the rates may be lower for new self-employed persons during the transition period.

As taxable income in Spain is subject to a progressive tax scale, which we can summarise as follows for 2015, it is generally more advantageous to operate as an S.L. if your taxable income exceeds €40,000.

So while only 19.5% is payable on the first £12,450.00, the tax on the next £7,750.00 rises to 24.5%. The next £13,800.00 is then taxable at 30.5%.

In contrast, the specific corporation tax rate remains constant at 25%.

With a taxable income of £40,000, the sole trader would have to pay a total of:

£2,427.75 on the first £12,450.00, plus £1,898.75 on the next £7,750.00, plus £4,209.00 on the next £13,800.00, and 38% tax on the next £6,000.00 up to the described £40,000.00, which would amount to another £2,280.00.

Broken down into a table, this would be: justify;”>12,450.00 euros -> 19.5% tax -> 2,427.75 euros
7,750.00 euros -> 24.50% tax -> 1,898.75 euros
13,800.00 euros -> 30.5% tax -> £4,209.00
The remaining £6,000.00, up to the £40,000.00 described above, is taxable at 38.00% -> £2,280.00

Total: 2,427.75 Euro + 1,898.75 Euro + 4,209.00 Euro + 2,280.00 Euro = 10,815.5 Euro

A Sociedad Limitada, on the other hand, would have to pay 10,000.00 euros in taxes on a taxable profit of 40,000 euros at a corporate tax rate of 25%.

If we now estimate the administrative expenses and costs (some of which are also tax-deductible) for fulfilling the legal obligations of a limited liability company at between £1,500 and £3,500, it becomes clear that the more the profit exceeds £40,000, the greater the tax advantages.

Those who consider limited liability important will, if necessary, opt for a limited liability company even if the profits are lower, even if the costs are higher than for a sole trader and even if the taxation is less favourable.

Those who do not value advantages such as limited liability are likely to be better off with a Sociedad Limitada once their taxable profits reach €45,000 at the latest, and should therefore consider setting up such a company.

Ultimately, however, it depends on each specific case, as further special features arise depending on the managing director’s salary and whether and how profits are distributed. The company’s assets are also independent of those of the shareholders. This means that the profits cannot be disposed of in the same way as for a sole trader.

However, anyone who does not wish to withdraw the profits generated from the company in the long term, but would rather reinvest them, should use the calculation described above to get an idea of the potential savings.