Starting a business in Spain means choosing a legal form. The big fork is this: self employed or limited company. In this guide you will see how taxes, liability, costs, and admin change with each option, and when to switch to an S.L. You will also get simple examples and a step-by-step view of the switch.
FAQ
Q: What is a sole proprietor in Spain?
A: It is the autónomo. You work as an individual, pay IRPF (personal income tax) on your profit, and you are personally liable for debts.
Q: What is an S.L.?
A: It is a Sociedad Limitada, a limited company. The company is a separate legal person and pays corporate tax. Your personal assets are protected. You only risk the money you put into the company.
Q: When does an S.L. save tax?
A: As a rough rule, when yearly profits go over 40,000-50,000 euros and you do not need to take all the profit out as your own salary or dividends.
Q: Can I start as autónomo and later switch to S.L.?
A: Yes. Many people do. You can switch anytime.
Q: How do social security payments work?
A: As an autónomo you pay a monthly cuota into RETA (the social security system for self employed). As an S.L. owner-manager, you usually also pay into RETA as a company director who works in the business.
Choosing the right business structure
The choice is between simplicity now or protection and growth later.
- As an autónomo, setup is fast, cheap, and simple. But you have unlimited personal liability. If the business owes money, your personal assets are at risk.
- As an S.L., the company is liable up to its capital. Your personal assets are shielded. You look more solid to clients and banks. But you must keep full accounts, file annual accounts, and handle more paperwork and costs.
Autónomo fits testing an idea, solo services, and low risk work. An S.L. fits stable and higher profits, recruiting employees, higher risk, and plans to reinvest profits. That is the core trade-off.
Factors influencing the choice between sole proprietorship and limited liability company
There are five main drivers to the decision: profits, withdrawals, risk, people, and image.
- Profit level. Under about 40,000-50,000 euros profit, autónomo is often fine. Above that, an S.L. may save tax if you do not withdraw everything each year.
- Cash withdrawals. If you need all profits personally each year, the tax edge of the S.L. shrinks. Salary and dividends add IRPF on top of corporate tax.
- Liability and risk. If a claim or debt could be large, the limited liability of an S.L. protects your personal assets. Autónomos are personally liable for all business debts.
- Team and partners. Hiring employees, adding partners, or taking investment is simpler in a company. Shares make ownership clear. Selling the business later is also easier.
- Client and bank perception. Bigger clients and banks often prefer dealing with a company. An S.L. can help you win contracts and get credit.
- Setup and costs. Autónomo has no minimum capital and lower setup costs. An S.L. has notary and registry costs. The classic minimum capital was 3,000 euros. There are now options to start with lower capital, but they have extra reserve rules and you still carry more admin.
- Social security. Autónomos pay a monthly cuota in RETA even in months with low income. Company directors who work in the S.L. usually also pay into RETA. Your chosen base affects both cost and future pension.
- Tax planning room. Companies let you separate your money from the business money. You can keep profits in the company to invest, set your salary, and decide when to pay dividends.
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Tax differences between both structures
Autónomos pay IRPF with progressive rates. S.L. pays a flat corporate tax.
- As an autónomo, you pay IRPF (personal income tax) on your net profit. Rates go up as you earn more. The top rates are around the high 40% range depending on your region.
- As an S.L., the company pays corporate tax. The general rate is 25%. New companies usually pay 15% in the first two profitable years.
The key point is keeping profits inside the company. If you leave money in the S.L., you only pay corporate tax on it. If you take money out as salary, it is taxed under IRPF for you. Dividends are also taxed in your IRPF. An S.L. helps when you can keep part of the profit in the company to grow.
VAT works the same in both. You charge VAT if your service has VAT and file modelo 303 (the quarterly VAT form).
- Autónomos also file modelo 130 or 131 (the quarterly income tax prepayment forms for IRPF).
- Companies file corporate tax once a year and must keep commercial books (the official accounting records) and file annual accounts.
Which one suits your business
Tax perspective
You do not need examples to decide. You can model it with two inputs: how much profit you make, and how much you will take out for yourself.
Step 1: estimate your yearly profit (revenue minus deductible costs).
Step 2: decide how much you will withdraw personally each year. In an S.L. this is usually a mix of salary and dividends. Salary is a company expense, so it reduces the company profit. That means you can end up paying little or no corporate tax if most of the result is paid as salary. The trade-off is that salary is taxed under IRPF for you.
So the part that typically creates a tax advantage in an S.L. is the profit you can leave inside the company:
Profit left in the company = profit − money you withdraw.
A rough tax saving is:
Tax saving ≈ (profit left in the company) × (your marginal IRPF rate − corporate tax rate).
Now compare that saving to the extra yearly cost of an S.L. (full accounting, annual accounts, registry filings, corporate tax compliance). If the saving is bigger than the extra cost, the S.L. makes sense on tax grounds. If you need to take out almost everything each year, the tax edge is usually small and the autónomo setup is often simpler.
Liability perspective
Even if the tax break-even is not there, an S.L. can still be the right choice when the liability risk is meaningful, because the company structure helps shield your personal assets from business debts and claims.
Can you switch from sole proprietor to S.L.?
Yes, and it is common once profits and risk grow.
Many start as autónomo and later form an S.L. The basic steps are:
- Check the company name, deposit share capital if needed, and get a bank certificate (proof of the deposit).
- Sign the notary deed (official company creation before a notary, a public officer who certifies documents).
- Get the company tax ID and register it at the Commercial Registry (public company register).
- Register the company for taxes and social security.
Then move your activity into the company. Update contracts, suppliers, bank accounts, invoice details, and insurance. Also close or adjust your autónomo registration.
As the owner-manager of an S.L., you usually still pay social security under RETA (autónomos) as a “self-employed company director” (autónomo societario). Your social security base and coverage are a bit different. Plan this before you switch.
Considerations for transforming sole proprietor to S.L.
Plan the transfer of assets, contracts, and tax positions to avoid friction.
- Assets and tools. Decide what you will contribute to the company. This can be laptops, equipment, stock, or intangibles like a website or brand (things you cannot touch but that have value). You can contribute them at value in exchange for shares. Keep invoices and simple valuations.
- Clients and suppliers. Tell them your new company details early. Set a clear date when the company starts billing. Close old orders and start new ones under the S.L. Avoid mixing invoices across that date.
- Tax neutrality. If you contribute your whole business into the company in one go, the move can be tax neutral (no extra personal income tax at that moment). This needs a proper structure as a full business contribution. Get advice so you do not trigger hidden taxes.
- VAT and withholding. Check if the transfer triggers VAT. A transfer of a whole business often does not. Selling single assets might. If you are a professional who applies withholding on invoices (retención - a small part of the fee sent to the tax agency in advance), this will change in a company setup.
- Social security. As a managing partner with relevant ownership, expect RETA for company directors. Budget the monthly cuota. Under the new system, cuotas depend on your expected income. Many founders forget this and get a back-bill later.
- Banking and insurance. Open a company bank account. Move recurring payments. Reissue insurance policies so the company is the holder when needed.
- Accounting and books. An S.L. must keep full accounting, legalize books each year (submit official copies), and file annual accounts. Budget for monthly accounting support. This is a real cost and time factor.
Bottom line
Start simple as autónomo if you are testing, risk is low, and profits are modest. Switch to an S.L. when profits are stable above about 40,000-50,000 euros, you plan to hire, you want limited liability, or you will reinvest profits. This keeps admin light early, then protects assets and optimizes tax when it matters. If unsure, pick a switch date, model both tax cases for the next 12 months, and choose the cleanest path.
