When starting an economic activity, the question always arises, what is in my best interest? Be self-employed or a limited company. There is no concrete answer without analyzing the peculiarities of each case.
Both options have their pros and cons, what is good in one way is bad in another, let’s see the advantages of each:
- Lower set up cost.
- Faster commissioning management.
- Lower administrative cost.
- Lower self-employed quota.
- Private economic information.
- Limited company:
- Limited liability.
- Company image.
- Management with partners.
- Easy financing.
Each of the above points are the ones we will take into account to make the right decision in each situation, so we will be sure to decide the best option, but for that it is necessary to know them in depth.
- Cost of incorporation, a self-employed person doesn’t really have to incorporate anything, they only have to register with the tax authorities and Social Security. While a limited company has to make a capital deposit, apply for a name, sign a deed before a Notary, register the company in the Mercantile Register and register with the Inland Revenue and Social Security.
- The time it takes for a freelancer to get up and running is a matter of hours. However, the company needs between one and two weeks to complete all the formalities.
- The formal obligations of a limited company are much greater so the administrative cost is higher, fiscally it is obliged to keep the accounts according to the General Accounting Plan, keep the minutes book, partners book, legalization of books, deposit of accounts. A self-employed person in Simplified Direct Estimation would have the obligation to keep a book of income, expenses, treasury and in some cases book provision of funds.
- The quota of a corporate self-employed is increased with respect to a normal self-employed by approximately 20%, not counting the eighteen months of flat rate enjoyed by the normal self-employed.
- Limited companies are obliged to file their accounts with the Mercantile Register, so their accounts are public and available to anyone who requests them.
- The liability to creditors of a self-employed person is his own capital, i.e. he responds with his current and future personal assets, for any debt generated by the economic activity. While the limited company, as its name says, has a liability limited to the capital of the company, in this way and if there has been no proven bad faith on the part of the partners or administrators, they will not have to respond with their personal assets.
- In order to give a more corporate image of a company, it is always better to use a limited company, even if it is a sole proprietorship.
- In the case of developing an activity with several partners, a limited company is more regulated the performance of these and their rights and obligations, both by the statutes of the company itself, as well as by the Companies Act.
- When applying for financing, in both cases the financial institutions will always ask for a guarantee, but in the case of limited companies, these have the advantage of having clearer and more accurate economic information, so it generates more confidence to financial institutions.
- In terms of taxation, the self-employed are taxed at a variable and progressive rate, while companies are taxed at a fixed rate, this requires an exhaustive study in each case, but as a general reference we will say that with low yields the best option is a variable and progressive taxation, and with high yields, it is better a fixed rate.