Should you start a business as a freelancer or through a single-member limited company?
At JUAN SALVADOR ASESORES, we are here to help you if you are ready to start a business or professional activity, as this involves making important decisions, one of the first being the legal form under which the economic activity will be carried out. There are two common options for those who wish to start out on their own: registering as a self-employed worker or creating a sole proprietorship.
Both have advantages and disadvantages that depend on the type of activity, the scale of the business and the entrepreneur's expectations.
- Definition of self-employed and single-member limited company
Self-employed: A self-employed worker is a natural person who carries out an economic activity independently. Its structure is simple and is usually the most common option for small businesses or freelancers.
Sole proprietorship: This is a commercial company with a single partner, which gives it a formal business structure but without the presence of other partners. It can be a sole proprietorship limited company (SLU), for example. Although it is a company, the entrepreneur has total control, as in the case of the self-employed worker.
2. Main differences between being self-employed and having a sole proprietorship
3. A) Liability
- Self-employed: The main difference lies in the entrepreneur's liability. As a self-employed person, the individual is liable with their personal assets for any debts or potential financial problems of the business. This means that, in the event of bankruptcy or debt, creditors can claim not only the business's assets, but also the self-employed person's personal assets.
- Sole proprietorship: In a company, liability is limited to the capital contributed to the company. In other words, the entrepreneur's personal assets are separate from the company's assets, which offers greater protection against financial risks.
- B) Initial and administrative costs
Self-employed: The cost of registering as self-employed is simpler, faster and cheaper. The accounting for a self-employed person can be simplified, so the administrative cost is lower than that of a company's accounting.
Sole proprietorship: Setting up a sole proprietorship involves more paperwork and higher initial costs. In the case of a limited liability company (SLU), it is necessary to contribute share capital and incorporate the company before a notary public by means of a public deed. Accounting management is more complex, and the annual accounts must be filed with the commercial register.
- C) Taxation
Self-employed: Self-employed workers are taxed on the income from their activity through personal income tax (IRPF), where the tax rate is progressive, i.e. it increases as income increases. Therefore, for small amounts of income, it may be more advantageous compared to company tax rates.
Sole proprietorship: Companies are taxed through corporation tax, with fixed tax rates, which can be more advantageous for high profits. Companies can also deduct a greater number of expenses, which can be more favourable from a tax point of view.
3. Advantages and disadvantages of each option
Self-employed
Disadvantages:
- Unlimited liability.
- Difficulty distinguishing between personal and business expenses.
Advantages:
- Lower start-up costs and less administrative burden.
- Simpler accounting management.
Single-member limited company
Advantages:
- Liability limited to the capital contributed.
- Better taxation for large profits.
Disadvantages:
- Higher initial costs and procedures.
- Greater administrative and accounting burden.
- Greater tax and management complexity.
4. Which option is best?
There is no single answer that applies to all cases. At JUAN SALVADOR ASESORES, YOUR ADVISOR IN THE MARINA ALTA: DÉNIA, XÀBIA, PEDREGUER, ONDARA, GATA DE GORGOS, LA XARA... we know that the choice between being self-employed or setting up a sole proprietorship will depend on several factors, such as the type of business, growth expectations, the level of risk and personal preference.
If the business is small, does not require large initial investments and does not involve many risks, it may be advisable to start as a self-employed person due to its greater simplicity and lower costs.
If significant growth is expected, larger amounts of money are handled or the sector in which you operate values the legal form of the company being a corporation.
