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Tuesday, 08 November 2016 15:13

Private Limited Company or Self-Employed?

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After the blog's summer break, and now that things are gathering pace, we’ve decided to cover this theme which we receive so many questions about in the office. It is a critical decision that people setting up a business need to sort out.

It is also a question that people with a business which is already up and running need to consider. When should I convert to a Private Limited Company and why? Other possibilities exist, but these are the 2 most common options so we are going to look at their pros and cons in this article.

sociedadsl What do I have to take into consideration, before making a choice?

Before answering this question, we have to make clear that every business venture is different and for this reason it is impossible to give an answer which covers all possible variables. But our recommendation is that an analysis is carried out using the following key criteria.

The six most important things to take into account, from our point of view are:

  1. Economic considerations: formation costs; operating costs; minimum capital requirements; and reductions in social security contributions.
  2. Complexity of management and administration
  3. Liability
  4. Tax
  5. Access to finance
  6. Commercial image

 What are the costs?

Here we will concentrate solely on economic considerations, leaving aside the other considerations for a future article.

Within the economic aspects to consider we can define: 

a) Formation costs and minimum capital requirements
b) Operating costs
c) Reduced social security contributions

Formation costs:  are lower in the case of the self-employed. Registering is also simpler for these individuals, compared to a Private Limited Company. The process is much quicker and can be carried out in less than a day.

The paperwork involved in setting up a Private Limited Company is more extensive and may get held up. However, new rules introduced at the end of 2010 have speeded up the process, which can now be completed online if certain requirements are met. This has reduced the average time needed to register the company from 30/40 days to around 5 days. Registering online also reduces notarial costs to €60 and the registration itself to €40.

The self-employed do not have a minimum capital requirement but this figure is €3,000 in the case of Private Limited Companies. This should be enough to cover formation costs and to get the company up and running.

Recommendation: It’s advisable towork out the full costs of setting up the company in advance:

  • Formation costs
  • Investment (advertising, equipment, furniture etc.)
  • A rolling fund of working capital with sufficient assets to cover ongoing operating costs during the period until the business is properly launched. The fund provides financial stability to the company in the period between the initial investment and receiving income.

Operating Costs: The management of a limited company has to comply with the requirements of the Commercial Code. These include making accounting entries for all economic activities, as well as amortisations. Everything has to be in line with the Spanish national chart of accounts which includes a series of records which must be kept. These include: an inventory ledger, annual accounts book, a journal, a minutes book (where decisions reached in directors’ meetings are noted). This inevitably leads to greater administrative costs.

Someone who is self employed and subject to the simplified method of the objective assessment scheme has much easier accounting requirements in that they only have to keep tax records regarding sales and revenue, and purchases and expenses.

Reduction in Social Security contributions: When it comes to the crunch and you have to plump for one or the other, one thing which has to be borne in mind is the saving which can be made under the so-called flat rate introduced in RD 4/2013. This is another law which favours the self-employed over the owner of a limited company. The saving under this measure can be up to € 2,580 over an 18-month period, if contributions are made at the minimum level.

Don’t hesitate to contact us if you have any queries about this article or you need professional advice on

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Read 5086 times Last modified on Tuesday, 08 November 2016 15:20

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