Choosing the right legal structure for your business is one of the first key decisions when starting out. Selecting one legal form over another will impact essential aspects such as taxation and legal liability. In today’s post, we analyze in detail the differences between both options to help you make the best decision.
Choosing the right path for your business
Self-employed or LLC? This choice will determine aspects such as taxation, legal liability, and administrative management of your company. When evaluating the differences between both legal entities, it is important to analyze factors such as income level, business risk, and financing needs. While being self-employed allows you to start with fewer formalities and no mandatory initial investment, establishing a limited liability company (LLC) offers advantages in terms of asset protection and credibility with clients and investors. But let’s not get ahead of ourselves.
What does it mean to be self-employed?
A self-employed person is an individual who carries out an economic activity on their own account. In Spain, this is the simplest and fastest way to start a business since it does not require formal incorporation or initial capital. Its key characteristics are:
- Unlimited liability: The self-employed person is personally liable for debts and obligations.
- Personal income tax (IRPF): Profits are taxed according to brackets, which becomes less favorable as income increases.
- Fewer formalities and lower initial costs: No minimum investment is required, and financial statements do not need to be filed with the Commercial Register.
- Ideal for small businesses and freelancers: If you work alone and do not need a corporate structure, this is often the best option.
What does it mean to be an LLC?
A limited liability company (LLC), on the other hand, is a separate legal entity from its owners, meaning that the company itself is liable with its own assets, not those of its founders. The key characteristics in this case are:
- Limited liability: The partners do not risk their personal assets, as the company is liable only with its contributed capital.
- Corporate tax: With a fixed rate of 23%, it is more advantageous for companies with high profits.
- Greater formality and professionalism: An LLC generates more trust among clients, suppliers, and investors.
- More accounting and tax obligations: It requires maintaining official accounting records and filing annual financial statements with the Commercial Register.
Advantages and disadvantages of being self-employed
The key characteristics of each entity are now clear. But there are more points to consider. Let’s start with the advantages and disadvantages of operating as self-employed:
Advantages of being self-employed
- Registering as self-employed is a quick process with no minimum capital requirement.
- You do not need to file financial statements with the Commercial Register or comply with strict accounting requirements like an LLC.
- There are tax benefits such as the flat-rate contribution for new self-employed individuals, reducing social security payments in the early months.
- As a self-employed person, you make all decisions without needing consensus from other partners.
- If you work in sectors like design, consulting, or marketing, being self-employed is the most practical option.
Disadvantages of being self-employed
- The self-employed person is personally liable for debts and obligations.
- Profits are taxed through personal income tax (IRPF), which can be more costly than the corporate tax paid by an LLC.
- Although there are initial benefits, the minimum self-employment contribution can be high compared to an LLC or a self-employed person with low earnings.
- Banks tend to grant loans and financial support more easily to LLCs than to individual self-employed workers.
Advantages and disadvantages of an LLC
Establishing an LLC offers significant benefits, but it also has drawbacks.
Advantages of forming an LLC
- Unlike self-employment, an LLC limits liability to the contributed capital.
- While self-employed individuals pay personal income tax that increases with earnings, an LLC is taxed at a fixed corporate tax rate.
- Banks and investors typically consider an LLC more reliable than a self-employed individual.
- If you plan to grow and bring in investors or collaborators, an LLC allows you to distribute capital and define roles clearly.
Disadvantages of operating as an LLC
- Creating an LLC requires a minimum capital of €3,000, along with legal and notarial procedures that are not necessary for self-employment.
- While a self-employed person has relatively simple management, an LLC must file annual financial statements with the Commercial Register, maintain detailed accounting, and meet more tax requirements.
- From hiring accounting services to managing payroll if there are employees, maintaining an LLC involves higher fixed costs.
- In an LLC, profits cannot be used freely as in a self-employed business.
How does your choice affect your business image?
Beyond all the advantages and disadvantages mentioned so far for both self-employed individuals and LLCs, both options project a business image. What exactly do they convey? Here’s an explanation:
Commercial image of a self-employed person
It conveys closeness and authenticity, ideal for personalized services like freelancing or consulting. However, it can sometimes generate distrust among large clients and project less solidity.
Corporate image of an LLC
It provides a more professional and stable image, facilitating contracts with large companies and access to certain sectors. However, it may be perceived as less approachable and requires greater structure and formality.
From self-employment to LLC: Can you switch?
Is the decision you make final? The answer is no. If you start as self-employed and your business grows, you can switch to an LLC to improve taxation and corporate image. When is it advisable to switch?
- When annual income exceeds €40,000 – €50,000.
- If you need to limit personal liability against potential debts or legal issues.
- To access more financing or attract investors.
- If you work with large companies or clients that prefer to contract with LLCs.
Conclusion
In conclusion, both being self-employed and forming an LLC have their advantages and disadvantages. The choice depends on the type of business, growth projections, and the need for asset protection. If you seek a quick and flexible option to start, self-employment is ideal. However, if your goal is growth, securing financing, or minimizing personal risks, an LLC is the best choice.
