One of the most difficult decisions entrepreneurs face is deciding when it is the right time to move from self-employment to a limited company. The transition not only changes your tax and administrative structure, but also affects the perception that customers and partners have of your business.
Throughout this article, we will analyse the advantages and disadvantages of becoming self-employed or a limited company, the right times to consider it and the necessary steps to carry it out.
Advantages of switching from self-employment to a limited company
The decision to switch from self-employment to a limited company (LLC) can affect the trajectory of any entrepreneur. Below, we explore some of the main advantages of moving from self-employment to a limited company:
Reduced tax burden
One of the main reasons to consider the transition from self-employed to SL lies in the possibility of reducing the tax burden. As a self-employed person, you face progressive tax rates that can be very high if your income is high.
On the other hand, one of the advantages of a limited company is that it has a more favourable tax regime. So, how much tax does an SL pay? Limited companies have a flat tax rate which is generally lower and more predictable than personal income tax.
By setting up an SL, you can plan your tax obligations more efficiently, taking advantage of deductions and tax benefits specific to this type of company. This tax optimisation can free up the financial resources needed to reinvest in the growth of your business.
Protection of personal assets
Another advantage of changing from self-employed to a limited company is the protection of your personal assets. The liability of self-employment lies in your responsibility for managing your financial obligations. This means that you can compromise your personal assets if you have financial problems.
When you operate as an SL, your liability is limited to the capital contributed to the company. This creates a legal barrier that ensures the protection of your personal assets, providing greater security and peace of mind. It is very important to consider this aspect if your business is risky or if you plan to invest heavily.
Improved image and reputation
A limited company can give your business greater credibility and professionalism in the eyes of customers and suppliers. The perception of a company as a more formal and structured entity opens doors for new business opportunities and strategic alliances.
Being an SL can also increase your presence in the market and increase customer confidence in your products and services. The formality and transparency of a company can be seen as an indication of solidity and business commitment.
Access to finance and collaboration
SLs can obtain more external financing because financial institutions and investors think it is safer to lend to companies than to the self-employed. Also, the structure of a limited company allows for the entry of new partners and collaborators, which can be crucial for business expansion .
Having the ability to attract investment is crucial when you are looking to expand your operations, launch new products or enter new markets. Investors tend to look more favourably on investment opportunities in well-structured companies with clear growth potential.
Disadvantages of moving from self-employment to limited company status
Although the transition from self-employed to limited company is always considered a good plan, there are also a number of disadvantages that make you think about becoming self-employed or a limited company. Some of these disadvantages are:
Incorporation and management costs
What are the costs of setting up a limited company? There are a number of upfront costs involved in setting up a limited company, such as notary fees, company registration and other administrative costs. These costs can be a barrier for some entrepreneurs.
In addition to incorporation costs, you need to consider the expenses of a limited company that are considered recurring, such as accounting, audits and legal advice. These additional expenses can affect your profitability during the first few years of business.
Greater administrative complexity
Managing an SL involves taking on more complex administrative tasks than those you have as a self-employed person. One of the differences between self-employed and SL is to carry out more rigorous accounting, file annual accounts and comply with various tax and labour obligations.
Be aware that a heavier administrative burden may require additional staff or external consultancy services, increasing operating costs. It is essential that you are able to manage this complexity efficiently to avoid legal and financial problems.
Oversight and compliance
As a limited company, you are subject to stricter supervision and a greater number of rules and regulations. Therefore, you need to get informed and professional advice to ensure that you are complying with all these obligations.
Because failure to comply with regulations can result in severe penalties and damage to your reputation.
When is the right time to change from self-employed to limited company?
Deciding when is the right time to change from self-employed to a limited company is a very important decision for any entrepreneur. However, there is no single answer that applies to all cases, as it depends on a number of factors specific to each business such as:
Annual turnover and profits.
If your annual turnover and profits have grown considerably, it may be a good time to consider the transition to SL. This will give you the opportunity to take advantage of the tax and management advantages mentioned above.
It is recommended to consider this change when your income exceeds 60,000 euros per year. But each case is different and should be assessed according to your specific circumstances and business objectives.
Business growth and volume of employees
When your business starts to grow in terms of employees and volume of operations, a limited company structure can offer better organisation and control. Also, the SL simplifies the administration of wages and labour contracts.
Risk considerations and asset protection
If your venture is exposed to significant risks that could affect your personal wealth, it is prudent to consider creating a limited liability company. That way you can protect yourself legally and financially.
For that reason, sectors with high volatility or those that require substantial investments in assets can benefit from an SL. Because the limited liability company provides you with an additional safety net.
Steps to convert from self-employed to a limited company
The transformation from self-employed to a limited company is a procedure that involves several legal and administrative procedures. Here are the steps to make this transformation:
Informing the Social Security
The first thing you have to do is to inform the Social Security of the cancellation of your self-employed activity. Then, you have to register with the general contribution regime as the administrator of the new company.
This process requires completing and submitting the necessary forms; make sure you follow all the procedures to avoid interruptions in your social security coverage.
Incorporating the limited company.
It is necessary to draw up the articles of association, go to a notary to formalise the incorporation and register it in the Commercial Register. You will also need to establish a bank account in the name of the organisation and deposit the necessary share capital.
During this process, it is essential to ensure that all documents are properly drafted and submitted. As any errors that occur can delay the incorporation of the company and lead to additional costs.
Catching up with the Inland Revenue
Finally, you need to register the company with the tax authorities, obtain a provisional VAT number and register for Business Tax (IAE). You must also notify the start of activities and obtain the definitive CIF.
By registering correctly with the Inland Revenue, you are allowed to operate legally and obtain all the tax benefits available to SLs. It is recommended to have the collaboration of a tax advisor to ensure compliance with all tax obligations.
Frequently Asked Questions
How long does it take to incorporate a limited company from the start of the procedure?
The procedure can vary, but it often takes between one and three weeks to complete all the necessary procedures. This may be longer if the registers are not efficient and there are few professionals available.
What happens if a partner wants to leave the limited partnership?
If a partner decides to leave the company, he can sell his shares to another partner or to third parties, always respecting the clauses set out in the articles of association. Clear agreements must be in place to manage such cases and avoid internal conflicts.
How is the distribution of profits handled in an SL?
The distribution of profits depends on the shareholdings of each partner and is agreed during the general meeting. It is important to make a clear and transparent record of these agreements to avoid confusion and to ensure a good management of the company’s resources.
Is it possible to convert a limited company back to a self-employed status?
Yes, although it is a more complicated process that usually requires the dissolution of the company and the liquidation of your assets and liabilities. It is advisable to seek professional advice before making this decision, as this could have significant tax and legal implications.
Conclusions
Becoming self-employed or a limited company is a decision that should be carefully evaluated. The tax advantages, wealth protection and consolidation of business reputation are attractive features, but you should also consider the costs and additional administrative complexity.
If you are prepared to take this step, the growth and opportunities you will gain can be very beneficial. So, are you considering making this transition? Ask for personalised advice and start on your way to business success.
