By Adolfo Martos Gross
Pros of SL
1) Limited liability. In an SL, shareholders are not personally liable for the business debts of the corporation. A shareholder risks what he has agreed to invest in the company and nothing more. But courts can find shareholders liable for the company’s debts if they’ve used the separate arrangement to shelter from creditors. Directors can be liable for social debts if they don’t fulfil their legal duties and obligations, such as applying for bankruptcy.
2) Flat taxation. There is a reduced fixed rate for small and medium sized SL companies, helpful when the business is wealthy, but not at the outset. At this early stage low profits have a better tax rate as autonomo than as a company.
3) Continuity. The death or resignation of a shareholder does not bring the company’s existence to an end, even though it may be impractical to continue without a key player.
4) Easy transference of shares. Shares can be transferred with very little restrictions. But in practice, shares in a closely held corporation have no market, and may only be sold to other shareholders, who may not be willing to pay very much.
5) Credibility: The words SL after a business name may give credibility. But generally clients will trust you, and not the legal entity of your business.
Cons of SL
1) Double taxation: companies pay corporate tax on their profits. When the diminished earnings are distributed as dividends they are treated as income in the hands of the shareholders and taxed again.
2) Excessive formalities: Reams of paperwork are necessary, and understandable in larger companies, but not for a one man band in its first years of existence.
3) Costs: Not only are there incorporation costs and taxes but also annual running costs such as accountancy fees.
4) Complex dissolution process: This has to be agreed by the majority of the shareholders in a General Meeting. If there is any legal reason for dissolution and the GM rejects it, the director can ask a judge to dissolve the company. The share of the net asset to the shareholders is subject to corporate tax and stamp duties.
Why go AUTONOMO?
1) Simplicity: minimum formalities to start / stop working as a sole trader (registration with the SS and the Tax Office) and easier accountancy formalities (no need to file annual accounts with the Company House).
2) Complete control over how the business is run.
3) Lower tax rate for small profits: during the first years presumably you will have small profits which are taxed with a better tax rate than corporations.
4) No set-up costs unless a business name is required.
5) Smaller running costs (Social Security fee) The unlimited liability of the Autonomo is certainly a disadvantage but you can take out professional indemnity insurance, plus clients trust good professionals, not legal entities. And in the future you can change to a limited company should you feel you are incurring too many risks.
If your business involves more than one person then Sociedad Civil (or partnership) is a good alternative to SL for much the same reasons as with autonomos.
Every case is different. But if Limited Liability is not important for your venture I would advise to choose the simpler and cheaper form of autonomo or Sociedad Civil during the first years of the business. There is always time to change your mind later.
You can contact Adolfo at [email protected]