SEVEN things you should know about starting a business in Spain: S.L. or going self-employed.
The one-man band company: If you are a singer, a real estate agent with no employees or a dentist and you set up a limited company to pay less tax, you have a problem. The Directorate General of Taxes has stated that a company –consisting of a single shareholder who also is the director- that is unable to trade without the direct participation of owner/director, is in fact a shell or ‘simulated’ company.
The main consequence is that the Tax Office will deem the person acting through company as self-employed, for tax purposes. To avoid this, a company must have enough human and material resources to operate irrespective of owner/director. In 2014, the Tax Office initiated 1.919 full enquiries in connection to this type of fraud.
Limited vs personal liability: the acronym S.L. stands for ‘Sociedad Limited’, which suggests companies will protect the entrepreneur should things go wrong (save for fraud). Self-employed do not enjoy such protection and are personally liable with present and future assets for losses incurred in the course of the business activity.
Growth expectations: an entrepreneur that intends to grow cannot operate as a sole trader. As the business increases its turnover, so do the associated risks. Self-employed operators without corporate protection will risk less and, as a consequence, expand at a slower pace (which may not be a bad thing after all).
Dealing with monies: Sole traders will have direct access to the proceeds of the business activity whereas in a company, the director (or the shareholders) cannot just dip into the account when in need of cash. In the latter case, it is important to note that any money received by the company belongs to the company and legally, to draw cash out, the director will have to issue a salary (“nomina”) or take out a dividend, both of which are taxable.
Costs: Setting up as a sole trader will not attract cost whereas a company will cost anything from €600 to €1,400, depending on various variables: share capital, legal assistance, choice of Notary Public etc.
Professional Image: In some businesses and industries, having a limited company will provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.