Before invoicing the first euro, anyone starting a project must decide whether it is better to register as self-employed or to establish a limited company. This choice affects how much is paid, how much is risked, and what image is conveyed to clients and banks. There is no one-size-fits-all answer, but there are specific criteria to get it right based on the activity, expected income, and growth plans.
Liability: the most significant difference
The self-employed person is liable for the debts of their business with all their assets, including their home, car, and savings. In a limited company, in principle, only the capital contributed is at risk, so personal assets remain protected if the company cannot pay. This protection has nuances: if personal guarantees are provided for loans or irregularities are committed, the barrier weakens. Additionally, with less than 3,000 euros of capital, partners may be jointly liable for the uncovered difference in the event of liquidation. Contributing a single euro, therefore, has consequences that should be considered before signing.
Procedures, timelines, and startup costs
Registering as self-employed is quick and has no incorporation costs. With a digital certificate, the process with the tax office and social security can be resolved in a day. The details lie in the bonuses, such as the flat rate of 80 euros per month during the first year or zero fees in some communities, as they require meeting criteria and deadlines from the outset. A mistake at this point can cost money every month.
Establishing a limited company requires more steps: a deed before a notary, registration in the Commercial Registry, and a bank account in the company's name. Through the traditional route, it usually takes between five and ten days and costs around 100 to 150 euros in notarial and registration fees. The telematic system CIRCE, combined with a standard statute, allows it to be established in 24 hours.
The legal minimum capital is one euro since the 2022 reform, but the company must allocate 20% of its annual profits to a legal reserve until it reaches 3,000 euros. This is not an outlay that comes from the cash flow overnight but an obligation that accumulates over time.
Monthly costs also change. The management of a self-employed person usually costs between 30 and 60 euros per month, while a limited company, with more paperwork and accounting, typically ranges between 80 and 150 euros.
Taxes: where the account is decided
The self-employed person is taxed under personal income tax (IRPF), with progressive rates starting at 19% and increasing as income grows. The limited company pays corporate tax, with a general rate of 25%, which drops to 23% for companies that invoice less than one million euros a year and meet the requirements.
The real advantage appears when profits are high. Under current regulations, from a taxable base of around 41,000 euros per year, the IRPF starts to become more expensive than corporate tax. However, the savings are not automatic, as the profits distributed by the company to its partners are taxed as dividends, and the salary of the administrators is subject to IRPF. The strategy involves combining a reasonable salary with the retention of profits within the company.
An example illustrates this. If a professional earns 75,000 euros in net profit and pays themselves a salary of around 41,000 euros, that salary is taxed under IRPF at an average rate lower than 25%, while the company pays the remainder under corporate tax. The more profit one wants to reinvest in the company, the more sense it makes to have a limited company. If all the money is to be withdrawn as salary or dividends, the difference diminishes.
Image, financing, and signals to make the leap
Banks tend to trust a formal structure more, with up-to-date balances and accounting. Nevertheless, in both cases, they are likely to ask for personal guarantees, so the improvement in conditions does not always reach as far as expected. In commercial dealings, a self-employed person may give the impression of being smaller when working with large companies or institutions that require invoices in the name of a company, a condition that some clients already raise from the outset.
There are signals that indicate that the business has ceased to be merely an individual activity. Profits stabilise around 40,000 or 50,000 euros annually, clients appear who request invoices from a company, a partner or investor is sought, or relevant public aid is only available for companies. In these cases, remaining self-employed begins to detract more than it contributes.
Other figures: SLU and ERL
Those who want to operate as a company while being the sole partner can establish a single-member limited company (SLU). It offers the same asset protection, but the status of sole partner must be reflected in the Commercial Registry. If not done correctly, that protection can be lost.
For those who prefer to remain self-employed, the Limited Liability Entrepreneur allows the protection of the primary residence, provided its value does not exceed 300,000 euros (450,000 in large cities). From 2024, it will also cover certain essential equipment, if well justified. It does not replace a company nor eliminate debts, but it does limit the damage if the business becomes complicated.
How to decide without making a mistake
If the expected income is below 40,000 euros, the activity is personal, and the economic risk is limited, starting as self-employed is usually the most practical: fewer procedures, lower costs, and room to validate the idea. If the project involves hiring, taking on significant investments, entering with partners, or working with large companies, the limited company is worth it from the start.
A common mistake is choosing the company for image without calculating the fixed costs it generates each month, or remaining self-employed out of inertia when the profits already justify another structure. It is advisable to simulate both options with real figures, including management fees, contributions, expected salary, and tax impact, before deciding. The legal form is not definitive: many businesses start as self-employed and become companies when growth demands it.
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