Self-employed vs SL: Entrepreneurship

Self-Employed vs. Corporation: Deciding the Best Path for your Entrepreneurship

Choosing between operating as a freelancer or incorporating is one of the crucial decisions facing entrepreneurs, especially those in the digital realm. Each option has significant implications in terms of taxation, personal liability and wealth management. This article will help you understand the key differences and make an informed decision.

Operating as a Freelancer

Advantages of Being Self-Employed

1. Quick and Easy Start: Starting as a self-employed is an agile process. You only need to register with the Special Regime for Self-Employed Workers (RETA) and with the Tax Authorities using forms 036/037. These procedures are free of charge, allowing an immediate start of the activity.
2. Less Bureaucracy: The tax and accounting administration of a self-employed is less complex compared to that of a company, which translates into lower administrative costs and more time to focus on the business.

Disadvantages of Being Self-Employed

1. Unlimited Liability: Self-employed persons must assume all debts and obligations of their business with their personal assets, which may involve considerable financial risk.
2. Higher Taxes: If income exceeds certain levels, the self-employed may face a higher tax burden due to the progressive nature of personal income tax, which can reach up to 47%.

Create a Corporation

Benefits of a Corporation

1. Limited Liability: When incorporating a corporation, the partners limit their liability to the capital contributed, thus protecting their personal assets.
2. Better Image and Credibility: Corporations are usually perceived as more solid and reliable, facilitating business relationships and access to financing.
3. Tax advantages: Companies can access specific tax benefits, and corporate income tax has a fixed rate of 25%, or 23% for companies with turnover of less than 1 million euros.

Disadvantages of a Corporation

1. Initial Cost and Complexity**: Incorporating a company involves more complex and costly processes, such as the need for a notary, registration in the Commercial Registry and obtaining the CIF.
2. Accounting and Tax Obligations: Companies face stricter accounting and tax obligations, which usually require the hiring of specialized professional services.

Particularities of Digital Entrepreneurship

Self-employed in the Digital World

• Ease and Adaptability: Starting a digital business as a freelancer is especially convenient due to the ease of launching through online platforms such as Shopify or WordPress.
• Limited Growth: However, a stand-alone structure may become inadequate as the business grows, especially if revenues increase significantly.

Mercantile Society in the Digital Sphere

• Attracting Investors: Digital startups seeking to attract investment benefit from being corporations, as this structure offers more security and transparency for investors.
• Global Expansion: Trading companies better manage international expansion, which is crucial in the digital environment, and project a solid professional image.

Overall Evaluation and Final Decision

The choice between being self-employed or incorporating depends on multiple factors and the specific business situation. For digital ventures, starting as a freelancer is practical and cost-effective at first. However, as the business grows, switching to a corporation can offer tax advantages, limit liability and improve credibility.

For businesses with annual profits in excess of €40,000-45,000, forming a trading company starts to be more advantageous. While the self-employed are taxed under a progressive personal income tax system, partnerships are taxed at a flat rate, which can result in lower tax payments as income increases.

In short, there is no universally superior option. The decision to operate as a freelancer or incorporate should be based on a detailed assessment of the business situation, considering factors such as taxation, wealth management and long-term objectives. Starting as a freelancer and then transitioning to a corporation as the business consolidates is a common and effective strategy for many entrepreneurs.

Cigarrán Lawyers continues to be at the disposal of its clients, attending to their needs in these and other matters. info@cigarran.com — Tel. (+34) 91 355 85 15