Thursday, 2nd July 2020
LEGAL Article

This Month's Magazine
The 5 advantages of trading through a limited company in Spain.

The 5 advantages of trading through a limited company in Spain.

There are a number of advantages in operating your business as a limited company that could well compensate the initial costs of incorporation and the slightly higher running costs.

  1. Limited liability. Unlike trading as a self-employed individual, a company only risks its registered capital and assets. Though in certain circumstances the director of the company may be persdonally liable in respect of the Tax Office and the Social Security; this is when it is proven that he has been negligent in attending to his managing obligations.
  2. Less Tax for the profit. When an ‘autonomo’ makes a profit he initially pays 20% of the profit as Income Tax. However the tax rate for an individual is graduated and it can reach 45%. The actual tax liability is calculated at the end of the tax year, when the tax return is submitted. By contrast, companies are subjected to corporation tax which is 25% of profit for small companies. An individual would have to pay 45% for every euro made over 50,000. 
  3. Pay more tax only when you “enjoy it”. Self-employed Individuals pay tax for every euro of the positive balance of the year at the highest possible rate. Should these funds be finally used, for example, to reinvest in their business in a later tax year, these are taxed at a “consumption tax rate” (personal Income tax) even though they were never used to that end. When the same situation arises in a limited
    company, though the profit was taxed at 25% when it was made, because it never went out of the company but stayed to be reinvested, it is not taxed at a high “consumption rate”. Only when the funds are used for personal use the highest possible tax is then paid. 
  4. Better public image. Companies give a much better business image than selfemployed. Companies present a more serious business image to creditors and suppliers. One of the companies’ regular obligations is to submit annual account to Companies’ House which installs further confidence to third parties too.
  5. Wrap up your investment with a nice ribbon. The company is the right vehicle if you plan to “own a business” instead of “owning an employment”. Business angels or investors will not typically invest in a sole-trader’s business. If you plan to develop a business, attract capital or sell shares this is the most advisable legal form. For a consideration on preparing a business to be sold later or buying an existing
    one, read at our article: Considerations before buying a business.

In conclusion, companies enjoy greater flexibility especially in deducting tax when purchasing, in transferring profits (dividends or salary) to the owner, a lot more.


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