In this blog post, we’ll discuss when it might be a good idea to form a Limited Liability Company (SL) based on revenue. In Spain, SLs are one of the most common ways to form a business, as they offer certain advantages in terms of liability and taxation.
Before going into detail about the desired revenue threshold for incorporating under this legal structure, it’s important to explain what a Limited Liability Company (hereinafter, SL) is.
It is a business corporation in which the shareholders’ liability is limited to the capital they have contributed; in other words, they are not personally liable with their personal assets.
In addition, the SL has its own legal personality, which means it can conduct business activities and enter into contracts in its own name.
The answer is not straightforward, as it depends on several factors. Below, we outline some of the most important ones:
– Liability: If you are self-employed and bill in your own name, you are liable for any debts you incur with your current and future assets. On the other hand, if you form an SL, your liability is limited to the capital you’ve contributed. Therefore, if your business carries a high risk of debt, it may be worthwhile to form an SL from the start, regardless of your revenue.
– Taxation: Self-employed individuals are taxed under the Individual Income Tax (IRPF), while SLs are taxed under the Corporate Income Tax. In general, the corporate income tax rate is lower than the IRPF rate, although it’s important to note that an SL must also pay Value-Added Tax (VAT) and the Tax on Property Transfers and Documented Legal Acts (ITPAJD) in certain cases. Therefore, if you anticipate high revenue, it may be beneficial to incorporate as an SL to take advantage of more favorable tax treatment.
– Credibility: In some cases, having an SL can convey greater credibility and trust to customers, suppliers, and investors. This can be especially relevant if your business is related to the financial, legal, or technology sectors, among others.
– Costs: Incorporating an SL involves initial costs that can range from 500 to 1,000 euros, depending on the type of company, the articles of incorporation, notary fees, and other expenses. In addition, an SL also has recurring costs such as Commercial Registry fees, accounting, liability insurance, etc. Therefore, if your revenue is low, it may not be worth forming an SL due to the costs involved.
Taking these factors into account, what is the minimum revenue at which it might be worthwhile to incorporate an SL? There is no single answer, as it depends on each specific case.
However, as a general guideline, we could say that
if you expect annual revenue to exceed 50,000 euros and your business carries a high risk of debt, it may be worthwhile to form an SL
If your projected revenue is below that figure, it probably isn’t worth forming an SL due to the initial and ongoing costs.
In any case, before making a decision, it’s advisable to carefully analyze the pros and cons of forming an SL in your specific situation, as well as to compare the tax implications and liability you would face as a self-employed individual versus as a corporation.
To do so, it’s a good idea to seek advice from a professional, such as a lawyer or tax advisor, who can help you evaluate all your options and choose the one that best suits your needs.
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