Monday, November 30, 2009

New Spanish business - should you incorporate or not?

Anyone setting up a business will face the question of whether to set up a company or not at some stage, whether from the outset or after a period of growth. There is no special requirement to incorporate a business in Spain and the vast majority of firms start life with only an "autonomo" (sole trader) registration. Why might you want to set up a company (there are various forms but the "SL" or Sociedad Limitada is by the far the most common, particularly for small firms)? The most common reasons are:

  • Corporate tax rates are generally lower than personal income tax rates and for high levels of income there may be tax advantages
  • Limited liability in case of business failure or other corporate liability
  • Assistance with raising finance
  • Enhanced credibility with certain companies or within certain sectors
None of these generally apply for small companies and some of the advantages are more theoretical than actual. For example, incorporation does not absolutely limit the owner’s liability in all situations (e.g. trading while insolvent). Also banks are likely to demand personal guarantees for loans whether the loan is applied for through a company or not. The tax advantages depend on circumstances particularly the level of profit.

What of the costs? Establishing a company in Spain takes longer, has more steps to the process and more associated costs than in many countries including the UK. The two main costs are notary fees and registry with the Mercantile Registry but there are others adding up to a minimum of 800€. My firm Advoco charges 400€ for setting up a simple SL but some firms charge considerably more. An SL has to have a minimum of 3006€ of capital at inception although of course this is not an expense as such because the money can be used for any purpose as soon as the company is registered. Also the running costs of an SL, in terms of tax declarations and financial reporting, are somewhat higher than a simple sole trader structure.

For further information see our webpage: Starting a business in Spain

I also just posted a new article about marketing a business in Spain.

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