Launching a limited company versus freelancing in Spain: What’s the difference?

Spring is certainly upon us here in Spain and if you body is aching for some of that sweet vitamin D, we’ve got some good news for you. You can set up a business in Spain pretty easily. Now that the Digital Nomad Visa is up and running, it’s easier than ever for expats from the EU and beyond to start living and working for themselves in Barcelona, Malaga, or even the Canary Islands. 

All you need is a bit of determination and the right information to guide you. At Xolo, we can take care of that second part, starting with this article!

If you’ve never set up a business before, you’ll be forgiven for finding it all a bit confusing. But we’re here to tell you everything you need to know about:

• The differences between a limited company versus freelancing in Spain
• Costs involved in launching a business
• Factors to consider for business registration in Spain

But first, here's a handy glossary of Spanish terms that English-speaking expats might come across when setting up a business or working as a freelancer.

Launching a business in Spain: A glossary

1. Autónomo: A self-employed individual or freelancer who operates as a sole trader.
2. Sociedad Limitada (SL): A limited company with limited liability protection for its owners.
3. Sociedad Anónima (SA): A public limited company with shares that can be publicly traded.
4. Sociedad Cooperativa: A cooperative company owned and managed by its members.
5. Agencia Tributaria: The Spanish Tax Agency responsible for collecting taxes and managing tax-related matters.
6. Tesorería General de la Seguridad Social: The Social Security Administration — responsible for managing social security contributions and benefits.
7. Registro Mercantil: The Commercial Registry where limited companies are registered.
8. Estatutos: The company bylaws that outline the company's structure, rules, and objectives.
9. CIF (Código de Identificación Fiscal): A tax identification number assigned to a limited company.
10. IRPF (Impuesto sobre la Renta de las Personas Físicas): Personal income tax applicable to freelancers.
11. IVA (Impuesto sobre el Valor Añadido): Value-added tax applicable to most goods and services in Spain.
12. Impuesto de Sociedades: Corporate tax applicable to limited companies.
13. Número de Identificación Fiscal (NIF): A tax identification number assigned to individuals and businesses, including freelancers.

Feel free to refer back to this list if you need it, there’s no pop quiz to test your Spanish. Now, let’s get to the juicy stuff.

Choosing your business path: Going autónomo or launching a Sociedad Limitada in Spain?

First things first: you need to understand your options. In Spain, there are two main legal forms that you can launch your business, so we’ll look closely at the differences between a limited company versus freelancing in Spain.

Side note: There are other types of companies you can form in Spain, such as a Sociedad Anónima (SA, a public limited company) or a Sociedad Cooperativa (a cooperative company). However, these are typically more suitable for larger businesses or those with specific organizational structures.

Between limited companies and freelancing, there’s no scientific formula for which route is right for you. As a general rule, those thinking about going into business with a team or pulling in over €60,000 a year will go the SL pathway and everyone else becomes a freelancer. 

But here, we’ll go into more detail, exploring what each pathway is and what kind of workers tend to go for each one.

What is a Sociedad Limitada (SL)?

A limited company, or sociedad limitada in the local lingo, is a type of company in Spain that offers limited liability to its owners, meaning that the owners' personal assets are separate from the company's debts and obligations. 

This is among the top limited company benefits in Spain, especially for businesses that may face higher risks or require substantial investments. If your business hits a rough patch (knock on wood), your personal assets will remain safe and sound.

Who decides to set up a Sociedad Limitada?

The kind of people who get into the SL game are usually ambitious entrepreneurs with a comfortable level of funding behind them and confidence in their idea. These entrepreneurs are usually looking to employ others, get funding from investors, and bring in enough revenue to stay solvent in the long term. Similarly, freelancers earning over €60,000 per year often convert themselves into a company to avoid big jumps in personal income tax rates.

SLs are an attractive option if you're looking to protect your personal assets, if you have higher startup costs, or if you plan to work with a team. An SL also has a more professional image, which can be beneficial if you're targeting larger clients.

What is an autónomo?

A freelancer, known as an autónomo in Spain, is a self-employed worker and they appear across all industries. Common professions are delivery drivers and farm workers, but most people think of autónomos as web developers, photographers, social media experts, and other high-paying digital freelance roles.  

The autónomo route is the simplest and most common option for self-employed individuals. As an autónomo, you're personally responsible for all aspects of your business, including debts and liabilities. 

Who decides to become an autónomo?

Typical autónomos are people who are already pretty good at their job and want the freedom (and the challenge, don’t forget) of working for themselves. They don’t need to be especially good at accounting, as most freelancers in Spain hire a gestoría to take care of all their admin and tax.

In a nutshell, choosing the best kind of legal company for you depends on your unique situation, needs, and goals. Consider factors such as the size and complexity of your business, your risk tolerance, and how you envision your business growing in the future. 

Keep reading as we dive deeper into the benefits, costs, and factors to consider when choosing between an SL and freelance registration in Spain.

Limited company versus freelancing in Spain: A head-to-head

Now you’ve got a good idea of what each kind of business offers, let’s do a little comparison to make things clearer. We’re starting off with a cheat sheet of the pros and cons of opening a limited company versus freelancing in Spain, before going on to more in-depth analysis.

Going solo or setting up a limited company in Spain? Factors to consider

Now it’s time to get our nerd on as we take a more analytical look at a limited company versus freelancing in Spain.

Business structure

Consider the size and complexity of your business. If you're a solo freelancer or a small team with low overheads, becoming an autónomo may be a better fit. If you're planning to grow, bring on investors, or work with a larger team, an SL might be more suitable.

Registration admin and costs

When it comes to registration, becoming a freelancer in Spain is by far the simpler option. Registering with the Agencia Tributaria and the Social Security Administration is a relatively straightforward process that can be done in 24 hours and you only pay a tiny amount in admin fees. 

On the other hand, setting up an SL requires more steps, including drafting the company bylaws, registering with the Commercial Registry, opening a company bank account, and depositing a recommended initial investment of €3000. Most of these processes come at a cost, and you can expect to spend around €1,000 to €1,500 on top of your initial investment.

As of September 2022, the minimum initial investment for a limited company in Spain dropped from €3000 to €1. That’s not a typo. It’s an incentive for more freelancers in Spain to set up SLs. However, until your company bank account reaches €3000, you have to deposit 20% of your yearly profits to the account and face a range of other restrictions. 

One crucial thing to remember is that it’s much easier to transition from freelance status to a limited company than the other way around. So if you’re still in two minds about which way to go, we’d advise you to take the easy autónomo route, to begin with.

Liability

The most significant difference between the two options lies in liability. As a freelancer, you're personally responsible for your business's debts and obligations, which means your personal assets could be at risk. An SL, however, offers limited liability, protecting your personal assets from any potential business issues.

Accounting and administrative requirements

Autónomos generally have simpler accounting and administrative requirements compared to SLs. As a limited company, you'll need to maintain more detailed records, submit annual accounts, and have a higher level of compliance with local regulations. 

If you're not keen on handling more complex accounting and administrative tasks, becoming an autónomo might be the way to go. However, if you're comfortable managing the increased administrative responsibilities, an SL could be a better option.

Taxes 

Freelancers pay personal income tax (IRPF) on their business profits, which increases progressively the more they earn, from around 19% to 30% from €20,200 and 47% on your earnings over €300,000 per year. On the other hand, SLs pay a fixed-rate corporate tax of 25%, with a 15% introductory incentive for one year. 

The smart ones among you will have realized that there’s a pretty obvious tipping point where that corporate tax works out cheaper. As salaries are tax-deductible, you won’t contribute any extra when paying your workers, but you’ll still have to pay income tax on your personal wage.

If your head is spinning by this point, we’d advise you to call an expert with your own specific case.

Social security contributions

Both freelancers and limited companies need to make social security contributions. However, the amounts and structures of these contributions differ slightly, with SLs paying a percentage of their employees’ salaries (including their own) and freelancers paying a monthly amount loosely based on their expected income.

As of 1 January 2023, the Spanish government introduced a new structure for freelance social security contributions, also called the freelance quota, which we’ve fully covered in another article.

Image and growth potential

As mentioned earlier, an SL can present a more professional image and offer greater flexibility in terms of growth, attracting investors, and adding shareholders. If you already have a vision and a five-year plan laid out in front of you, a limited company is probably a better choice. 

Similarly, you can offer your employees more comprehensive benefits and social security coverage, which can help attract and retain top talent.

Long-term goals

Finally, think about your long-term business goals. If you envision your business growing, collaborating with others, or potentially selling it in the future, an SL may offer more advantages. If you're content with a smaller, more manageable operation, becoming a freelancer could be the perfect fit.

Ultimately, the choice between setting up an SL and registering as an autónomo depends on your individual needs, risk tolerance, and long-term business goals. By understanding the differences between these two options, you'll be better equipped to make an informed decision for your business in Spain.

Xolo: making it easy to start working as a freelancer in Spain

As we’ve hinted at throughout the article, starting out as a freelancer is a much easier — not to mention cheaper — route. If you want to move on to a limited company later, the option is always open. 

But the truth is that even launching a business as a freelancer is no walk in the park. Unless you’re with Xolo of course. 

We’ll take care of all the admin behind your business from set up onwards:

✅ FREE registration with the Agencia Tributaria and Social Security

✅ Automated invoicing platform to save you time

✅ Quarterly tax returns to keep you compliant

So what are you waiting for? Sign up for Xolo today and get your business moving. 

About James

James McKenna has been a freelancer since 2017, working in subtitling, translation, and his main passion — writing. He loves nothing more than falling down a rabbit hole, a habit that has helped him specialize in areas as diverse as biotech, climate change, higher education, and business strategy.

Based in Barcelona, James learned the ropes the hard way, making mistakes that turned into valuable learning experiences. After working hard to establish himself, he is now working smart, and is always on the lookout for ways to streamline his business.