Sole trader or limited company: liability, capital and formalities

Diego runs a small renovation business in Málaga as an autónomo. A client refuses to pay 18,000 € for a finished job, and Diego's supplier, owed 12,000 €, starts asking about his flat. His brother-in-law set up a sociedad limitada with 3,000 € of capital years ago and says he sleeps better. Diego wants to know what, exactly, that sleep is made of.

Two ways of being in business

Someone starting a business in Spain usually chooses between two forms. The first is to work as an autónomo, a natural person carrying on the activity in their own name. The second is to set up a company, most often a sociedad de responsabilidad limitada, SL, which becomes a separate person holding the business.

The choice is often presented as a tax question. It is first a question of liability, formalities and running costs, and only then a question of tax. This module deals with the first three; the next one compares how the same profit is taxed in each case, with its limits.

Liability: all your assets or your contribution

For a sole trader, the rule comes from article 1911 of the Civil Code, in one line: the debtor answers for the fulfilment of obligations with all his assets, present and future. There is no business estate separate from the private one. Business debts can be pursued on the flat, the car and future income.

For an SL, article 1 of the Companies Act, the Ley de Sociedades de Capital, provides the opposite rule. The capital, divided into shares called participaciones, is made up of the contributions of all the partners, who are not personally liable for the company's debts. The company answers with its own assets.

The protection has limits worth knowing. Banks often ask partners of a young SL to guarantee its loans personally, which brings the personal assets back into play for that debt. And a director who breaks the duties the Act imposes can incur personal liability, a subject beyond the scope of this course.

For Diego, the difference is concrete. As an autónomo, the unpaid supplier can pursue his personal assets, because the business debt is his own debt. Had the renovation business been run by an SL, the supplier's claim would be against the company, and Diego's flat would only be exposed if he had signed a personal guarantee.

The weight of that argument depends on the activity. A consultant with few suppliers and no borrowing faces little business debt; a builder buying materials on credit and answering for his work faces much more. The riskier the activity, the more the separation of assets is worth.

Capital: one euro, with conditions

Article 4 of the Companies Act, in its consolidated version, sets the minimum: the capital of an SL may not be less than one euro and is expressed in that currency. The wording results from Ley 18/2022, which replaced the former requirement. For comparison, the same article sets the minimum capital of a sociedad anónima at sixty thousand euros.

One euro does not mean no rules. While the capital of an SL does not reach three thousand euros, article 4 imposes two safeguards. First, at least 20 per cent of the profit must go to the legal reserve until that reserve, together with the capital, reaches three thousand euros.

Second, in a voluntary or compulsory liquidation, if the company's assets are not enough to pay its debts, the partners are jointly liable for the difference between three thousand euros and the capital subscribed. The limited liability of a one-euro SL is therefore limited to about three thousand euros, not to one.

Setting up: deed, register, and the online path

Article 20 of the Companies Act is short: the incorporation of a capital company requires a public deed, which must be registered in the Mercantile Register. An SL therefore needs a notary and a registration before it exists as a company with its own legal personality, a step the sole trader does not have.

Since Ley 11/2023, the Act also allows SLs to be set up through a fully online procedure, and the founders can use a model deed with standard articles of association in that case. The online route is excluded when partners contribute to the capital with anything other than money, such as equipment or a vehicle.

The Act also allows the later operations of the company that must be registered, and the legal obligations of its life, to be carried out online. For a founder, that means the notary and the register remain compulsory steps, but they no longer necessarily require a physical visit when the capital is contributed in cash.

The articles of association must state, among other things, the corporate purpose, the registered office, and the capital with the number, nominal value and numbering of the participaciones. They also set how the company is managed and how many directors it has.

Those choices are not mere formalities. The corporate purpose limits the activities the company can carry on without amending its articles, and the way management is organised decides who can sign for the company. Drafting them with the next few years in mind avoids a return to the notary.

Once incorporated, the SL follows the same tax registration path as any business: a census declaration on modelo 036, filed before the activity starts.

For the NIF, the Agencia Tributaria's guide gives legal persons their own deadline: within the month following the date of incorporation. That deadline does not postpone the general rule: anyone about to carry on business activities must apply before any supply, collection, payment or hiring of staff for the activity.

Among the pages of the form, the Agencia Tributaria's practical guide lists page 2B, identification of legal persons, page 8, list of partners, and page 10, list of beneficial owners. The course on registering as self-employed describes that declaration.

The yearly cycle of an SL

A sole trader keeps the records required for income tax and VAT. An SL carries more. Article 253 of the Companies Act requires the directors to prepare the annual accounts, the management report where applicable and the proposal for applying the result within three months of the end of the financial year.

Article 164 requires the ordinary general meeting to be held within the first six months of each financial year, to approve the management, the previous year's accounts and the application of the result. Article 279 then requires the directors to file the approved accounts with the Mercantile Register within the month following their approval.

Profit does not all go to the partners either. Article 274 requires, in every case, that ten per cent of the year's profit be allocated to the legal reserve until that reserve reaches at least twenty per cent of the capital. For a small capital, that requirement is quickly met; for a large one, it holds profit back for years.

None of these steps exists for a sole trader. They are not heavy for a small company with a good adviser, but they have a cost in fees and time every year, and they must be kept even in a year without activity. That fixed cost is part of the comparison, alongside tax and liability.

The director and the Social Security

Setting up an SL does not free its owner from the self-employed scheme. Article 305.2.b of the General Social Security Act includes in it those who direct and manage a capital company, or provide other services to it, habitually, personally and directly, for profit, when they hold effective control of the company.

Control is deemed to exist, in any case, when the worker's shares represent at least half of the capital. It is presumed, unless proven otherwise, when the worker holds at least a third of the capital, or at least a quarter while exercising management functions.

Another presumption, the first one the law lists, looks at the family: at least half of the capital is held by partners who live with the worker and are linked to him by marriage or by kinship through blood, marriage or adoption, up to the second degree.

A partner-director included on that basis pays self-employed contributions like an autónomo, with one difference: article 308 prevents choosing a base below the minimum of contribution group 7 of the general scheme. The reduced fee for newcomers, article 38 ter of Ley 20/2007 specifies, also applies to such partners when they meet its conditions.