If you’re reading this, you probably have a great idea for a business. You know what service or product you want to provide, you know who you want to provide it to and you can’t wait to start. However, in order to be able to get started, you have an important decision to make. Are you going to move forward as a limited liability company, or does it make more sense for you to work as a freelancer?
This decision is very personal and will depend not only on the specific characteristics of your business model, but also on the priorities that you have for your business and your plans for its future development.
In this article, we will look at some questions to consider when deciding between the limited company route or the freelancer route.
Do I want to set up as a legal person or a natural person?
This question outlines the key difference between limited companies and freelancers. While a limited company constitutes a ‘legal person’, meaning that it can separate its own assets, risks and responsibilities from those of the partners of the company, a freelancer is a natural person, meaning that his or her assets are tied to the business, along with the risks and the responsibilities of the work that he or she is carrying out.
We will go into detail about the consequences of this distinction below.
What risks will my business face?
Given that a freelancer is a natural person, their liability is unlimited. A limited company, as their name suggests, limits their liability to the assets of the company.
Therefore, you will want to bear in mind the assets that you and your business possess or plan to possess, the level of risk that your business will face day-to-day, and which option you feel most comfortable with.
What will the setting-up of my business look like?
The process to become a freelancer is relatively simple and cheap. You can sign up from one day to the next.
However, the process to set up a limited company involves more steps and can take between 5 and 30 days. You will need to establish your partners and the administrative structure of the company, and you will need to consider the costs of getting established.
See the following link for information about the steps involved in setting up a limited company and the assistance that we can provide you to do so:
Am I willing to dedicate time/money to accounting?
The accounting involved for freelancers is generally simpler than that involved for limited companies, especially as the company grows. However, in either case, we would always recommend that you contract a professional to help you with your accounting. Why? Because accounting is probably not your area of expertise. Paying for someone else to take care of this essential part of your business can allow you to dedicate more time (and headspace!) to the tasks which you are passionate about, skilled at and which motivated you to start the business in the first place.
At Conesa Legal, our lawyers and finance specialists can help you to manage your business from its initial conception to its day-to-day management and accounting. See the following link for more information about our financial services:
What taxes will I have to pay in both situations?
Both freelancers and limited companies will pay IVA unless exempt and will be subject to taxes on their assets.
In addition, freelancers pay IRPF. This is a progressive tax which means that you will end up paying anywhere between 19% and 48% depending on your earnings, whereas limited companies pay between 15% and 25% in Company Tax (Impuesto de Sociedades).
In addition, you may have more opportunities to write-off business costs against tax if you are registered as a limited company.
Might I want a loan (now or in the future)?
In theory, a limited company will find it much easier to gain access to outside finance given that they are more established financially and are in a better position to clearly evidence the current financial position of the company. For example, a limited company must have its own dedicated bank account, while a freelancer is not obliged to create a bank account dedicated to their professional activities.
Am I hoping to expand the business?
A limited company has many more opportunities to expand than a freelancer does. The organisation of a limited company makes it easier/possible to increase capital, take on employees and bid for public and private tenders.
So, which is the best option for me?
As you can see, the answer to whether being self-employed or setting up a limited company will be the best solution for you is very much dependent on how much importance you attach to each of the factors mentioned above.
Given the smaller start-up costs and more simple administration, it can make sense for entrepreneurs to start as freelancers and then set up a limited company as their business grows, and that is entirely possible.
However, if you worry about liability or if you have dreams of expansion, you might be best placed to start a limited company sooner rather than later.
Unsure of how to align your priorities with the best financial and commercial decisions for your business?
Let us help you! Book an appointment with us and we will help you to decide whether to set up as a freelancer or a limited company and support you to make your dream business a reality.