Sole proprietorship or Limited Liability Company: which legal structure suits your business best?

Sole proprietorship or Limited Liability Company: which legal structure suits your business best?

One of the most important decisions when starting a business in Spain is choosing the legal form under which to operate: as a sole proprietor (autónomo) or through a Limited Liability Company (Sociedad Limitada or S.L.). This decision affects not only taxation but also legal liability, internal business organization, external perception, and medium- to long-term growth opportunities.

In this article, we analyze the key differences between these two structures and, most importantly, help you understand which one might be best suited to your project depending on its current stage and characteristics.

Tax differences between both structures

From a tax perspective, sole proprietors are taxed on their personal income through the Personal Income Tax (IRPF), which is a progressive system. This means that the higher the profit, the higher the tax rate, potentially exceeding 40% in the top brackets.

On the other hand, companies pay Corporate Income Tax (Impuesto sobre Sociedades), with a general rate of 25%, and a reduced rate of 15% for the first two profitable years if it’s a newly created company.

This difference becomes more significant when the business starts generating substantial profits. For moderate annual earnings, the sole proprietor tax scheme may be more efficient or at least neutral. However, when profits consistently exceed €40,000–50,000 per year, it usually becomes more tax-efficient to operate through a company—especially if not all profits are withdrawn as personal income.

However, taxation is not the only factor to consider. While the sole proprietor manages their business personally and directly, profits in a Limited Liability Company belong to the company itself. If a partner wants to access these funds personally, they must do so through salary or dividends, both of which are also taxed under IRPF. Therefore, it’s important to evaluate each case from a broader perspective.

Additionally, an S.L. is required to maintain full commercial accounting, file annual accounts, legalize accounting books, and comply with formal obligations before the Commercial Registry. A sole proprietor, by contrast, has lighter administrative requirements and lower management costs.

Which one suits your business: practical examples

The choice of legal structure should not be based solely on taxation. Other crucial factors include revenue volume, the nature of the activity, liability exposure, the need for partners or employees, and the image you want to convey to clients or investors.

In the early stages of a project, when the business model is still being validated, operating as a sole proprietor is often the simplest, most cost-effective, and flexible option. Registration is quick, no initial capital is required, no notarial procedures are needed, and you can start operating without major complications. This structure is especially suitable for independent professionals, low-structure activities, or freelance services.

A typical profile might be a freelance graphic designer, therapist, or consultant who earns under €40,000 per year and doesn’t yet need to hire staff or make significant investments.

On the other hand, a Limited Liability Company becomes the better choice once the business reaches a certain level of maturity. It is particularly advisable if the activity generates recurring profits, there’s growth potential, or employees, partners, or investors will be involved. The ability to limit liability to the capital contributed—even if it’s symbolic—is a key advantage in sectors with legal or financial risk.

It’s also more appropriate for businesses needing to access financing, sign larger contracts, or project a stronger corporate image. A good example would be a digital agency with several employees, more than €70,000 in annual revenue, and plans to reinvest profits into new developments.

Thus, while a sole proprietor is personally liable for business debts and obligations, in an S.L., risk is limited to the capital invested. This protection of personal assets is a decisive factor for many entrepreneurs when transitioning to a company.

Can you switch from sole proprietor to S.L.?

Yes, and in fact, this is a common transition among professionals and entrepreneurs. Many starts as sole proprietors to launch their business quickly and at a low cost, and later—once the business model is validated and stable—they choose to form an S.L.

The switch isn’t automatic, but it can be carried out smoothly with proper planning. The process includes formally incorporating the company before a notary, registering it with the Commercial Registry, and notifying the new entity to the Tax Agency and Social Security. Simultaneously, you’ll need to transfer contracts, bank accounts, tax registrations, and other professional relationships to the new company.

In most cases, the individual who previously operated as a sole proprietor becomes a partner-director of the new company. This also affects their social security status, as they become a corporate self-employed worker, which has some differences compared to regular self-employed status.

It’s essential that this transition be made with the right legal and tax advice, as a poorly executed switch can result in duplications, penalties, or operational issues.

If you’re just starting out, with moderate revenue, no partners or employees, and want a simple, flexible setup, starting as a sole proprietor is usually the best option.

But if your project is growing, your revenue is increasing, you’re hiring a team, or you want to limit your personal liability, then it’s time to seriously consider forming a Limited Liability Company (S.L.).