From What Profit Level Is It Worth Having a Company?

One of the most common questions for self-employed professionals and small business owners is determining the optimal moment to make the leap and set up a company. The answer is usually linked to the volume of profits and how those earnings are to be taxed.

Profits and taxation: the break-even point

In a company, the owner can keep part of the profits within the business, avoiding personal income tax (IRPF in Spain), provided that their salary is set at market value. This way, only the withdrawn amount is taxed under personal income tax, while the remaining profits stay in the company and are taxed at the corporate tax rate (currently 25% or even less in some cases).

Practical example

If a company earns €60,000 in profit (before the owner’s salary) and the owner withdraws that exact amount as salary:

• The company’s final profit would be €0.

• The €60,000 would be taxed under the owner’s personal income tax.

In this scenario, the total tax burden would be very similar to being self-employed, meaning there would be little difference.

However, if profits are higher and it’s not necessary to withdraw them all as salary, the company structure can lead to tax savings. For example:

• Total profit: €100,000

• Salary withdrawn: €60,000

• Profit retained in the company: €40,000 (taxed at 25% = €10,000 corporate tax)

• Personal income tax on the salary: €15,622.50

• Total tax burden: €25,622.50, compared to €33,462.50 as a sole trader.

Important considerations

The salary must reflect the actual duties performed. An artificially low or high salary can be adjusted by the tax authorities, recalculating both personal and corporate tax. Additionally, managing a company involves greater formal obligations and administrative costs.