Sole trader or company: key factors for making the right legal decision

 

1. Liability: the scope of personal risk

One of the main differences lies in liability towards third parties.

• A sole trader is personally liable for all business debts.

• A limited company, on the other hand, limits liability to the capital invested, protecting the personal assets of the shareholders—at least in principle.

However, this protection is not absolute. In practice, banks often require personal guarantees, and company directors may be held personally liable in cases of mismanagement or negligence.

2. Taxation: total tax burden and planning

There are significant differences in how each structure is taxed:

• Sole traders pay personal income tax (IRPF) on business profits, with progressive rates.

• Companies pay corporation tax (usually 25%), and shareholders who work in the business must also pay personal income tax on their salaries.

From an income threshold of around €40,000–€60,000 per year, operating through a company may result in lower overall taxation, especially if income and compensation are planned effectively.

3. Formal obligations and management

Forming a company requires a higher level of administrative formality:

• Accounting must follow the General Accounting Plan

• Legalisation of accounting books

• Filing of annual accounts with the Companies Registry
   

While the sole trader model is more flexible, both structures require sound financial and tax management. Today, digital tools have significantly streamlined these processes, particularly for small businesses.

4. Financing and access to capital

The legal form can also affect access to funding. Although both companies and sole traders face strict requirements—especially in early stages—a properly constituted company with transparent accounting is often seen as more reliable by banks and investors.

Furthermore, companies can raise funds through capital contributions, silent partnerships, or other financing instruments that do not require giving up control of the business.

5. Scalability and business development

Companies offer a more suitable framework for growth. As the business grows, hires staff or bids for public contracts, the corporate structure allows for more professional operations and a stronger business profile.

For many entrepreneurs, moving from sole trader to company is a natural step once the business reaches a certain scale.

At Valero Tax Legal, we offer tailored advice to help you define the legal and tax structure that best aligns with your business goals.