Antonio Flores’ Blog

Setting up a Spanish Limited Company is a relatively straightforward process. In fact, many investors who are looking to start a business will immediately think of the colloquially known as “S.L. company”, formed via a notarial deed of company incorporation. And for many too, that’s about as knowledgeable as they get with these type of business structures.

Below is a list of “must knows” for any S.L. owner or director:

S.L.s are not devised for one-man bands: The Spanish Hacienda, whilst accepting that an S.L. is a legitimate form of conducting business, will not accept those that lack an infrastructure to carry out the commercial or professional activity -whether human or material resources (staff, office etc.)- e.g. people who work from home. These companies are described as “dummy” or “shell” companies and operating through them could be challenged by the Tax Office. This is the case too with services where the company could not exist without the founder: think of medical doctors, dentists, singers, elite sportsmen and women etc.

S.L.s cannot be “closed down”: I typically hear of people talk about closing a company down when debts become insurmountable. A company can only be closed if there are no debts; if there are, the director is obliged to file for bankruptcy within two months after it becomes insolvent, at the Courts.

High vs low share capital: Unless you are looking to show financial credibility with your potential clients or lenders, shareholders and directors should go for a lower share capital; the lower this figure is the less they will be personally responsible for. But this has downsides too: if a company has a net worth below 50% of the share capital, it is technically insolvent, being a legal ground for forcible wind up.

An S.L. is not a personal piggy bank: Company money and personal money are separate, no matter how much we try to try to stretch it; logic and common sense must prevail here. Here are some tips of what is deductible and what not: shopping list (if consumed by the business), clothes (only if they have a logo or anagram of the S.L.), vehicles and petrol linked to the S.L., business meals (up to 1% of the net income of the S.L.). Not deductible are holidays, new home kitchen, kids schools, etc.

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1. The One-Man Band Company: if you are a singer, a real estate agent with no employees or a dentist and you set up a limited company to pay less tax, you have a problem. The Directorate General of Taxes has stated that a company –consisting of a single shareholder who also is the director- that is unable to trade without the direct participation of owner/director, is in fact a shell or ‘simulated’ company.The main consequence is that the Tax Office will deem the person acting through company as self-employed, for tax purposes. To avoid this, a company must have enough human and material resources to operate irrespective of owner/director. In 2014, the Tax Office initiated 1.919 full inquiries in connection to this type of fraud. 
2. Limited vs Personal Liability: the acronym S.L. stands for “Sociedad Limited”, which suggests companies will protect the entrepreneur should things go wrong (save for fraud). Self-employed do not enjoy such protection and are personally liable with present and future assets for losses incurred in the course of the business activity.
3. Growth expectations: an entrepreneur that intends to grow cannot operate as a sole trader. As the business increases its turnover, so do the associated risks. Self-employed operators without corporate protection will risk less and, as a consequence, expand at a slower pace (which may not be a bad thing after all).
4. Dealing with monies: Sole traders will have direct access to the proceeds of the business activity whereas in a company, the director (or the shareholders) cannot just dip into the account when in need of cash. In the latter case, it is important to note that any money received by the company belongs to the company and legally, to draw cash out, the director will have to issue a salary (“nomina”) or take out a dividend, both of which are taxable.
5. Costs: Setting up as a sole trader will not attract cost whereas a company will cost anything from €600 to €1400 Euros, depending on various variables: share capital, legal assistance, choice of Notary Public etc.
6. Professional Image: In some businesses and industries, having a limited company will provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.

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