To SL or not to SL, that is the question

[versión en Español]

[If you are new to the Spanish fiscal system, here’s some context for you: An SL, or Sociedad Limitada, is the rough equivalent of a limited company in other jurisdictions. SLs pay a flat rate of 23-25% on revenue after taxes (15% during the first two profitable years), and they are usually the solution when you have co-founders or want to hire employees. Whether and when to move your autónomo activity into an SL - that’s not just a numbers game.]

The moment I crossed the 90k/year threshold, my then-gestoría told me to start thinking about opening an SL, “because of taxes”. I started hearing the same recommendation at networking events and coworking spaces, and on social media, usually promoted by other gestorías.

The details were fuzzy, but everyone agreed: this is what you do.

(If you know me, you know that this is exactly the kind of comment that makes me dig deeper.)

The SL question isn’t a tax question. It’s a life/work design question.

From a tax perspective, the numbers are indeed clear-cut. The corporate rate in Spain is 23%-25% (15% for the first two profitable years). The marginal IRPF rate (income tax for autónomos) above 60k is 45-47%. 25% is less than 45% - yes, I get it. Case closed? 

Maybe. Or maybe not. So this is what my subsequent conversation with my then-gestor looked like: 

• Them: At your revenue level, you should really start looking into the SL. I can send you a list with the documents you need. 
• Me: Oh right, does that mean I’d have more money left over at the end of the year? 
• Them: Exactly, you can expense a lot more things, and the SL pays less taxes. 
• Me: Does that mean I can pay my rent through the SL? 
• Them: Well, no. That’s a personal expense. 
• Me: Right, can I do anything about the school tuition for the kids? Or the summer school costs? 
• Them: Actually, no, because those are private expenses. 
• Me: OK, so the idea is that I keep my retirement savings in the SL, right? 
• Them: Not really, you’d have to pay IRPF on that if you ever take it out. 
• Me: So, if I want to use my revenue to fund my lifestyle, where exactly would I save anything? 
• Them: Well, maybe we wait for another year. 

¡Ojo! I am not saying an SL is the wrong choice. It just shouldn’t be the default choice based on your income. 

Four tax-unrelated questions to ask yourself before creating an SL

An SL is a good next step when you have stable revenue from multiple sources, and you continuously invest in your business to grow and scale. It can be the right choice if you are thinking about hiring someone. And it is definitely the easiest solution when you want to bring in a business partner, or if your plan includes selling the business in the future. However, if you provide services, running a lean solopreneur setup, this might no be the best option for you. 

Maintaining an SL requires continuous investment, and it adds complexity that you may not need right now. So here are some questions that can help you decide whether it’s time to investigate options, or where you can continue as is. 

[And if you are a quiz person, here’s one you might enjoy: To SL or not to SL - that's the question!]

What do you do with your money?

An SL pays less taxes on revenue, as long as the money stays within the SL for growth or reinvestment. The SL can’t pay for your mortgage, your kids’ afterschool activities, or your weekend trip to Carcassonne. 

In practice, that means that for autńomoas who extract close to 100% of their revenue every month, the net savings are negligible. And if we account for the additional costs of maintaining the SL, you are probably better off reviewing your current autónoma setup for optimisations, instead of creating another entity to take care of. 

Now, if you generate more revenue than you need for life and joy, then an SL might (!) save you some money. So the main question is: if you deducted all your life choices from the income you generate: Is the remaining amount enough to merit its own legal structure? 

How stable is your income? 

An SL has fixed administrative costs. Monthly gestoría fees are higher, there are annual accounts to file, the accounting is more complex, and there are legal obligations around capital and governance that don't exist as an autónoma. And these requirements are independent of the revenue you generate each month. 

If your income is project-based with months of silence between contracts, or if losing your main client means you’ll need some time to re-group, you may need more flexibility in your cost structure. You probably know that nagging anxiety that creeps in when your aren’t quite sure when the next paycheck is coming in. Maintaining an SL on top of that just adds stress you don’t need. The autónoma status is structurally a lot more flexible for these kinds of situations. 

What are your plans for the next five years? 

Do you want to bring in a business partner? Do you want to sell your business (exit)? Are you planning to hire? An SL may be the right solution for these scenarios. You’d be creating a legal entity that can hold employees, contracts, and equity in a way that the autónoma status can’t. That said, I have hired someone as an autónoma, so if you are looking to hire one person, it is possible. 

If your five-year plan is “continue doing what I am doing, maybe raise rates”, then the SL structure adds complexity by solving a problem you don’t have. If you are a service professional, you are probably in that situation.

Do you enjoy administrative complexity? 

Don’t laugh, some people do enjoy complex setups. Running an SL means you are now a company director as well as a service provider. You are officially in charge of compliance, annual accounts, and every board meeting (even if that’s just you). You are now legally obliged to separate your personal finances from your company’s accounts. And while you can outsource some of these obligations, it does add a layer of complexity that you may not enjoy. 

Side note: even as an autónoma, you can (and should) separate your business finances from your personal finances. But that’s something to dig into in a future post.

If you open an SL: do it well, or don’t do it (yet)

An SL can be a great solution for a very specific problem: stable revenue over multiple years that you aren’t using for your personal expenses, plus serious expansion plans. If that isn’t you, an audit of your autónomo setup is probably the better next step. 

An SL does not make you more serious. It doesn’t make you more or less professional, and it doesn’t automatically get you more clients. That’s what your financial and business strategy is for. 

If you’d like to think through the SL or not SL question with your real numbers, we created a quiz for exactly that (internal) conversation: SL Assessment Tool.

And if you’d prefer to talk to us, here’s our calendar.