Sole Trader vs. Limited Company: Key Differences

Comparison of Legal Forms

Sole Trader

Basic Features:

• No required minimum capital.
• Unlimited liability.
• Pays income tax.
• The employer has total control of the company.

Advantages:

• It's a perfect business form for the operation of small-sized companies.
• The employer has complete freedom of choice and total control of the company, as they do not need to agree with any partner.
• This form requires the fewest steps and procedures to carry out activities since there is no process to acquire legal personality.
• There is no minimum capital for start-up.
• It can provide tax credits to pay income tax, meaning that a progressive rate applies that increases as profits rise. In contrast, corporations have to pay a fixed tax rate of 25% or 30%. This means that companies with relatively low profits can benefit from progressive taxation.
• It offers some discounts for people under 35 and women over 45 who join the General Scheme of self-employed workers; they can reduce their contribution base to 75% of the minimum for three years.

Disadvantages:

• The responsibility of the independent business owner is unlimited since there is no separation between business and personal assets.
• The autonomous person must answer personally for the obligations arising from the company's activity.
• If the employer or business owner is married with community of property, the spouse's property may be affected by the duties arising from the company's activities.
• Sometimes, public tenders require participants to be a corporation.

Limited Company

Basic Characteristics:

• The minimum number of founders is one, in which case it is a single-member limited liability company.
• The capital may not be less than €3,005.06, is always expressed in Euros, and must be fully subscribed to and paid at the time of incorporation. Financial contributions can be made, but personal work cannot.
• The company capital will be divided into equal shares, cumulative and indivisible, that cannot be incorporated into or called securities or actions.
• Liability is limited to contributions.
• The company is taxed on corporation tax, and the partners pay income tax.

Advantages:

• It's the ideal legal form for small companies with few partners and low capital.
• There is a register of members, so there is control and knowledge of the people who own the shares.
• It is not necessary to have an external expert report when making monetary contributions, reducing the associated costs.
• The liability of partners for the debts of society is limited.