Why the threshold does not exist
The comparison people make is between a progressive personal rate that reaches the high forties and a corporate rate of 25 %, with reduced rates for small and newly created companies. Put like that, incorporating looks obviously right above a certain profit.
The comparison is wrong because a company's profit is not yours. To spend it you have to take it out, and taking it out is itself taxed: as salary, through the progressive personal scale plus social security, or as a dividend, through the savings scale which begins at 19 % and rises through 21 % and 23 % as the amounts grow. Corporate tax is not an alternative to personal tax on money you are going to spend. It is a first layer.
What a company costs before it saves anything
| Item | Order of magnitude |
|---|---|
| Formation: notary, registry, name certificate | A few hundred euros, once |
| Accounting and corporate compliance | Meaningfully more than self-employed bookkeeping, every year, forever |
| Annual accounts, corporate tax return, accounting books filed at the registry | Fixed annual obligations that exist whether or not the company traded |
| The director's own social security | Does not disappear. A working owner-director contributes in their own right |
| Closing it down | Formal liquidation, with its own costs and its own tax consequences |
That last line matters more than people expect. A company is easy to open and slow to close, and a dormant company that nobody winds up keeps generating filing obligations and penalties for years.
The situations where it genuinely makes sense
- You reinvest most of the profit. Money that stays in the business to buy equipment, hire people or build stock is taxed once, at the corporate rate, and works from there. This is the strongest argument by a distance.
- There is more than one owner. Two people sharing a business need a way of holding it, of splitting it, of letting one leave. A company is a governance instrument before it is a tax instrument.
- You want to separate the business from your personal assets. Limited liability is not absolute and it is routinely undermined by personal guarantees, but it is real.
- Your customers require it. Some clients will not contract with an individual. That is a commercial fact, not a tax argument, and it is a perfectly good reason.
The situations where it is usually a mistake
- You need all the profit to live on. Then everything comes out as salary or dividend and the second layer of tax appears in full, on top of the running costs.
- The business is you. Where the income depends entirely on one person's own work and the company has no real means of its own, the tax authority can question how the profit is split between the individual and the company, and Spanish law requires that services rendered personally be remunerated at market value. This is settled ground and it is checked.
- The turnover is irregular. Fixed annual costs hurt most in a bad year, which is precisely when the company still has to file everything.
- Somebody offered you the structure before asking what you do. That is a product, not advice.
On a profit of around 40,000 € entirely needed for living costs, a company almost never wins: the second layer plus the running costs exceed anything the corporate rate saves. On a profit of around 100,000 € of which perhaps half is genuinely reinvested, the picture can reverse, and reverse substantially. Those are illustrations of shape, not thresholds: the actual answer moves with your region's income tax scale, your contribution base, your family circumstances and what you intend to do with the money. We would not give a figure without seeing yours, and we would not trust anybody who did.
What people get wrong once the company exists
Three things, consistently. Paying the director nothing, or a token amount, when the director is doing all the work. Using company funds for personal expenses, which is the single fastest way to turn a tax discussion into something worse. And forgetting that the company's money is not the owner's money, so that withdrawals sit in a loan account nobody documents and everybody has to explain three years later.
A company run properly is entirely straightforward. A company run as a personal wallet with a corporate name is a liability that grows quietly.
The middle route people forget
Between remaining a sole trader and forming a company there are intermediate arrangements that are often a better fit: a joint venture contract between two professionals who want to share costs but not a balance sheet, or a civil partnership arrangement for a project with a limited life. They carry fewer formalities than a company and, critically, they are much easier to unwind. They are not right for a business that intends to accumulate assets, but for two freelancers sharing an office and a client list they frequently are.
The other overlooked option is doing nothing yet. A company formed in the year your profit first spikes, because an adviser said the moment had come, is a permanent cost incurred on the basis of a single year. If the spike is repeated three years running, the decision is a great deal better informed — and nothing has been lost, because a company can be formed at any time.
What tips the balance on your self-employed work
One question, asked honestly: what happens to the profit? If it stays in the business, the company is worth modelling. If it goes into your current account every month, the structure is adding a layer of cost to reach the same place. Everything else — rates, thresholds, what a competitor did — is secondary to that.
The second question is how long you will keep doing this. Set-up costs, running costs and the eventual liquidation are spread over the life of the company. A structure that makes sense over ten years frequently does not over three.
This decision needs your figures, modelled both ways, in writing, with the risks stated — which is a report rather than a page, and it sits outside the monthly compliance fee. What the fee does provide is accounts clean enough for the report to be written. Before any of that, the cheaper wins are usually still on the table: see lowering the bill without inventing costs and choosing the right regime, and the self-employed basics on self-employed in Spain.
Daniel's 90,000 €, run three ways
Daniel is an IT consultant in Madrid. He works alone, from home, for three regular clients, and this year will close with about 90,000 € of profit after his costs and his self-employed social security. At dinner one friend told him «above 60,000 € you have to be a company» and another that «with an SL you pay 25 % and that is it». He has asked for a quote to form a company and wants to know what he gains before signing.
To keep the arithmetic readable we simplify: an approximate general income tax scale with no personal reliefs beyond the basic allowance, the general 25 % corporate rate, and 2,500 € a year for running the company (bookkeeping, annual accounts, corporate tax return, registry). Social security is left out because it does not change between scenarios: a member who controls and runs their own company keeps paying as self-employed.
A: he stays self-employed
The allowance for hard-to-evidence expenses, capped at 2,000 €, leaves 88,000 € taxable. Income tax is roughly 29,447 €, and 60,553 € is his to do with as he likes.
B: he incorporates and takes everything out
The company pays him a salary of 50,000 €, on which his income tax is about 12,407 €. The company's profit is 90,000 − 50,000 − 2,500 = 37,500 €, taxed at 25 %: 9,375 €. The remaining 28,125 € goes out as a dividend, taxed in the savings base at 19 % on the first 6,000 € and 21 % on the rest: about 5,786 €.
C: he incorporates and leaves half inside
He pays himself 45,000 €, what he needs to live on, with income tax of about 10,557 €. The company makes 90,000 − 45,000 − 2,500 = 42,500 € and pays 10,625 €. Nothing is distributed, and 31,875 € stays in the company.
| One year, 90,000 € of profit | A. Self-employed | B. Company, all out | C. Company, reinvests |
|---|---|---|---|
| Income tax on activity or salary | 29,447 € | 12,407 € | 10,557 € |
| Corporate tax | 0 € | 9,375 € | 10,625 € |
| Income tax on dividends | 0 € | 5,786 € | 0 € this year |
| Running the company | 0 € | 2,500 € | 2,500 € |
| Total going out | 29,447 € | 30,068 € | 23,682 € |
| Money in Daniel's hands | 60,553 € | 59,932 € | 34,443 € |
| Money inside the company | — | — | 31,875 € |
If Daniel needs everything to live on, the company saves nothing: it costs him about 600 € more a year, plus the work. If he can leave half inside, the company holds 31,875 € to invest, against the 26,110 € he would have as a sole trader after living on the same amount. The difference, some 5,800 € a year, is real, but it is a deferral: distribute those 31,875 € one day and between 19 % and 23 % falls on them, and most of the advantage goes.
The fine print in column C
The salary is not his to set freely: where all the turnover comes from the member's personal work and the company has no resources of its own, his pay must reflect market value, and a company billing 90,000 € for one person's work while paying him half can see that split challenged. The company's cash is not his: personal spending on the company card, or withdrawals with no payslip or dividend behind them, create a loan account someone will have to explain. And leaving costs more than entering: a company forms in days and is wound up in months, with its own cost and its own tax.
Who looks after what if you take the step
We work with individuals. If you form a company, its bookkeeping, annual accounts and corporate tax return will be handled by a company accountant. What remains yours — the salary you pay yourself, the dividends you receive, your other income — we can help with, which is why we prefer the decision made beforehand, with both sets of figures on the table. The broader comparison is in self-employed or limited company, and the starting point for a look at your own numbers is the self-employed form.