Limited Liability for the Self Employed

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It is not well known in Spain, especially in the expat community, that limited liability is possible for the self-employed entrepreneur, without the need to establish a formal limited company.

This article explains the steps that a self-employed entrepreneur needs to take to register as a limited liability.

Before explaining this in detail, lets first understand what limited liability means and when this would be useful and when it would be unnecessary.

What is limited liability?

Limited liability is a concept where the financial responsibility of a person who is in business is limited, usually so that the only financial risk is the money the person has invested in the business. In practice this means that creditors cannot go after the entrepreneur to force the payment of debts out if the personal, non business capital and assets of the entrepreneur.

In the typical Spanish SL (Sociedad de responsabilidad limitada) company, the entrepreneur would typically only invest 3.000€, this being the legal minimum share capital for an SL company. In practice the entrepreneur might also lend money to the company, usually in a very informal manner. The law treats such loans as quasi-share capital. So all this money invested by the entrepreneur is at risk and if the business fails would almost certainly be lost.

Anybody else (except the tax office) that is owed money by the business, suppliers, customers, lenders etc, would also loose their money if the business fails.

The tax office has a privileged position and would get paid before the normal creditors but if there is no money or other assets in the failed business to pay tax debts, then the tax office will also loose out. The only exception to this is in the case that the limited company has been irresponsibly or fraudulently mismanaged by the directors of the company, in which case they may be subsidiarily responsible for unpaid taxes.

The problem with SL companies in Spain is that they require a lot of extra formality in their bookkeeping and other regulatory obligations, and these take a lot of time and result in much higher professional costs.

When is a self-employed person an entrepreneur?

The dictionary definition is pretty clear:

  • A person who organizes, operates, and assumes the risk for a business venture.
  • One who takes the initiative to create a product or establish a business for profit; generally, whoever undertakes on his own account an enterprise in which others are employed and risks are taken.
  • A person who organizes and operates a business venture and assumes much of the associated risk.

A person with such a business should either use a company to trade or take advantage of Spain’s entrepreneur’s limited liability regime.

So person would not be considered as an entrepreneur if all they do is provide services to customers, without employing anyone or supplying bought products, and in so doing never incurring any risk. In such situations the only risks they take is not being paid by their customers and not being able to generate enough income to pay for their cost of living.

In Spain, such a self-employed person would usually be called a ‘profesional’ and classified as such in the tax and business statistical definitions.

If the ‘profesional’ does work for customers that involves some kind of risk, they can cover this with a typical professional indemnity policy.

Spain’s limited liability regime for entrepreneurs (Empresario de Responsibilidad Limitada)

The obligations are as follows:

  • The entrepreneur must execute a deed before a notary public in which the entrepreneur’s wish to be granted this status is stated. In the deed the entrepreneur’s habitual residence should be stated which would protect from any business debts.
  • The deed is presented to the provincial mercantile registry to make the entrepreneur’s status public information. The mercantile is responsible for requiring the corresponding Land Registry of the registration to record the ERL’s habitual residence to make public its protected status.
  • The ERL must file annual business accounts similarly to a Limited Liability Company, although the accounting formalities are less complex. This means that the annual accounts must be filed with the provincial Mercantile Registry within the first seven months of each financial year. Failure to file the annual accounts within this period will result in the loss of the ERL status, although this would be automatically restored once the accounts are filed.
  • It is also important for those doing business with the entrepreneur to know that they are contracting with an ERL, so the entrepreneur must publicise this status in all business documentation (invoices, letterhead, website, marketing material etc). The text “Emresario de Responsibilidad Limitada” or simply the initials “ERL” should be added alongside the person’s name.

It should be remembered that the limitation of the ERL’s liability is not absolute. Although the registered home is protected,  as indeed are the spouse’s assets, other assets are not protected such as personal bank accounts, investment assets like properties, pension plans and savings funds.

In order to have greater protection of personal assets it is advisable to create a Sole Proprietorship Limited Liability Company (Sociedad Limitada Unipersonal).

Spence Clarke specialises in the provision of Spanish tax, accounts, law and labour services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.