Sole trader or limited company? When it pays to switch to an SL

One of the questions we hear most often at DPL Asesores is: when does it pay to set up a limited company (SL)? The answer depends on your net profit and on whether you reinvest or distribute dividends.

Personal income tax vs corporate tax

• Sole trader (IRPF): progressive rate from 19% to 47%. From roughly €40,000 of profit, the effective rate exceeds 35%.
• SL (corporate tax): flat rate of 25% (15% in the first two profitable years).

The dividend trap

If you set up an SL but distribute all the profit as dividends, you pay twice: 25% corporate tax + 26% on the dividend (effective rate ~45%). It only pays off if you reinvest a significant share in the business.

Our recommendation

The realistic threshold is €40,000-50,000 of net profit, as long as you reinvest at least 40%. At DPL we run a personalised simulation with your real figures. Request your simulation.