Setting up a Limited Liability Company (SL) can be an excellent option for many entrepreneurs, as it offers advantages such as personal asset protection. However, it’s not all benefits. This business model also presents a series of disadvantages that should be carefully evaluated before incorporation.

From our administrative consultancy in Palma de Mallorca, we explain the main drawbacks you should consider if you are thinking of creating an SL in Palma de Mallorca.

1. Greater administrative complexity

Unlike registering as a sole trader, the creation and management of an SL involves more procedures and legal obligations. You must maintain formal accounting, hold shareholders’ meetings, file annual accounts, and comply with commercial and tax regulations. This requires more rigorous management and often professional support.

2. Higher initial and maintenance costs

Forming an SL includes several initial expenses such as:

• Public deed before a notary
• Registration in the Commercial Registry
• Minimum share capital of €3,000
• Legal and tax advisory services

Additionally, maintaining an SL involves ongoing costs for bookkeeping, tax filing, and sometimes auditing. Therefore, it’s essential to assess whether these expenses are outweighed by the benefits of a corporate structure.

3. Restricted transfer of shares

Shares in an SL are not freely transferable like those in a public company. Selling or transferring them often requires approval from other partners or compliance with internal statutes, which can make it difficult to bring in new investors or exit the company.

4. Bureaucracy in decision-making

In an SL, important decisions must be approved in a general meeting of shareholders, which can slow down business operations, especially in urgent situations or when disagreements arise. This added bureaucracy can hinder agility.

5. Mandatory minimum share capital

Although not a large amount, a minimum capital of €3,000 is required to establish an SL. For some entrepreneurs with limited resources, this may pose a challenge.

6. More complex taxation and potential double taxation

An SL is subject to Corporate Tax, which may lead to a higher tax burden compared to operating as a sole trader. In addition, when profits are distributed as dividends, the shareholder must also pay personal tax—resulting in double taxation.

7. More complex closure process

Closing a Limited Liability Company requires a formal dissolution and liquidation process, which is usually more lengthy, costly, and bureaucratic than closing as a self-employed person. This involves convening meetings, appointing liquidators, settling debts, and filing official documentation.

8. Less flexibility in handling company funds

In an SL, the company’s money is not for personal use at will. It can only be withdrawn as salary, dividends, or loans—each with its own fiscal and legal implications.

Is setting up an SL a good idea?

A Limited Liability Company is a smart option if your business involves multiple partners, requires investment, or you want to protect your personal assets. However, before moving forward, it is essential to seek professional advice to determine if the advantages outweigh the disadvantages in your specific case.

At our gestoría in Palma de Mallorca, we help you create a Limited Liability Company in Palma de Mallorca safely and ensure you choose the right legal structure for your business goals.

Are you considering starting a company in Mallorca? Contact us with no obligation—we’ll guide you step by step.