Should I work as a freelancer or start a limited company? This is a question we get asked a lot here at Rauva.

In today's evolving business landscape, many professionals are faced with the decision of whether to go self-employed and pursue freelance work or establish a limited company, called a limitada or ‘LDA’ in Portugal.

Both options come with their own advantages and considerations, making it essential to choose the path that aligns best with your goals and circumstances, but there is, however, a quick answer, in that it’s nearly always beneficial to establish a limited company.

Nonetheless, in this article, we will explore the pros and cons of freelancing and establishing a limited company in Portugal. By understanding the key factors and asking yourself the right questions, you can make an informed choice that sets you on the path to success.

Understanding the Options: Freelancing and Limited Company

Before delving into the decision-making process, it's crucial to understand the fundamental differences between freelancing and establishing a limited company in Portugal.

Freelancing (or being ‘self-employed’ or a ‘sole trader’) refers to working as an independent contractor, offering services to clients on a project basis, and usually trading your time for money. There are various legal forms in which undefined can take, especially if you are coming from overseas to work as a freelancer, but the Portuguese version of ‘sole tradership’ is called ENI or ‘Empresário Em Nome Individual’. You are your business, and there is no legal separation between you and your business activities.

On the other hand, a limited company is an entity that is legally separate from the business owner. It has its own legal identity and operates as a business, providing products or services to clients while enjoying certain legal and financial protections. Although with a limited company you can employ staff or start the company with multiple owners, you don’t need to, and a limited company can still be entirely owned and operated by a single person (called a ‘Sociedade Unipessoal por Quotas’ in Portugal).

Pros and Cons Comparison

As mentioned in the intro to this article, there are pros and cons to both working as a freelancer in Portugal and establishing a limited company.

Pros and Cons of Freelancing

Flexibility and Independence: Compared to regular employment, you can enjoy the freedom to choose your projects, clients, and work schedule.

Diverse Opportunities and Projects: Explore a variety of assignments and expand your skill set.

Potential for Higher Earnings: With the right clients and projects, freelancers can earn more than employed workers.

Income Instability: That said, freelancers regularly face income fluctuations due to project availability and market conditions, compared to employed workers.

Self-Motivation and Discipline: As a freelancer, you are solely responsible for managing your workload and staying motivated.

Isolation and Networking Opportunities: Freelancers often work alone, limiting networking opportunities and social interactions.

Pros and Cons of Establishing a Limited Company

Limited Liability Protection: Establishing a limited company separates personal and business liabilities, providing protection for personal assets.

Credibility and Professional Image: A limited company often portrays a more professional and established image to clients.

Access to Funding and Investment Opportunities: Limited companies may find it easier to secure funding or attract investors for business growth.

Compliance and Administrative Requirements: Operating a limited company comes with additional compliance obligations and administrative responsibilities.

Tax Implications and Obligations: Limited companies have distinct tax obligations, including corporate income tax and VAT.

Decision-Making Autonomy: As the owner of a limited company, you have greater control over business decisions.

Key Factors to Consider

When deciding between freelancing and establishing a limited company, several key factors should be considered:

Financial Considerations

Taxation: Evaluate the tax implications of each option, particularly the comparison between personal income tax as a freelancer and corporate income tax as a limited company. Ultimately, one of the biggest advantages of running your business as a limited company is the significant tax savings you could make compared to paying personal income tax as a freelancer. Limited companies are subject to corporation tax, which is currently 21% in Portugal, regardless of the amount of profit you make. If you are the owner of a limited company, you can choose to take a small salary, pay minimal income tax and social security, and take most of your income in the form of dividends (or company profits).

If you are paying personal income tax as a freelancer, you can potentially pay up to 48% in income tax, which can cost you considerably more than you’d pay in corporation tax as a company.

Cash Flow and Expenses: Consider the financial stability and cash flow management involved in both freelancing and running a limited company. Running a limited company does come with financial obligations, for instance, accounting and legal costs can be higher if you are running a company, but these are usually offset by the savings in taxes.

Long-Term Sustainability and Growth Potential: Assess the growth potential and long-term viability of your chosen path. The potential growth of your enterprise is always greater if you have a limited company. You will have more credibility to attract larger clients and some clients may even require you to have limited company status before working with them. In addition, banks and other lenders tend to be more hesitant about financing for freelancers or self-employed people meaning you might not be able to borrow as much to fund any growth of your enterprise or you might have to pay higher rates of interest.

Legal and Compliance Obligations

Personal Liability vs. Limited Liability: Even considering tax benefits and growth potential, liability and risk is the main reason that we would encourage people to go with the limited liability company option. If you don’t, your personal assets, including your house, can be at risk if you have any financial or legal trouble with your business. Its always wise to protect yourself the best you can in business.

Administrative and Reporting Requirements: Consider the administrative tasks and reporting obligations associated with freelancing and operating a limited company. One of these is invoicing as required by the tax authorities in Portugal.

Compliance with Tax Laws and Regulations: Understand the tax laws and regulations that apply to both freelancers and limited companies to ensure compliance. Whether you have a company or operate as a freelancer, we always recommend you get a Portuguese accountant who can help you navigate the confusing issues of taxes in Portugal.

Making the Decision: Questions to Ask Yourself

To help you make an informed choice, here are some essential questions to consider:

1.      What are your undefined and aspirations?

2.      How comfortable are you with assuming personal liability for business activities?

3.      Are you prepared to handle the administrative and compliance requirements of a limited company?

4.      What is your level of financial stability and risk tolerance?

5.      How important is flexibility and independence in your work?

FAQs

Should I choose to be a freelancer or establish a limited company in Portugal?

The decision depends on various factors such as taxation, liability, flexibility, and long-term sustainability, however forming a limited company is usually the better choice. Assess your goals and circumstances to make an informed choice.

How does taxation differ between freelancing and establishing a limited company?

Freelancers are subject to personal income tax, while limited companies have corporate income tax obligations. Consult with a tax professional to understand the specifics and how they relate to you.

What are the compliance requirements for freelancers and limited companies?

Freelancers must meet registration, invoicing, and data protection requirements, while limited companies have additional obligations such as commercial registry compliance.

Can I switch from freelancing to establishing a limited company (or vice versa) later?

Yes, it is possible to transition between freelancing and establishing a limited company based on your evolving needs and circumstances. Seek professional advice for a smooth transition.

Conclusion

Choosing between freelancing and establishing a limited company is a significant decision that requires careful consideration of various factors. By understanding the pros and cons, evaluating financial considerations, legal obligations, and personal preferences, you can determine which path best aligns with your goals and aspirations.

Remember, this article provides a condensed overview, and for more detailed information, refer to a comprehensive guide on freelancing and limited company formation in Portugal, and here at Rauva we’re here to help you with this process.