What Is an LLC? A Guide for Entrepreneurs in Spain

Are you thinking about starting a business and wondering which legal structure is best for it? In the dynamic world of entrepreneurship and investing, the right choice can make all the difference. Today we dive into the world of Limited Liability Companies (LLCs): we explain what an LLC is, its advantages and drawbacks, and how to set one up and pay taxes on it from Spain.

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1️⃣ What is an LLC?

A Limited Liability Company (LLC) is a legal hybrid between a corporation and a partnership or sole proprietorship. This structure combines the limited liability of a corporation, protecting the owners' personal assets from the company's debts and lawsuits, with the operational flexibility and tax benefits of a partnership.

LLCs are separate legal entities that can own property, take on debt and be sued. However, unlike corporations, they do not require a board of directors, which makes them less burdensome in terms of regulatory compliance.

This structure is ideal for entrepreneurs who want to avoid the double taxation of corporations without sacrificing protection from personal liability.

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2️⃣ Main advantages of choosing an LLC for entrepreneurs in Spain

🟢 Quick and simple setup: Starting an LLC can be a straightforward process, allowing you to begin operating in as little as a week. The ease and speed of this process are unmatched compared with the options available in Spain.

🟢 Low maintenance costs: Unlike business structures in Spain, maintaining an LLC in the United States is inexpensive, with relatively low state fees.

🟢 Favorable taxes: If your LLC makes no sales in the United States, you will be exempt from paying taxes there, paying only the state fees. This gives you a major tax advantage, with your tax obligations centered on your tax residence in Spain.

🟢 Anonymity: Some states offer total privacy over the members of the LLC, protecting your personal and business information.

🟢 Simple tax filing: LLCs only need to file taxes once a year in the United States, with no obligation to keep detailed accounting records.

🟢 Broad deductible expenses: The IRS allows a wide range of deductions, making the financial management of your business easier.

🟢 Personal liability protection: Much like Spanish limited companies, LLCs provide a "corporate veil" that protects your personal wealth from potential lawsuits.

🟢 Access to bank accounts and payment gateways: With an LLC you can easily open bank accounts and access international payment gateways.

🟢 No need to register as self-employed: Running an LLC does not force you to register as self-employed (autónomo) in Spain, which can be a major financial relief.

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3️⃣ Points to keep in mind

🔴 Pass-through taxation: The LLC's profits flow through to its managing members, who must pay Spanish personal income tax (IRPF) on them.

🔴 Form-filing costs: The forms required by the IRS, while essential, can represent an additional cost.

🔴 Obtaining the EIN: Applying for the Employer Identification Number (EIN) can take time, although there are services that speed up this step.

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4️⃣ Is it legal to own an LLC while living in Spain?

The legality of operating an LLC while you are a resident of Spain is clear: it is completely legal. What matters is meeting your Spanish tax obligations, which includes reporting foreign assets and income to the Spanish tax agency (AEAT). Here is what you need to know:

➖Reporting foreign assets: If your LLC's assets exceed €50,000, you must report them through Form 720 (modelo 720).

➖Taxation of income: As a member of the LLC, any income generated and remitted to Spain must be declared and taxed under the corresponding IRPF rules, keeping your tax compliance up to date.

And what if you want to set up an LLC in the United States as a non-resident foreigner? Some Spaniards, overwhelmed by changes in Spanish legislation and rising tax bills, look for alternatives outside the country; hence the decision to form an LLC in the United States, where regulation is simpler, accounting requirements are lighter and the tax environment is more favorable.

To establish an LLC in the United States, you must be of legal age and hold a valid passport. Although these companies are not taxed directly by the US Internal Revenue Service (IRS), the income generated passes through to the owner, who must report it on their tax return in their country of residence — in Spain, under personal income tax (IRPF).

That said, as we have already noted, the US tax regime can be more advantageous thanks to a more flexible policy on expense deductions, which may not apply in Spain.

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5️⃣ Tax obligations for LLC owners in Spain

You do not need to automatically inform the Spanish tax agency of your LLC's existence unless you meet the specific Form 720 threshold. However, transparency about your income is essential.

Declaring income earned abroad in your IRPF return is mandatory, ensuring that your tax position in Spain reflects all your sources of income, both domestic and international.

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6️⃣ How is an LLC taxed in Spain?

Although LLCs do not exist as such under Spanish law, foreign companies operating in Spain under this form can face a complex tax landscape that requires careful navigation.

➖Corporate income tax: For an LLC operating in Spain, its profits may be subject to Spanish corporate income tax (Impuesto de Sociedades) if the entity is deemed to have a permanent establishment in the country. This means that, even though the LLC structure allows for flexible taxation in its home country, operations in Spain may be subject to the standard corporate rates, currently set at 25%.

➖VAT and other taxes: In addition to corporate income tax, commercial activities carried out in Spain are subject to VAT (IVA), which requires companies to register for and remit this tax regularly. Other local or activity-specific taxes may also apply, depending on the type of operation.

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7️⃣ Business models that suit an LLC

LLCs offer great flexibility and tax advantages, particularly for businesses that operate digitally or internationally without a significant physical presence in Spain. Some clear examples:

➖Digital and online businesses: E-commerce (especially dropshipping), consulting, digital services or products, freelancers, online training, content creators and affiliate marketing are ideal candidates for invoicing through an LLC.

➖Activities that require a physical presence: Restaurants, real estate agencies or services that need an office or warehouse in Spain could face complications trying to operate exclusively through a foreign LLC.

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8️⃣ Requirements to set up an LLC

Starting an LLC, while relatively simple, involves meeting certain basic requirements and having a clear understanding of your tax responsibilities. Make sure you are prepared with the following:

➖Age and capital: You must be over 18 and have at least €500 to cover the formation costs and the initial tax forms.

➖Tax knowledge: A basic understanding of your obligations to both the IRS (the US Internal Revenue Service) and the AEAT (the Spanish tax agency) is crucial. It will help you navigate the tax complexities of running an LLC.

➖Documentation: Although the process may not always require ID documents such as a passport or national ID card, it is advisable to have them at hand. In particular, they may be needed for steps such as appointing a Registered Agent or opening bank accounts.

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9️⃣ Legality, costs and handling VAT with an LLC: do you need to be self-employed?

The VAT treatment for an LLC that operates from Spain but invoices internationally is specific. If your income from clients in Spain does not exceed €10,000 a year, you are not required to register for VAT in Spain. This means you can issue invoices to these clients without VAT. It is a relevant point for businesses that operate globally but still keep a client base in Spain.

As for where your business activity is centered, although an LLC is a pass-through structure (income flows directly to the members), having all your clients in Spain could raise questions from the Spanish tax authority (Hacienda) about where the economic activity is really generated. Even so, the nature of the LLC allows a degree of flexibility, since the structure does not draw a clear line between the individual and the legal entity.

As for initial expenses, the cost of setting up an LLC can vary, but it generally hovers around €500, including obtaining the EIN (Employer Identification Number) for an additional cost of between €100 and €250. In addition, the services of a Registered Agent and a physical address in the state of registration can add around €120 a year. Some providers offer complete packages to make this process easier, including all the services you need to establish your LLC, at competitive prices.

And do you need to be self-employed? No. Owning an LLC does not automatically require you to register as self-employed in Spain, which is a significant advantage in terms of social security savings and tax flexibility. The key is to manage the income properly and meet your personal tax obligations.

BONUS: A path to business flexibility

Setting up and running an LLC from Spain offers an attractive route for entrepreneurs seeking flexibility, tax efficiency and a simplified legal structure for their global businesses. Establishing a Limited Liability Company (LLC) in the United States can be an advantageous strategy for entrepreneurs interested in a business structure that protects personal assets and reduces business liability.

However, it is essential that entrepreneurs take the time to weigh their goals and business needs, reviewing the legal and tax requirements as well as the financial consequences of such a decision.

At the end of the day, creating a company is more than a simple procedure; that is why seeking professional guidance is essential to ensure the sustainable development of the business. In this context, properly understanding the process of forming an LLC in the US is key to preventing setbacks down the road.

Proper preparation, professional advice and a well-planned tax strategy are essential to make the most of the advantages an LLC offers, while ensuring full compliance and the long-term sustainability of your venture.