Self-Employed vs. Incorporated: When Does It Make Sense to Start a Company?

Many professionals reach a point in their careers when the question naturally arises: should I continue to issue freelance invoices, or is it worth starting a business? The answer isn’t the same for everyone. It depends on your revenue, the type of business, your cost structure, and your long-term goals. What’s certain is that making this decision without the right information can cost you a lot of money—either way. In this article, we analyze both options clearly and objectively, so you can make the right decision for your situation.

1. What is a Self-Employed Worker?

A self-employed worker, commonly known as a “freelancer,” is an individual who carries out an economic activity on their own account, without being tied to an employer. They issue electronic invoices through the Finance Portal and are taxed under the IRS (Personal Income Tax) system, in Category B.

The main characteristics are:

• Taxation under the IRS system — income is added to the household’s other income.

• Social Security contributions calculated based on relevant income.

• Simplified or organized accounting, depending on the volume of revenue.

• Unlimited liability — your personal assets are liable for the business’s debts.

• Lower administrative and incorporation costs.

• Ideal for those just starting out or with low to moderate revenue.

2. What is a limited liability company?

A limited liability company is a legal entity—a separate legal entity from its partners. It is the most common type of company in Portugal, often incorporated with the abbreviation “Lda.” at the end of its name. It is subject to corporate income tax (IRC) on the profits it generates.

The main characteristics are:

• Corporate income tax (IRC) — currently at a general rate of 21%, with reductions for small and medium-sized enterprises.

• Partners receive income through salary or profit distribution.

• Liability limited to the share capital — the partners’ personal assets are protected.

• More demanding accounting and administrative obligations.

• Fixed maintenance costs — mandatory certified accountant, filing of accounts, among others.

• Minimum share capital of €1, although a higher amount is recommended in practice.

3. Tax Differences: Where Is the Real Impact?

This is the part that matters most to anyone making this decision. The tax difference between the two options can be quite significant, especially once you reach certain income levels.

As a self-employed individual: Your income is taxed under the IRS system, which in Portugal has progressive tax brackets reaching up to 48% for higher incomes. Added to this are Social Security contributions, calculated on 70% of relevant income, at a rate of 21.4%. As revenue grows, the tax burden can become quite heavy.

As a corporation: The company pays corporate income tax (IRC) on profits. The general rate is 21%, but SMEs benefit from a reduced rate of 17% on the first €50,000 of taxable profit. Managing partners receive a salary—taxed under the personal income tax (IRS)—and may also receive dividends, subject to a withholding tax of 28%. With a sound structure, it is possible to significantly optimize the total tax burden.

4. At What Revenue Level Does It Make Sense to Start a Business?

There is no universal magic number, but the general rule of thumb used by accountants in Portugal suggests that an annual turnover of €40,000 to €60,000 is the range at which forming a company begins to make sense from a tax perspective.

Below that amount, the fixed costs of maintaining a company—organized accounting, filing financial statements, annual minutes, and social security for the managing partner—may outweigh the tax savings achieved.

Above that amount, personal income tax (IRS) begins to weigh heavily, and the corporate structure allows for much more efficient tax management.

Practical example:

Imagine Ana, a marketing consultant who earns €80,000 per year:

• As a self-employed individual, her income falls into the highest income tax brackets, with a marginal rate of 45% or 48%, in addition to Social Security contributions. The total tax burden can approach 40% of gross income.

• As a managing partner of her own company, the business pays 17% corporate income tax on the first €50,000 in profit and 21% on the remainder. Ana receives an optimized salary and can strategically manage profit distribution, significantly reducing the overall tax burden.

The annual difference can amount to several thousand euros—money she can reinvest in the business or in her personal life.

5. Advantages and Disadvantages of Each Option for Self-Employed Workers

Advantages

• Easy to Manage

• Lower Fixed Costs

• Easy to Close

• Ideal for Low Turnover

Disadvantages

• Heavy Tax Burden Above a Certain Threshold

• Unlimited Liability

• Income Tax Brackets Can Be High

• Less Professional Image for Some Clients

Limited Liability Company

Advantages

• More Tax-Efficient

• Limited Liability

• More Professional Image

• Better for Growth

Disadvantages

• Fixed Maintenance Costs

• More Stringent Accounting Requirements

• More Red Tape

• More Complex to Dissolve

6. How to Transition from a Sole Proprietorship to a Partnership

If you’re already self-employed and have decided it’s time to start a business, the process is simpler than it seems:

Step 1 — Consult a certified accountant. Before making any decisions, talk to a professional. An accountant will analyze your specific situation, run through different tax scenarios, and help you choose the most appropriate structure.

Step 2 — Choose the company name and CAE. The company name must be approved by the RNPC (National Registry of Legal Entities). The CAE must correspond to the main activity you will be carrying out.

Step 3 — Incorporate the company. You can incorporate the company online through the Empresa na Hora portal, at in-person service counters, or through a notary. The process can be completed in a few days.

Step 4 — Register the business with the Tax Authority and Social Security. After incorporation, you must register the company with the Tax Authority and enroll the managing partners in Social Security.

Step 5 — Close your self-employment registration. After starting your business through the company, you can close your individual registration with the tax authorities if you do not intend to continue issuing self-employment invoices in parallel.

7. Conclusion

There is no one-size-fits-all answer to this question—there is the right answer for your situation. What is certain is that making this decision based on solid information and with the guidance of a qualified professional can make a huge difference in your financial and professional life.

If you’re growing your business, earning over €40,000 annually, and feeling that taxes are becoming an increasingly heavy burden, it’s probably time to seriously consider setting up a company. If you’re still taking your first steps, the self-employed status may be the most sensible option until your business matures.

The most important thing is not to make this decision alone.

Still unsure about the best structure for your business? Talk to our certified accountants and get a personalized analysis of your situation—with no obligation.