Eight mistakes to avoid when setting up a business in Spain

Setting up a business and becoming self-employed in Spain can be exciting and rewarding, but it can also be very challenging with lots of legal hoops to jump through, high taxes and lots of associated fees. 

According to data from Spain's National Statistics Institute (INE), only 40 percent of companies in Spain, make it past five years. This means that 20 percent have to fold within the first few years. The survival rate of Spanish companies is one of the lowest out of the 38 members of the Organisation for Economic Co-operation and Development (OCED).

Company closures, however, are not only down to the market and the legal issues in Spain, they also have to do with the way the company has been set up or run. When creating a business for the first time, it's important to keep several factors in mind and avoid certain common mistakes. 

Not signing up to the IAE

IAE stands for Impuesto de Actividades Económicas or tax on economic activities. When you become your own boss in Spain, you will have to sign up to become an autónomo. To do this you will need to register with the Régimen Especial de Trabajadores Autónomos or RETA, as well as social security. You will also need to sign up for a particular IAE, which lets the authorities know which sector or industry your business falls under. According to several tax experts, many people confuse being exempt from paying the IAE with registering in the IAE, which is essential. Those who are exempt include self-employed people as well as companies whose turnover does not exceed €1 million.   

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Not having a solid business plan

Your business plan is a roadmap to show how the company will grow and progress. It marks out the steps to follow at each stage and the objectives. It's easy to go wrong when designing your first business plan. According to Infoautónomos, experts on all things for self-employed and small businesses in Spain, a common mistake is to think that the business plan is a mere procedure instead of considering it a tool to take into account for the future development of your business. It's also important to add in your sales strategy, and learn exactly how your clients might think.

Setting the wrong prices

It’s fundamental to know your market well when you’re setting up a business. Remember that what you may charge back home for a product, may not be the same as what you should charge for it in Spain. Keep in mind that people in Spain have lower salaries and usually lower purchasing power than in places like the UK or the US. You want to make sure you’re not outpricing the locals, but equally, you don’t want to make your product too cheap so that you’re not making enough money from it or covering your expenses. 

READ ALSO: How to set up an online shop in Spain

Setting up a successful business in Spain is no mean feat. Photo: Jorge Guerrero/AFP

Not considering key legal issues

Starting a business involves a lot of legal documents and paperwork, particularly in Spain. You need to ensure you have expert help, especially if this is your first time doing business here. According to TAS Consultoría, a Barcelona-based tax, accounting and labour consultancy, these can include not obtaining the correct permits and authorisations and or forgetting to register in the Registro Mercantil or commercial registry. These can be issues that may not seem essential at first but can cause a lot of problems years down the line. A gestor or lawyer can help you with such matters.  

Choosing the wrong business partners

It may seem like fun to set up a business with your friends or easy to get your family to invest and make them a business partner, but it can lead to issues later on. Just because someone is your best friend or the perfect sibling, doesn’t always mean that they’ll make a great business partner. There can be too many emotions involved sometimes to make a clear business decision. If you have investors back in your home country, they may also not know exactly how it works in Spain, and so may not agree with some of your decisions. Ceca Magán Abogados law firm suggests that if you are going to go into business with these people, the best way to avoid problems is to have solid legal papers drawn up to show the exact percentage of the company each person owns, as well as their specific roles and workload. 

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Not knowing the best form your company should take

According to TAS Consultoría, specialised in business creation, you need to make sure you choose the best business structure. It can be complex, but it’s essential for your company to work. Should you just sign up as autónomo and hire employees or should you create a limited company for example? The main types of businesses in Spain are:

• Limited Company (S.A.)
• Limited Liability Company (S.R.L.)
• Collective Society (S.C.)
• Limited Partnership (S. in C.)

Ignoring the competition

You may have a brilliant idea that you’re sure is going to work in Spain, but you won’t really know, unless you do your market research. You need to check out the competition and see how many other businesses there are like yours in your local area. What do you offer that they don’t? Is there a reason not many other companies are offering the same service? Will people trust a new player or do other companies have a monopoly? Legal firm AYCE Laborytax, with offices in Madrid and Toledo state: “The more you study the market situation, the easier it will be for you to take advantage of the different opportunities it presents, and you will have a better knowledge of your target audience”.  

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Being too optimistic and not having a financial cushion to fall back on

It can take a while to make money when you’re first starting out. Indeed, some companies begin by losing money, before they make their fortunes. It’s very easy to get carried away with your projections when you first start your company as you’re excited to begin and imagine that everyone else will be just as excited with your idea as you are.

It’s important, however, to be realistic and make sure you have a financial cushion in place to support yourself in those early days. Be aware, you’ll need not only enough cash flow for yourself and your personal expenses, but also enough to keep the business afloat. Many businesses don’t survive if cash flow hasn’t been planned for correctly. Not to mention in Spain, you’ll need enough money every month to pay for your social security contributions, as well as contributions for any staff members, even if you’re not making money yet.