Starting a business as a sole proprietorship (Empresário em Nome Individual – ENI) is one of Portugal’s most straightforward and affordable ways to begin economic activity. However, the apparent simplicity of this structure hides several pitfalls that can jeopardise the success and sustainability of your business.
Below, we highlight the seven most common mistakes when setting up a sole proprietorship in Portugal, based on legislation, administrative practice, and relevant case law.
1. Lack of Planning and Preliminary Analysis
Many entrepreneurs rush into establishing a sole proprietorship without conducting a proper market analysis, understanding the legal and tax framework, or creating a structured business plan. This lack of preparation can lead to poor decision-making, underestimating costs, and difficulty complying with legal and tax requirements, putting the project’s viability at risk from day one.
2. Choosing the Wrong Tax Regime
Selecting between the simplified regime and organised accounting is not a one-size-fits-all decision. It should be based on expected turnover, the nature of the business, and growth projections. The wrong choice can increase your tax burden or create compliance challenges, such as filing complex periodic returns or maintaining detailed accounting records.
3. Ignoring Tax and Social Security Obligations
A common mistake when setting up a sole proprietorship is underestimating the importance of meeting tax and social security deadlines. Failing to submit IRS, VAT, or Social Security declarations on time, or omitting income, can lead to fines, interest charges, and criminal or fiscal liability in severe cases.
4. Mixing Personal and Business Assets
Unlimited liability is one of the most significant risks of a sole proprietorship in Portugal. Without a clear separation between personal and business assets, all debts incurred by the business are backed by the owner’s entire personal estate. This exposes you to significant financial risk in failure or legal disputes.
5. Not Updating Business Information with Authorities
Notifying tax and social security authorities about changes such as business address, activity type, or closure can cause compliance issues. This oversight may limit access to government incentives, financial support, or the ability to regularise your fiscal and social security status.
6. Inadequate Social Security Protection
Many sole proprietors misunderstand the Portuguese social security contribution rules, particularly the obligation to register and pay contributions regardless of whether the business has income. Failure to contribute can result in losing access to social benefits such as sick pay, parental leave, or retirement pensions.
7. Overlooking Legal Alternatives
Sometimes, a sole proprietorship is not the best choice, especially for high-risk businesses or those aiming to limit liability. Alternatives such as an Individual Limited Liability Establishment (Estabelecimento Individual de Responsabilidade Limitada – EIRL) or a private limited company (Sociedade por Quotas) may offer greater asset protection and operational flexibility.
Conclusion
Setting up a sole proprietorship in Portugal involves more than just filling out administrative forms. Professional legal and tax advice is essential to avoid the common mistakes when setting up a sole proprietorship that could threaten your business’s future and personal assets. Making an informed decision with the guidance of qualified professionals is the first step toward sustainable business success in Portugal.
