- I checked Estonia as an option, but I am not sure how to manage taxes in this case (I am in EU). I am paying taxes as a citizen, and as part of my daily work. In case I start a company, do I need to care about paying other taxes https://investinestonia.com/business-in-estonia/establishing-company/
- Is it a good idea to incorporate an LLC while having full-time job ?
I am getting mixed signals whenever I read similar discussions, those who are interested in reading more about the topic:
https://news.ycombinator.com/item?id=15441846
https://www.mycompanyworks.com/create-a-company-to-manage-your-side-projects/
http://stu.mp/2010/09/why-you-should-probably-have-an-llc-for-side-projects.html
P.S: In case you are wondering, I am based in Germany. Feel free to suggest contacts to get legal advises (I couldn't find any one)
In Germany you could do a "Nebengewerbe or Einzelunternehmen", where you can write invoices in your name, this is a fast way to get started.
Otherwise you have the UG, which can be created with 1 EUR "Stammkapital", or the GmbH with 25k EUR, but you only need to have 12,5k when founding it.
Which taxes have to be paid is different if you do the "Einzelunternehmen" or found a company (UG/GmbH). With the company there is the Körperschaftssteuer instead of the Einkommenssteuer, additionally the regular Umsatzsteuer (19%) and also you have to pay Gewerbesteuer. Gewerbesteuer, Körperschaftssteuer and Einkommensteuer all have a free amount per year, if you don't hit that limit you don't have to pay it.
I would advise against founding in a different country, because taxes have to be paid in Germany and founding a company outside of Germany makes it a mess and really expensive.
Let's say I started a SaaS company as an Einzelunternehmen. What's the risk for me personally since I can always spin up and immediately cancel cloud resources with hourly billing as customers come and go. I don't see a lot of financial risk in terms of customer churn. Again: What am I missing?
Bugs in your infrastructure could also cause you to accidentally spin up a shitton of instances far exceeding your operational budget, but that isn't the primary concern.
> "Nebengewerbe or Einzelunternehmen",
Can I still do this while I have other full-time job ?. In Germany, they have the status of freelancer, and I am not on freelance VISA. I thought that it is only for freelancers.
P.S: feel free to suggest organizations/lawyers/consultants who can help with these matters.
Yes, you can do the Nebengewerbe/Einzelunternehmen while having a full time job. You should create an additional bank account and use that one for your side business, which will make it easier for book keeping (otherwise you have to open your private bank account to the tax authorities). You can also get a VAT ID, if you do EU business outside of Germany.
Freelancer is something else as you might think, some jobs fall in the category of "Freiberufler", which is some creative jobs, etc... All others are simply "Gewerbetreibende".
You can also found a UG/GmbH on the side, you don't need to do it fulltime. You should look in your contract though if there is anything that prevents you from doing so.
Sadly I can't suggest anyone since I had to take care of everything myself as well, I simply work together with a regular tax guy. I am based in Germany as well and started basically the same way as you.
Incorporating abroad spares you of a hassle dealing with German bureaucracy as a company. Not as an individual. Same goes for tax liabilities. Whatever you draw from a company either as income or dividends gets taxed wherever you happen to be a resident.
What many of my Germany-based friends, relatives, business associates do. They incorporate abroad and pay income to their Germany registered gewerbe (for those unfamiliar with German system, it's like sole trader).
A cousin is a steuerberater in Hamburg while a close friend is a wealth manager in Berlin. If you think they could be of any help, feel free to reach out to me.
For example if you found a Limited in the UK, you have to tell the German authorities and the Limited will be seen as a German GmbH. It will be more expensive in the end because, for example, everything has to be translated and signed by a notary.
What you have to report to the authorities is your personal income drawn from foreign companies you own or work for.
Pretty sure if you keep all your revenue inside the legal entity, you don't have to pay any taxes. Only once (if?) you distribute profits or pay yourself a salary it'll require paying taxes and might become a bit complicated due to you being based in Germany. From what I understand that's not yet your intention, which would mean it's pretty simple.
As a person doesn't have to pay taxes until you pay out money to yourself, but the company itself still has to pay corporate taxes (on the profit it makes (Körperschafts- and Gewerbesteuer)).
For a GmbH/UG it is usually good to pay yourself a salary (if it makes money), because otherwise you essentially get taxed "twice" (corporate taxes and then income/dividend taxes if you distribute your profit to get it out of the company).
If you do a company, you should talk to a tax advisor, IMO best let him handle everything. I did a few companies in Germany, and I don't think it is worth to incorporate in Estonia (if you are not located there). It is reasonably easy to do in Germany.
- hire an accountant, 100EUR/month and you don't have to care about taxes that much, unless you go wildly profitable
- LLC/GmbH is a better idea than having your life on the line if SHTF (though corporate veil might require at least 2 partners in some countries/states)
- Estonia doesn't seem very recommended lately (the only easy part is to get e-citizenship but the rest seems to be overly complicated). UG in Germany might be what you need, but your taxes will still be around 50%. Did you think about moving to Switzerland/Luxembourg instead?
- think about having a company in Delaware for flexibility reasons. International taxes are more complicated though and Germany would still be your tax domicile, and demanding its share of your profits while bombarding you with unending bureaucracy, often years after
I don't know if this applies in EU, but in the US, incorporating would give the separate benefit of protecting your personal assets in the case your company was sued. So, it might be worthwhile even if you aren't profitable.
Be careful with this advice and consult a lawyer. Incorporating alone does NOT guarantee protection of your personal assets.
In my non-lawyerly understanding, single-member LLCs offer particularly fragile protection.
See "piercing the corporate veil" [1]
[1] https://www.nolo.com/legal-encyclopedia/personal-liability-p...
But how would you make it there without being incorporated? Or does this applies to have an LLC only? How would you issue invoices to your first customers without having a legal entity?
- double-entry bookkeeping: This is easier than it sounds because there're lots and lots of rules. I mean, even though I had learned this stuff in school for a bit and my mom actually used to teach bookkeeping, it was still hard. An Excel sheet won't cut it! (In fact, Excel is not allowed anymore as it can be manipulated after the fact, so you'll need actual bookkeeping software.) Sure, you could hire a bookkeeper but then you'd be spending even more (see below).
- Umsatzsteuer-Voranmeldung: monthly, for the first two years
- Umsatzsteuererklärung, Körperschaftsteuererklärung, Gewerbesteuererklärung, Handelsbilanz, Steuerbilanz/E-Bilanz: 6 months after the end of a fiscal year (usually May 31). Make no mistake, this is tons of work.
And then there're the costs:
- Founding: at least ~300€
- Mandatory IHK membership fee: ~160€/year
- Business bank account: at least 10€/month
- Bookkeeping software: at least 15€/month (unless you want to use pen & paper)
- Sending E-Bilanz & Handelsbilanz electronically to the tax authorities & the Handelsregister: ~50€/year
So yeah, unless your ramen-profitable as people call it, I'd say: Don't do it [in Germany]!
While it may very well be true that if you try to incorporate some alter ego of yourself as an LLC or similar in another jurisdiction (e.g. the US) and thus you'd be subject to local taxation, there's probably a much simpler approach, of simply being the majority investor in an established overseas corporation.
You buy say a 51% stake, it sells your software (with your marketing and continued development efforts) and it acts as a passthrough, keeping your hard-earned money (probably earned largely outside the EU) away from the watchful gaze of local tax authorities. You derive any income in the form of dividends or draws held in overseas accounts. (The minority owner might also be some form of you, or an agent willing to own 49% and do nothing for a reasonable fee).
The US is not exactly paradise for all entities and purposes but buying a Wyoming-based shell corporation can be done for under 1000 EUR. This can provide you with a US situs for the business, which unlocks all kinds of doors for legitimacy, particularly when it comes to accepting payments. Am not a tax expert but it occurs to me that taxes can be legally avoided through this approach, given the size of the "shell company" industry in Wyoming (and a few other states) and the level of foreign interests therein.
If there isn’t one, then it really is no business of your current employer whether you start a company while employed. Still, you should be very careful of anything that might be construed as taking advantage of confidential information gained through your employment. Don’t use your work computer, steer clear of their customers, and so on.
Starting a corporation in a different country can be overwhelming. Estonia is relatively easy compared to other countries but you can’t do everything online.
In particular you’ll need a bank account to receive invoice payments. Are you prepared to travel to Tallinn and visit local banks in person to try convince one to open you a business account? If not, just incorporate in your home country and start with the bank you’re already using.
I’m not a lawyer or financial adviser, but generally and purely anecdotally speaking, taxation of EU corporations isn’t as complicated as some make it sound. If your company pays you a salary, it’s taxed as income. If you pay a dividend at the end of the year, it’s taxed as capital gains. It doesn’t make a substantial difference whether the company is in another EU country.
If you do create an Estonian corporation, there’s one nice thing about their tax law: corporate profits are not taxed until you actually withdraw money as dividends. Most other countries have a corporate tax charged from annual profits, which means that if your Year 1 goes great but Year 2 ends up losing money, tough — you’ve already paid taxes from Year 1 profits so there’s no way to subtract the loss retroactively. In Estonia, if you kept the profit in the company, you’d get to subtract Year 2 loss and pay tax only on the net profit when you finally do pay yourself the dividend.
This can be deferred though. You can open an account with Transferwise or Holvi online and recieve payments/pay yourself a salary. You only need a bank account once you want to pay the share capital or withdraw dividends.
Also, if you use leapin.eu they get you a "pre-acceptance" from LHV bank _before_ you travel to Tallinn
> If you pay a dividend at the end of the year, it’s taxed as capital gains
Really ? I'm not in the EU but I would assume dividends would be taxed at regular income tax rate or a special dividend tax rate (and the company would pay corp tax). Only if you sell your shares in the company, the profit would be taxed as capital gains.
> Really ?
Yeah, really. At least this is the way it is in Germany. One should note, though, that taxes on capital gains are just another form of income tax and the boundaries are somewhat blurry. In particular, it doesn't necessarily mean you're paying more in taxes only because it's capital gains. (See also: https://de.m.wikipedia.org/wiki/Abgeltungsteuer)
One thing that you never want is to be stressed out about getting personal sued into oblivion - it has the potential to irreparably financially damage you.
If you're doing a side project for interest, make a little money I don't think its worth it unless you think you could get sued. If its a serious small business maybe there is someone in local government that can help you - maybe even govt/EU grants and such.
Keep in mind that even if you incorporated in Estonia, you still might have to pay taxes in your country of residence. Failing to do so might result in unpleasant meeting with your local tax collection state representative.
If you wrote a bug that cost one of your clients to loose a sale you could be personally liable for the full amount.
Just spend an hour doing it and don’t risk losing all of your savings. You don’t want to go to court with a company that has many more resources for lawyer than you.
This is a no brainer. Advice saying not to do it is just plain wrong.
It’s ridiculously easy, you pay your taxes almost identically to how you currently do if you make an LLC and are sole owner.
—edit I see you are not in US. My advice is more specific to US.
i can suggest, however, the main things to consider are separating your personal and business income tax and absolving yourself of personal liability in case something overbearing happens like a lawsuit, these are good things of incorporating.
again, i'm not a lawyer, and this is not legal advice, i know nothing of eu laws either.
Why do you feel the need to comment then?
As stated above, I couldn't find one, someone who can deal with tech-y stuffs here in my area.
I would look into Stripe Atlas in any case.
You should strongly consider incorporating in the jurisdiction where your business operates as just because you form the company somewhere else does not stop local tax liability (and in fact if done wrong could incur new additional tax liability in the other jurisdiction where you incorporate)
Whether it's a good idea to incorporate while having a job, that depends mostly on your relationship with your employer. Some will care, and some will not.
In terms of where you are located, there may be different laws and protections for an LLC. So be careful to read them. Youll also likely have taxes to pay (I create my LLCs in wyoming - where taxes are much lower - I think just a fee)
Good luck
