[pudo]

I worry that Lukas is about to find out about the business end of the Umwandlungssteuergesetz: converting a Einzelunternehmen to a GmbH is a surprising amount of faff, and once you've done it you (normally) end up with a company you can't easily sell for 7 years without paying some pretty hard-core taxes. I got to do this whole dance early this year, and it took a big bite of momentum out of the little bootstrap I was trying to pull.

As weird as it sounds: German founders, consider just biting the bullet and doing a GmbH straight away. Conversion is no fun. And even worse, UGs are hated by everyone with a law degree for absolutely no reason, but they will try to make your life as difficult as they can just to show who is boss.

[Atropos]

If you are planning on VC-like returns by selling your company, you should start with a holding GmbH and an operative GmbH below (or crazier structures like a Holding GmbH & Co. KG). But: This way you have the maximum administrative costs and complexity in the beginning...

I think starting as an Einzelunternehmer makes sense in certain situations. I'm not a tax lawyer, but I'm a lawyer in a firm that advises startups and I have seen a lot of "Starts as Einzelunternehmer -> Does asset sale to own GmbH" type deals... "Normal" lawyers / tax advisors will never recommend this, because it is not a "simple check the box" exercise, and "sophisticated" lawyers are incredibly expensive.

[_antix]

Author here. I appreciate your points. I started the business as a learning experience without any thought of the end game. Now that I am wiser and with some money a GmbH is the way to go for the next business.

[slow_typist]

While bootstrapping, you do not know whether you would ever want to go full GmbH. So biting the bullet is a little bit like betting on the future. You have considerably higher cost and hassle from day one on and would need a tax consultant for doing your yearly balances. Of course all the cool kids have GmbHs but do you really need it? Its main advantage is that you can sell it at once or in pieces if you need financing, but even that is manageable with an Einzelunternehmen.

With regard to risk, the CEO of a GmbH is still personally liable for a lot of risks and liabilities including the social insurance payments of employees.

Also, all risks you can get insurance for you should get insurance for regardless of the form of the enterprise.

Agree that the UG is the worst choice since you are basically announcing you have zero savings behind and can generally not be trusted.

If you want to get more serious with your Einzelunternehmen, you could also consider becoming an „e.K.“ (eingetragener Kaufmann). Same tax rules but full HGB (Handelsgesetzbuch, special law that governs interactions between companies) applies.

[hnbad]

Realistically, it's entirely possible to bootstrap without going full GmbH right away as long as you can do it quickly. There's a grace period where you can retroactively designate stuff to fall under the GmbH you created later and if you are smart about it, you can move your software project into the GmbH if it's plausible that it was created during that period.

In other words: you don't need a GmbH to build a prototype but it's probably a good idea to have the GmbH in place before you're production ready. Also people are way too squeamish about UGs (micro-GmbHs): they're actually fairly normal in the startup space and end users don't care about that distinction and larger companies are more interested in knowing you have sufficient capital/insurance to cover any liability claims rather than what it says on your letterhead - a full GmbH isn't worth anything to them either because they know you can literally buy and repurpose a shell GmbH for cheap.

I agree that a GmbH is not necessary if you don't consider VC investment an early/eventual goal for your product. If you can bootstrap and build a sustainable product, the biggest advantage is that having a GmbH (or UG) makes it easier to appear as a serious business but as you say, often e.K. is another viable route for that. And as you say, the managing director of a GmbH is still personally liable for anything that could be considered a neglect of their legal duties. Plus the way most people found GmbHs, the owner(s) are usually €12.5k in debt to the company as you only need to transfer €12.5k of the €25k initial capital directly to the company's bank account.

That said, things get messy if you're in GbR territory, i.e. if you have a co-founder who is a co-owner. You can approximate something of a worker cooperative by having everyone individually be an Einzelunternehmen but then you'll have to structure your business in such a way to still split profits fairly while also avoiding running afoul of Scheinselbstständigkeit (fake self-employment) - there's a good example in the Premium Kollektiv[0] (and plenty of literature and research articles have been written about their approach) but this is more of a case of "bending the law" and not something the law was written to explicitly support. A GmbH has the advantage of being structured in such a way you can precisely define split ownership but the disadvantage is that by default this will mean your co-founder can just decide to quit and still retain their ownership because the ownership and the job are legally distinct concepts.

Lastly an often overlooked caveat of GmbHs (although this in part also goes for all self-employment) is that German laws are written with the idea that "business owners" have access to generational wealth and are thus exempt from many aspects of the welfare state and this is even reflected in times of crisis: there were for example COVID relief programmes for solo-entrepreneurs (including solo GmbH owners with no employees) as well as COVID relief measures to allow downscaling employee hours (and thus costs) but if you were a small GmbH with more than one owner, most programmes were not available to you. Things also get nasty if you're a woman who wants to have children while owning (or co-owning) a GmbH: legally the best option for heterosexual couples looking to start a business is still for the woman to be an employee (no, not a managing director either) and own zero shares in the company and even then the German IRS may decide that the woman has a controlling influence and retroactively reclassify her as a co-owner. In short: if you're an entrepreneur in Germany, either don't be a woman or plan to abandon your company in favor of dependent employment if you try to get pregnant.

[0]: https://premium-kollektiv.de/

[grumpy-de-sre]

Do you have any further information / links / legal references regarding the IP transfer grace period? As ideally this is what I'd like to do with my current ideas.

Basically work on a bunch of opensource components that would complement a commercial product that I offer / develop under a future GmbH (which I spin up basically as soon as I have an interested party in the hypothetical product).

Trying to reduce the amount of legal and finanzamt shenanigans where possible.

[hnbad]

I'm not an accountant or lawyer and I'm not your accountant or lawyer. You should speak to an accountant or lawyer familiar with IP law or software companies.

All I can say is that it's de facto possible to create a GmbH after you already have started building something that will be owned by the GmbH without requiring a formal transfer of the assets. To do so in a way that is legally safe and sound you should speak to a legal expert.

As I understand it, it's less that there's a legally defined period, it's more about the limits of what you can rationalize or to what degree history can be redefined. If all the code you've written is sitting on machines under your control, who's to say that the code you wrote before the company was founded is the same as the code the company ends up owning? Especially when it was just a draft prototype you definitely threw away anyway. If sale of the company or investment ever comes up, they'll do the due diligence to make sure the documented history is up to par anyway.

If any of this was too subtle: legally, history consists of what everyone agrees history is. Founders can be expected to bring in their prior knowledge when founding a company, so any software produced by them for the company while employed by that company is owned by that company, even if it happens to be indistinguishable from software they wrote prior to founding the company, as long as there are no third-party claims to that previous software (which would create liability for the founder anyway). If you're the only person who knows what color your bytes are, well... .

[grumpy-de-sre]

Thanks so much for sharing your experience.

[slow_typist]

Thanks for sharing, now the last paragraph really got my attention: What exactly is the problem with (co-)owning as a woman with children, no eligibility for parental leave?

[hnbad]

There are a number of problems.

The least direct one that may still be fairly consequential is that if you own a controlling share in a company and are in the public health insurance, fluctuations in income can become an existential threat because while salaried employees have their rates adjusted on a monthly basis and Einzelkaufleute can use their income tax advances (which can be adjusted on a fairly short notice based on projected annual revenue) to adjust their rates, you don't pay an income tax advance (because your company instead pays corporate tax advances) but you also aren't considered salaried so public health insurers are legally required to use your most recent income tax return as the basis for your rate even if your salary changes. This can mean up to 2 years of delay between what your insurance rate is based on and what you actually make. Keep in mind that upon submitting a new income tax return, any difference is owed immediately. So if you decide to reduce your salary because you reduce you have to your number of hours or take time off for your kids, you continue having to pay the same monthly rate to your health insurance (although of course the difference will be refunded eventually) and if after doing this for a while you decide to go back to full-time employment you basically have to find out what your rate should be and set the difference aside so you can pay it back when the rate eventually catches up.

Another example with self-employment is that if you give birth, you are banned from working for a set period around the due date and this ban even applies if you're self-employed but because you are self-employed this also translates to zero income (or at least zero billable hours). Contrary to what some accountants might tell you, you can absolutely apply for Elternzeit though and the money you receive will be based on your salary, so there's that - but keep in mind what I said about public health insurance still applies even here.

Another fun fact about public health insurance is that as a mother giving birth, you receive compensation for the days around delivery via the health insurance. But this is tied to the "Krankentagegeld" and this is a "feature" you explicitly have to opt in to. So if at any point you switched health insurance companies you need to make sure you ticked the box - it's absurd that this is optional given that omitting it only saves you a few Euros per month but especially early on many solo entrpreneurs try to cut costs wherever they can. Keep in mind that there is not only a maximum insurance rate but also a minimum and many early entrpreneurs pay this disproportionate minimum while making barely any money - this is something private insurance companies prey on. Private health insurance is always a numbers game and not something that should be taken lightly even if public health insurance may seem extremely awkward an expensive. It's also much more difficult to go back to public once you've been in private (the usual hack is to register as unemployed for a couple of months to lose eligibility for private health insurance and automatically roll back into public insurance).

I don't recall the exact problem we ran into but the short version is that a lot of services Germans think of as "public" because they're publicly funded or paid by the government are actually tied to salaried employment or unemployment and "do you own at least 50% of a GmbH" appears on a surprising number of forms (as well as "does your GmbH employ more than one person including its owners").

Oh, and another thing worth mentioning: if your work is at all creative (somehow "building software products" doesn't tick that box, yet) or editorial, you may be subject to the Künstlersozialkasse. This is a social insurance that anyone hiring creative or editorial labor for commercial use has to pay into directly (i.e. it's not part of the invoice but the amount is based on the invoice). If you hire this labor via a GmbH, you don't have to pay this but the GmbH does. This means if you have a GmbH that provides creative or editorial labor (e.g. you do any design work), the amount owed to the Künstlersozialkasse will be based on the salary of the person that holds ultimate editorial control. If in doubt, this will be one of the owning managing directors, i.e. you. This can be a bit of a shock but if you are in the public health insurance this also means you can join the Künstlersozialkasse as a member, pay into public health insurance (via the KSK) the exact same way a salaried employee would (i.e. none of that "wait 2 years to adjust your rate after salary changes" nonsense) and not only does the money your company has to pay to the KSK go towards your own social security but through the magic of arcane accounting laws, they effectively contribute twice the amount you would if you paid directly (which for self-employed people is voluntary and largely pointless) - in other words you end up in a situation where you are legally self-employed but still benefit from public health insurance and the public retirement fund as if you were a regular salaried employee. I can't overstate how useful this is, especially if you are able to do this early on:

If you want to be self-employed in any creative field subject to the Künstlersozialkasse: JOIN THEM ASAP. You massively cut down on the headaches of self-employment and someone will have to pay into them for your work anyway so you might as well benefit from that.