Ask HN: Should I incorporate a company for software side projects?

74 points by ___cs____ 7 years ago | 68 comments

I am a software engineer, working on a side project. The project consists of platform in the area of real-estates, I already have consumers (real estate agencies). I would like to know when should I incorporate LLC, how, and where to do it.

- 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)

nik736 7 years ago |

You have to pay taxes in Germany, it doesn't matter if you found a company in the US, Estonia or somewhere else, you are living in Germany and that's the important thing that decides you need to pay taxes there.

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.

heipei 7 years ago | |

One thing I still haven't completely figured out yet is the difference in liability between a UG (Haftungsbeschränkt) and Einzelunternehmen in Germany. As an Einzelunternehmen, you (as the sole proprietor) are liable with your private assets for any outstanding bills etc, I get that part. But is there anything else you're on the hook for? Am I'm missing something?

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?

arghwhat 7 years ago | | |

Customer and legal problems put you at great financial risk. E.g. customers get out of paying one way or another and you cannot cover operational costs, you lose customer data and get sued for damages, you screw up on GDPR and get fined, etc.

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.

nik736 7 years ago | | |

There is also always the chance of getting sued. If you lose in court as a Einzelunternehmen, you personally will have problems If your UG or GmbH loses in court, you personally don't have any problems.

___cs____ 7 years ago | |

I have my full-time job in Germany. I don't work freelancer as a full-time. This project doesn't take 40 hours week. I built the platform, and now I am maintaining it as a side project. However, I want to make it profitable.

> "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.

nik736 7 years ago | | |

It doesn't matter if you already have a full time job or not.

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.

wprapido 7 years ago |

Yeah, you should incorporate. Not only that, keep separate accounts such as hosting, email, payment gateway, etc.

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.

nik736 7 years ago | |

I don't think this is legal. If you are based in Germany and incorporate in a different country you have to tell the german authorities.

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.

wprapido 7 years ago | | |

You and your company are separate entities. Many Germans incorporate abroad and it seems to work.

What you have to report to the authorities is your personal income drawn from foreign companies you own or work for.

welder 7 years ago | |

I've been wondering about similar things as a foreigner in Berlin. Would love an intro to your Germany-based friends to chat about what they recommend when incorporating! My email: alan.hamlett@gmail.com

relix 7 years ago |

Check out https://www.leapin.eu/ for an easy way to set up an Estonian company and manage the accountancy around it. You can probably also contact them how it works with their German customers, and what your obligations and taxes would be exactly.

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.

helge5 7 years ago | |

> Pretty sure if you keep all your revenue inside the legal entity, you don't have to pay any taxes

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.

relix 7 years ago | | |

I was talking about Estonian companies, they don't have corporate taxes.

bitL 7 years ago |

- only if your idea is already profitable beyond ramen profitability, i.e. you can quit the job and survive from the income, and you have a financial buffer for ~1-2 years

- 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

tyingq 7 years ago | |

"only if your idea is already profitable beyond ramen profitability"

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.

zackbrown 7 years ago | | |

> in the US, incorporating would give the separate benefit of protecting your personal assets in the case your company was sued

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...

___cs____ 7 years ago | | |

I was given the same advise. Specially if your business is using a unique skill to solve the problem (e.g: ML, .. etc)

kostarelo 7 years ago | |

> - only if your idea is already profitable beyond ramen profitability, i.e. you can quit the job and survive from the income, and you have a financial buffer for ~1-2 years

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?

throwawayheyhey 7 years ago |

As a German, I would strongly advise against incorporating too early (at least in Germany). I once made the mistake of founding a UG for a small side project and had to realize at some point that all the required bureaucracy was keeping me from doing the actual work. Let me break down the work for you because I hadn't been fully aware of what was awaiting me:

- 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]!

helge5 7 years ago | |

I did this a few times and I disagree. The tax consultant can do all this work for you (book keeping, all the tax work, etc). It is not free (I would say ~3k per year for everything a small GmbH needs), but in return you get a limited liability company.

throwawayheyhey 7 years ago | | |

Well, if OP is making so much that he can easily afford spending 3k/year on a tax consultant and still be left with a considerable amount (say 2-3 times this amount), then I'd say he's already ramen-profitable. ;)

zenovision 7 years ago | |

Yes, better not incorporate any business at all, than do it in Germany. You will waste 50% of your time on bureaucracy, instead of developing your product.

mchannon 7 years ago |

You're selling software, which you can exclusively purvey on a different continent, and you're probably unhappy about relinquishing quite a bit of coin to VAT and/or other taxation. Am I right in thinking this is why you're considering incorporation?

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.

diarmuid 7 years ago |

There are two main reasons to incorporate - the 1st is to shield your other assets from liability - this is more or less important depending on if you have substantial assets and how likely the business is to incur liability (everything has some risk). The second is that with good accounting practices and proper structuring it is often the case that running a business as a legal entity will be more efficient for tax purposes - but this only starts to matter as your business starts to really make $.

pavlov 7 years ago |

You should first check your employment contract very carefully. There may be a no-compete clause that could prevent you from doing related work on your own.

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.

chuckgreenman 7 years ago |

Having some sort of legal entity that stands between you and your clients is always a good idea. It isn't that expensive to get set up, and the peace of mind.

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.

rb808 7 years ago |

The reasons I'd start an LLC * You are selling expensive services or something where you could be sued. (ie selling children's clothes in America I'd definitely do it) * You expect it to be profitable and want to take advantage of tax breaks for small businesses or similar. * You want to sell the company on, raise money etc I don't know much about this route

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.

raintrees 7 years ago |

Entity choice is usually due to 2 reasons: Taxes and Liability. Work with your CPA and Attorney, find out from them the cost benefits of the various forms and the mitigation you think appropriate at this time. Review periodically.

gdubs 7 years ago | |

This is good advice. I’d add that, in the US at least, there’s a little more overhead to deal with when it comes to an S-Corp vs an LLC. A CPA is definitely the first person to talk to.

znpy 7 years ago |

Fellow EU resident here.

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.

needaccount 7 years ago |

It’s definitely worth it. In many states you can do it online for less than $100.

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.

ttty 7 years ago | |

Hum... Do you really think you can sue Google because of some bug in Gmail? I doubt it. I guess he should put some tos saying he is not responsible for lots of sales because of bugs...

epynonymous 7 years ago |

i'm not an attorney, nor should my advice be taken as legal advice. i would strongly suggest getting a lawyer to handle this.

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.

derekp7 7 years ago | |

I've been doing some research (from a US perspective) on this topic. From what I've read, a single-person corporation only shields you from things like not being able to pay back a business loan, or paying suppliers, etc. But it doesn't necessarily shield your personal assets from liability lawsuits, since the person who is responsible for the potentially liable action is the same as the company, and is the same as 100% of the shareholders. To get that protection, your best bet is to have a good umbrella insurance policy, along with having a lawyer draft appropriate terms and conditions for your services (such as "this software is not guaranteed to be fit for any purpose, and should not be used for any purpose", but worded a bit different).

tommoor 7 years ago | |

> 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?

___cs____ 7 years ago | |

> i would strongly suggest getting a lawyer to handle this.

As stated above, I couldn't find one, someone who can deal with tech-y stuffs here in my area.

unilynx 7 years ago | | |

why do you need a tech-y lawyer? I'd look for a fiscal advisor, because this is mostly about getting your tax liabilities right. And they should know enough about forming companies.

m0llusk 7 years ago |

Incorporate when you have a sale set up. That is the same for any product, any industry.

andrewflnr 7 years ago | |

This is not something I've heard before. Is it really standard practice to put off incorporation until you've made a deal?

helge5 7 years ago | | |

I don't think so. In fact it can make sense to incorporate early, so that you can offset later profits with costs you had during bootstrapping (ddg "Verlustvortrag"). Not to mention that you don't have to pay VAT for equipment required to operate the business (PaintCode license, iMacPro's and such ;-) )

matiasb 7 years ago |

You could also look for opinions on the e-residents Facebook group: https://www.facebook.com/groups/eResidents/

welder 7 years ago |

I have 2 friends who incorporated but they both raised funds. One used Stripe Atlas for incorporating in Delaware, USA and not sure if the other incorporated in Germany or abroad. Lemme know if you want an intro!

chrisked 7 years ago |

Feel free to contact me any time. My email is ck at domain. I’m running www.firma.de/en/ and we help entrepreneurs to setup their business properly. Happy to talk through some options.

arisAlexis 7 years ago |

Estonia is a very good option. When and if you make profit you will pay in Germany for the dividends but until you take out money from your company in Estonia the taxation is zero.

neptvn 7 years ago |

Are your clients based globally or solely in Germany?

I would look into Stripe Atlas in any case.

https://stripe.com/atlas

nik736 7 years ago | |

That's really bad advise, because he still has to pay taxes in Germany and Atlas creates a huge mess.

neptvn 7 years ago | | |

Can you describe the mess Atlas creates?

9wzYQbTYsAIc 7 years ago |

If you already have customers, it’s probably a good idea to at a minimum create a legal entity to be liable and insured for the work that you do for said entity.

___cs____ 7 years ago | |

That's my point actually. I want to protect the data, the work and consumers. At the same time, brand my work under one company, so it would be easier to get new freelancing work.

diarmuid 7 years ago |

if your located in the U.S. a single member LLC is one of the most convenient ways to go.

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)

diarmuid 7 years ago |

in most states you can file to open an LLC online (or by printing and mailing a form and a check) - 2nd step is to apply to the IRS for an EIN (tax id) for the new entity. then you need to do annual filings with the secretary of states office of the state your in (This is all applicable to the U.S)

lordnacho 7 years ago |

Chances are you are legally obliged to report work done in the country you live in. Since you're doing software, a very remotable business, there's a fair chance you can get away with it, but an accountant will probably tell you you're not supposed to.

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.

sharemywin 7 years ago |

You probably need an accountant to answer tax questions.

lettergram 7 years ago |

My typical advice, is ince you have customers, create an LLC as it protects you from some liability. A lawyer costs a bit of money, but is worth it.

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