
Ask HN: Should I incorporate a company for software side projects? - ___cs____
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.<p>- 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:&#x2F;&#x2F;investinestonia.com&#x2F;business-in-estonia&#x2F;establishing-company&#x2F;<p>- Is it a good idea to incorporate an LLC while having full-time job ?<p>I am getting mixed signals whenever I read similar discussions, those who are interested in reading more about the topic:<p>https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=15441846<p>https:&#x2F;&#x2F;www.mycompanyworks.com&#x2F;create-a-company-to-manage-your-side-projects&#x2F;<p>http:&#x2F;&#x2F;stu.mp&#x2F;2010&#x2F;09&#x2F;why-you-should-probably-have-an-llc-for-side-projects.html<p>P.S: In case you are wondering, I am based in Germany. Feel free to suggest contacts to get legal advises (I couldn&#x27;t find any one)
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nik736
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
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
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.

~~~
heipei
OK, I get that lawsuits would be a good example of "liability", but my
question is this: Are you really not liable for the things you mentioned
(GDPR, customer data) if you're the CEO of a UG/GmbH and it falls back on you
because you're the one that designed the whole product?

~~~
throwawayheyhey
Only if they can prove that you willingly or carelessly neglected your duties
as a CEO. These are very narrowly defined, though:
[https://de.m.wikipedia.org/wiki/GmbH-Geschäftsführer-
Haftung](https://de.m.wikipedia.org/wiki/GmbH-Geschäftsführer-Haftung)

------
wprapido
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
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
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.

~~~
nik736
No, that's simply false information.

~~~
throwawayheyhey
No, you're the one peddling misinformation here. It's true that you have to
tell German authorities about your foreign business (not just your income from
that business) for tax purposes _if_ you're actually operating your business
from within Germany (i.e. you're running a "Gewerbe"). There are also some
rules to follow you're merely conducting business with German customers, i.e.
how to collect VAT etc.

In any case, however, you certainly don't have to "convert" your business into
a GmbH.

~~~
nik736
I havn't said that you need to convert your business into a GmbH. What I said
(or at least meant) was that if you found a Limited while living in Germany,
it will be seen and handled similar to a GmbH by the authorities here in
Germany.

------
relix
Check out [https://www.leapin.eu/](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
> 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
I was talking about Estonian companies, they don't have corporate taxes.

------
bitL
\- 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
_" 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
> 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...](https://www.nolo.com/legal-encyclopedia/personal-liability-
piercing-corporate-veil-33006.html)

------
throwawayheyhey
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
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
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. ;)

------
mchannon
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
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
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.

~~~
arshsingh
> Are you prepared to travel to Tallinn and visit local banks in person to try
> convince one to open you a business account?

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.

~~~
throwawayheyhey
> > If you pay a dividend at the end of the year, it’s 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](https://de.m.wikipedia.org/wiki/Abgeltungsteuer))

------
chuckgreenman
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
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
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
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
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
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
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
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.

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

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

~~~
helge5
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
You could also look for opinions on the e-residents Facebook group:
[https://www.facebook.com/groups/eResidents/](https://www.facebook.com/groups/eResidents/)

------
welder
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
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
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
Are your clients based globally or solely in Germany?

I would look into Stripe Atlas in any case.

[https://stripe.com/atlas](https://stripe.com/atlas)

~~~
nik736
That's really bad advise, because he still has to pay taxes in Germany and
Atlas creates a huge mess.

~~~
neptvn
Can you describe the mess Atlas creates?

~~~
vorpalhex
Atlas is built to form a registered Delaware Corp with an agent and a
corporate bank account in the US. If your goal is to be acquired or go the
traditional startup route then it's perfect. If you just want to roll a new
entity for legal/financial protection it is akin to combating mosquitos with a
grenade.

~~~
pofgiru
Because atlas costs $500?

~~~
vorpalhex
If you just want some legal/financial protection, most countries have a
simplified way to form a basic company (in the US it's LLC) that you can
easily file for yourself, and usually the taxes are easier then say a C corp.

Atlas was designed to correctly setup a company to become acquired or go
public. You simply don't need those features and the complexity included on
the cap table, taxes, etc.

------
9wzYQbTYsAIc
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____
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
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
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
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
You probably need an accountant to answer tax questions.

------
lettergram
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

