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I watched YouTube videos about founding a Holding Company and founded one; in Germany in less than 4 months (Part 1 of Founding a Company) ​

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Introduction ​

I have a good and interesting job, I am a freelancer with interesting small projects from time to time and I do voluntary work for the local swimming club as the vice president.
Why - really - why did I want to found a company? Even more interesting, I did not only want to found one company, but two in a specific structure.

In this first article I want to take you with me on the journey from watching videos about it and learning a lot about taxes, structuring several companies in a holding structure and how much it costs. In follow-up post(s) I'll continue with actually signing the certificate of incorporation at the public notary and further highlights until finally having both companies ready.

Hi 👋

This is Kai Mindermann, the CEO of NuInnovate - with the vision of creating a world where every improvement serves a meaningful purpose. Just wanted to quickly say: Enjoy your day!

Ideas, problems and solutions ​

So I tend to have all kinds of ideas, actually all the time. Most of them are like just random for whatever context I'm in at that moment and either really absurd or plain unusable. Still, some ideas have a little more merit and make it to further thought processes. Most often the next step for me is to think about an implementation of the idea and how it could be done most effectively and efficiently, doesn't mean only with software but trying to factor in the most fundamental and easiest way to it (at least that's how I think I approach it).

A challenge with this way of thought-processing is: I totally skip the question if this is actually a problem somebody has? Of course, some ideas are around problems I observe other people having to deal with, but there are, at least equally many, also ideas for non-existent problems (at least from most people's perspective or not yet significant enough compared to other problems, I guess).

Filtering out many of the ideas without problems and solutions without problems, there still are some combinations, which I cannot shake off to be just in my head, but that these are real problems for which people would pay to have them solved better or at all.

So, I'm not going to tell you about the concrete problems and the ideas for how to effectively and efficiently solve them. Let's assume for now, they are desirable, and I can build them.

Why didn't I just build them and try them out? I think many people do this, and I also think that's the most effective approach to find out. Yet, I still couldn't do that, at least not publicly with users and their data. Why is that?

I think there are multiple reasons, many of them common among founders, like being scared or afraid of taking risks or being afraid of failure. First: For me, at least that is what I have in my mind when I think about the public release, it is that I want to make sure the personal data of my users is safe and processed like expected, regardless if it's just a prototype or a demo or whatever state the product is in. I know, even with good procedures in place, data can still be leaked by one of the services my products rely on or by vulnerabilities in any of the software libraries my products rely on or many other ways, actually. Still, I want to do it right, at least to a high degree. Second: If anything goes wrong, even without me being at fault, I want to protect myself. Both of these reasons lead me, pretty much all the times when I was thinking about implementing and publishing a prototype, to the conclusion, that I need a professional structure for any of the ideas as well as needing a limited liability company of some sort.

Finding the right country for the company ​

Before getting into the path of deciding for the kind of company I went for, I first want to discuss the Where.

Where should the company be founded? With the vast reach of the excellent technology of the Internet, for a software-focussed company, it doesn't matter so much where the company is located physically. So, from a product and service distribution standpoint that is right, but there are other factors that are relevant.

For example, I was really thinking about using Stripe Atlas, which claims to be an "automated" service to "create [your company] in one click" as a company in Delaware, United States. It's really popular:

Since the turn of the 20th century, Delaware has become an onshore corporate haven whose corporate laws are deemed appealing to corporations; over half of all New York Stock Exchange-listed corporations and over three-fifths of the Fortune 500 are legally incorporated in the state.

Wikipedia contributors. (2024, April 9). Delaware. In Wikipedia, The Free Encyclopedia. Retrieved 16:43, April 15, 2024, from https://en.wikipedia.org/w/index.php?title=Delaware&oldid=1218085751

But my decision process was biased in two ways, meaning some of possible locations where ignored by me.

First, I wanted to make sure I was able to be available for all required steps in person and without delegating anything to someone else I don't know (yet). Even though for most of the options there are not many steps that would have required me to be present somewhere. But I also know that things can go wrong and processes get stuck and then, suddenly, they can only be moved forward, when you are physically there for some reason. So this risk, even though small, I wanted to eliminate as much as possible.

Second, I wanted to be able to understand the relevant company and tax laws and all other stuff. Though, I understand English, in fact I'm writing this without help (except for some specific words that I need to translate), I am not going to count on interpreting every detailed aspect of the law correctly, even not in my native language (I give my best, though)... But there I feel most confident in learning enough to be able to make sound decisions.

So this left me with the available kinds of companies and legal forms of the following list of countries: Germany. Are you surprised? I'm not.

Now that the country has been decided and the limited liability is relevant, it's time to decide on the kind of legal entity. There are only a few basic ones to choose from.

Most prominent and wide known is the German Gesellschaft mit beschränkter Haftung, most often abbreviated as GmbH. Also, possible is the, almost identical from a legal and tax perspective, Unternehmergesellschaft (haftungsbeschränkt) - engl. Entrepreneurial company (limited liability) - often abbreviated UG (haftungsbeschränkt) and also known as Mini-GmbH or 1-Euro-GmbH. Just for the sake of completeness, there is also the Aktiengesellschaft, in short AG, which is a joint-stock company and a Kommanditgesellschaft auf Aktien which I did not further research.

So back to the GmbH and the UG (haftungsbeschränkt). Both are limited companies (in German Kapitalgesellschaften). The main difference between them is obviously the name. By law, you are not allowed to omit the "(haftungsbeschränkt)" for the Unternehmergesellschaft (haftungsbeschränkt), as it is the sign for others that this company might have less capital than a regular GmbH. At the same time it allows you to incorporate it with less capital than the GmbH, which requires you to provide it with 25000 € (or at least 12500 €, I'll tell you about this detail later), instead you can provide the UG (haftungsbeschränkt) with only as little as 1 € as initial share capital! Yet, in practice you should provide it with a little more, as otherwise it would be insolvent almost immediately.

As I told you that they are also both described in the same law, GmbH-Gesetz, there is a paragraph that encourages - actually it requires - you to build up the required capital every year to allow you to change it to a GmbH later (§ 5a Abs. 3 Satz 1 GmbHG). So this adds a separate step for creation of the annual financial statements and also how profits can be used.

Still, so far I was thinking about incorporating a Unternehmergesellschaft (haftungsbeschränkt), with the main reason being that it can be founded with less than 25000 €.

Watching videos ​

I mentioned something about watching YouTube videos online, right? Yes, I did not forget to tell you about that. So I of course researched this topic a lot, this included watching YouTube videos. I don't remember when I stumbled over the channel or some of their interesting videos about the tax perspective of GmbHs or in general limited companies, but they were like very authentic from a tax consultant perspective. More specifically I'm talking about the YouTube channel of Prof. Dr. Christoph Juhn. The videos I watched were mostly about optimizing your existing company that already made millions of profits and how you can save taxes. Even though I didn't even have a company at that point, it was interesting to learn about what to keep in mind.

Some topics, which I found interesting - keep in mind the channel is in German, but YouTube at least can generate subtitles in your language on the fly:

Quick note about taxes from my personal perspective

I personally think we gain quite a lot in our society by having (to pay) taxes. For example, streets and infrastructure, schools and universities, all used and needed by everyone - all paid for by each other's taxes. Of course, there are areas where also the tax money might be wasted - or let's better phrase it as - not spent effectively and efficiently, but that's a difficult thing to actually change.

Back to the videos. So pretty interesting topics are explained there in a really comprehensive format. What is important is, that though they are talking sometimes about the concrete details, most videos discuss the topics from a principle and structural perspective. That means, the concrete steps that you need to take in your specific situation are left for you to discuss with them or anybody else as tax-advisors. This is totally fine, and you still get quite a lot of information that you can research further on your own or bring to your tax advisor.

So I watched a lot of them, some of them even more than once, to make sure that I understood it correctly after I looked at other resources.

Learning about needing only 12500 € to found a GmbH ​

If you don't really dig into a topic, your assumptions about it will stay at the level of what you have been told, heard or understood to that point.

My assumption was that I have to have 25000 € in cash to implement a GmbH. I learned that this is not true!

Let us take a look at the law (§ 7 Abs. 2 GmbHG):

(2) Die Anmeldung darf erst erfolgen, wenn auf jeden Geschäftsanteil, soweit nicht Sacheinlagen vereinbart sind, ein Viertel des Nennbetrags eingezahlt ist. Insgesamt muß auf das Stammkapital mindestens soviel eingezahlt sein, daß der Gesamtbetrag der eingezahlten Geldeinlagen zuzüglich des Gesamtnennbetrags der Geschäftsanteile, für die Sacheinlagen zu leisten sind, die Hälfte des Mindeststammkapitals gemäß § 5 Abs. 1 erreicht.

(2) The registration may only take place when a quarter of the nominal amount has been paid in on each share, unless contributions in kind have been agreed. In total, at least enough must have been paid in on the share capital so that the total amount of the paid-in cash contributions plus the total nominal amount of the shares for which contributions in kind are to be made reaches half of the minimum share capital in accordance with § 5 Paragraph 1. [Translated to English]

So "reaches half of the minimum share capital" tells us that you only have to pay 12500 € of the minimum share capital of a GmbH, which is 25000 €. Interesting discovery - this means for me, that I have to save less money or similarly can reach my savings target in around half the time! Nice!

But wait a second. Doesn't this mean you cannot expect a GmbH to have at least 25000 € in (keep not of the initial, another detail) share capital but only half of it? So in business transactions with companies of the GmbH-kind you have a higher risk now? I would say yes, at least to this point.

The quoted paragraph only states that you don't have to pay it upfront. Yet, you still owe the missing amount to the company until the minimum share capital. The company can at anytime decide, and regularly will do in the case of bankruptcy, to ask the shareholders to pay the outstanding capital.

Now I thought: The GmbH sounds much more attractive again compared to the Unternehmergesellschaft (haftungsbeschränkt). It's still a lot more money than 1 € but the company should anyway be able to pay for the first investments on its own. Meaning - I anyway was saving some money for the company to be able to live and not just survive.

Can the share capital of the GmbH be used? ​

Now after I have understood what the capital is for and read a lot, it makes total sense for me that the company can use its initial share capital. But before that, I had to learn it. My understanding was, that this minimum share capital is the minimum amount of cash the company needs to hold on to, to pay creditors especially in the case of an insolvency. Sounds logical, right?: In business transactions with companies of limited liability you can be sure they can give you (shared with the other's who conducted business with them) back at least the 25000 €, right? - No.

Apparently, and after thinking or learning more about it (also often mentioned in the videos), this capital is intended to be used by the company to conduct its business. The only thing you cannot do with that money is: Giving it back to the shareholders!

Of course this changed also my understanding of limited liability companies - they might not have even this initial money to pay you! I now understand why you need to have the kind of company in your company's name: So others know the risk of making business with a company of this kind!

For me, having understood this, it meant that I would not have to save more money, like more than the 12500 € to have money for the company that the company can actually use. Great!

Learning about the holding structure ​

Most interesting for me was to understand, based on the videos, what would be a good structure to allow others to participate, not from the start, but later. Additionally, it was interesting for me to learn the tax implications of getting profits out of the company, either from profits of the services and products sold or after increase of the company value through investment rounds and similar. Apparently it makes a huge difference if you distribute it to a natural person (you) or another company (a holding or group), as we will see in a bit!

And now it gets interesting for the structuring of my company.

Getting the profits out of the company (in a legal way!) makes sure, that the company will not be able to access that money if anything goes wrong during any operations of that company. In simple terms, it will only be able to access the money that belongs to the company, and distributed profits don't belong to it anymore. So on the one hand side you want to make sure (some of) the profits from the company are distributed to the shareholders / you. At least as long these earnings are not needed for further or future investments of that company. Yet, on the other hand side, the money should be left in a (not necessarily the same!) company to allow cheaper investing the money for something else again, why?, see below.

What is a holding structure and/or a holding company?

In very simple terms: Not only a natural person can be the owner / shareholder of a company, but a company can also own or hold shares of another company. Both for unrelated other companies, but also for subsidiaries! So it's just a similar company, but it also owns (all) parts of another company.

If you are looking for laws describing the rights and duties of a holding company, you will not find any, as the term "holding" is just a description of the structuring relation between the companies. From a legal and tax perspective, both companies are individual companies. Though, there are laws concerning some of those structures, especially groups of corporations (in German Konzerne), most of them are (just) derived from the laws for stock corporations (German Aktiengesellschaften), e.g. § 15 Verbundene Unternehmen AktG.

This I also didn't know at that point, and I think this is good to understand that it's not a separate kind of company but only how you structure the companies.

Before looking at the possible savings, let's first mention that a company also has to pay taxes for its profits, regardless if they are distributed or reinvested. For the sake of simplicity it's approximately 30 %, made up of ~15.2 % for the Corporate income tax, Körperschaftsteuer, and the other ~15 % are the Municipal trade tax, Gewerbesteuer, though the latter can vary between 7 % and unlimited, the highest being currently 31.5% in Dierfeld.

Why is it now cheaper to distribute (parts of) the net profit from a company to another company than from a company to a natural person?

There is a law that states that a company does not have to apply income tax on capital gains / incomes from investments, except on 5 % of it, when the company owns at least 15 % of the other company. So the tax to pay is the ~30 % applied to the 5% of the received dividend, which leads to a total tax of only around 1.5 %. Details are stated in § 8b Körperschaftsteuergesetz and § 9 Gewerbesteuergesetz.

Compared to ~26.375% what a natural person would have to pay (maximum) in final withholding tax (in german Abgeltungssteuer). Of course, you would have to pay that, when you distribute the net profit from the holding further to you as a natural person! Actually for that, the structure of a holding is making it worse (more expensive and more effort). Yet, if I don't have to own the things I want or need by myself, but the/a company can be the one who buys and owns it, then it is much cheaper to leave the money in that company and use it or otherwise let me use it (e.g. lease it to me)!

So a holding structure allows you to save the profits outside the operative business company and within the holding company, so you don't have to pay so many taxes on it. Yet, it is owned by that holding company. But the holding company is solely in your ownership.

Is there more to it? Because the incorporation and running costs (including time/effort) of one GmbH are already significant, why should you want to go the extra mile and put up with it for a second company right from the beginning?

Can't I just create a holding company when I want to sell the operative company? ​

You can - but you won't profit from the tax-savings of the structure. So, I guess because it was exploited before, there is a law that tells you that you need to wait some years to benefit from the tax-savings of a holding company. Actually the law, stated in § 22 Abs. 1 Satz 1 bis 3 UmwStG, says each year that passes, you gain a 7th of the benefit until you have waited 7 years. So you can do it earlier and have some kind of benefit but only after waiting full 7 years, the total benefit is there.

This means, I just have to create a holding structure 7 years before I want to sell it or sell parts of the operative company. I don't think I can predict ahead 7 years... I am both not sure if I can make any of the ideas I have into scaling companies that attract investors interest, but also I believe in the possibility of that happening.

So I want to be prepared and as a good CEO I want to set up the company in the most beneficial structure for the next years. This is the point at which I decided:

When I'm going to found a start-up I'll do it in a holding structure right away.

Next steps ​

There is quite some bureaucracy involved to incorporate a GmbH in Germany. I researched a lot of resources, apart from the videos, that describe all the necessary steps.

As I won't go into details of all of them, here are two other blog posts, who describe their experience with these steps. How To Found a Company In Germany: 14 “Easy” Steps And Lots Of Pain and Just how complicated could it be to register a German company?. A more unemotional description can be found here: How to set up a GmbH: Your guide to starting a limited liability company in Germany

So far I already covered a few aspects which I discovered, learned and experienced:

In the next post(s) I'll highlight the next steps, some of which I did not comprehend quickly in the - for me - necessary detail:

Disclaimer

The content provided in our articles is for informational purposes only and should not be construed as legal or tax advice. Readers are encouraged to seek professional advice from qualified professionals regarding their specific legal or tax situations.