Should I start my own business as a sole proprietor or as a limited liability company (LLC)?
May 11, 2024 | 50,00 EUR | answered by Fanni Siebert
Dear tax advisor,
I am about to start my own business and am faced with the important decision of whether to establish myself as a sole proprietor or a GmbH (limited liability company). Currently, I am employed and have a stable income, but I now want to take the step into self-employment and start my own company.
As a sole proprietor, I would have the opportunity to start quickly and easily. I could have full control over my company, make decisions on my own, and keep all the profits for myself. However, I would also be personally liable for all obligations and would therefore take on a financial risk. Additionally, there are tax aspects to consider that I, as a layman, am not yet familiar with in detail.
On the other hand, a GmbH offers the advantage of limited liability. This means that my personal assets are protected and I would not have to be liable with my private assets for the company's debts. However, establishing a GmbH involves higher costs and bureaucratic effort. The tax regulations are also more complex, and I would need to delve deeper into the topic.
Considering these aspects, I am unsure which legal form is best suited for my planned company. Therefore, I would like to ask for your opinion and recommendation as an expert. What are the advantages and disadvantages of establishing as a sole proprietor or GmbH? What tax implications should be considered, and how can I minimize the financial risk?
I look forward to your assessment and thank you in advance for your support.
Kind regards,
Leon Nitsche
Dear Mr. Nitsche,
Thank you for your inquiry regarding the choice of legal form for your planned company. This decision is indeed of great importance, as it can have both legal and tax implications. I would be happy to assist you in your decision-making process and explain in more detail the advantages and disadvantages of the two possible legal forms - sole proprietorship and GmbH - as well as the tax aspects.
As a sole proprietor, you would indeed have the advantage of being able to start quickly and easily. You would have full control over your company and be able to make all decisions yourself. Additionally, you could keep all profits for yourself. However, there is the risk of personal liability. This means that you would be personally liable with your private assets for the debts of the company. This can pose a significant financial risk, especially if the company is not successful.
Furthermore, as a sole proprietor, there are tax aspects to consider. You would pay taxes on your profits as income and be subject to income tax. Additionally, you would have to pay sales tax and comply with all relevant tax regulations. As a layperson, this can be quite complex and requires a detailed understanding of tax matters.
On the other hand, founding a GmbH offers the advantage of limited liability. Your personal assets would be protected, and you would not be liable with your private assets for the company's debts. This provides a certain level of security and minimizes the financial risk in case of insolvency.
However, founding a GmbH involves higher costs and bureaucratic effort. You would need to provide a minimum share capital of 25,000 euros, conclude a partnership agreement, and register in the commercial register. Additionally, GmbHs are subject to stricter tax regulations. Profits are usually taxed with corporate income tax before being distributed to the shareholders. Again, a thorough knowledge of tax regulations is required.
To minimize financial risk, you could, for example, establish a GmbH & Co. KG. In this case, you would be personally liable as the general partner, while the shareholders would only be liable up to the amount of their contribution. This offers a certain combination of limited liability and flexibility.
Ultimately, the choice of legal form depends on various factors, such as the size of the company, planned business activities, liability risks, and your personal preferences. I recommend that you consult with an experienced tax advisor or lawyer to discuss your individual situation and make an informed decision.
I hope that my explanations have been helpful in your decision-making process. If you have any further questions, please feel free to contact me.
Best regards,
Fanni Siebert
Tax Advisor
