Which form of company formation is most tax advantageous?
July 23, 2022 | 40,00 EUR | answered by Siegfried Strauss
Dear tax advisor,
My name is Emma Niemeyer and I am planning to start my own business. However, I am unsure about which form of business incorporation would be most advantageous for me from a tax perspective. I have already done some research, but I am still uncertain about which option is best for me.
Currently, I work as a freelance graphic designer and now want to offer my services under my own company name. I have a stable income and am confident that my business will be successful. However, I am concerned about how I can best benefit from a tax standpoint.
I have heard of different forms of business entities such as sole proprietorship, GmbH, and UG (limited liability company). Each of these options has its pros and cons, but I find it difficult to determine which is most suitable for me. I would like to be optimally positioned from a tax perspective in order to keep as much of my profits as possible.
Could you please help me understand the advantages and disadvantages of the different forms of business entities from a tax perspective? Which form of business incorporation would you recommend for me and why? Are there any specific tax benefits or pitfalls that I should consider in my decision?
I am looking forward to your assistance and I appreciate your support in advance.
Kind regards,
Emma Niemeyer
Dear Ms. Niemeyer,
Thank you for your inquiry regarding the tax aspects of starting your own business as a graphic designer. I am happy to assist you in your decision and explain to you the advantages and disadvantages of different business forms from a tax perspective.
Let's start with the sole proprietorship. As a sole proprietor, you would be the sole owner of your business and would keep all profits for yourself. From a tax perspective, the income from your self-employment is treated as business income, which you must declare in your income tax return. With this business form, you have full control over your business and there are no complicated formalities in starting up. However, you also bear the full entrepreneurial risk and personally liable with your private assets.
The GmbH (limited liability company) is a corporate entity where your private assets are generally protected from business debts. The profits of the GmbH are taxed separately and the share capital is at least 25,000 euros. Establishing a GmbH involves higher costs and bureaucratic effort, but offers the advantage of limited liability and a clear separation of private and business assets.
The UG (limited liability), also known as Mini-GmbH, is a special form of GmbH with a lower minimum share capital of 1 euro. Here too, your private assets are protected from business debts. The UG offers a more cost-effective alternative to the GmbH, but has the reputation of being a "cheap GmbH" and may not inspire as much trust with business partners.
The most advantageous form of business formation for you depends on various factors, such as your profit, long-term goals, and risk profile. I would recommend consulting a tax advisor who can analyze your individual situation and provide you with a tailored recommendation. There are tax advantages and pitfalls to consider with each business form in order to optimize your tax position.
Finally, I would like to emphasize that the choice of business form is an important step in your start-up process, with long-term implications for your company. I hope this information is helpful to you and I am happy to answer any further questions you may have.
Best regards,
Siegfried Strauss, Tax Advisor
