How to choose between a GmbH or Self-Employed status in Austria
Still unsure whether you should choose to found a GmbH (Limited Liability Company or ‘LLC’) or register as self-employed, then this blog is for you. 7 reasons a GmbH might be your best choice.
In this blog you can read that it is more beneficial for you to found a GmbH instead of registering as self-employed if:
1. You have enough starting capital
2. Your business operation requires high costs transactions and/or high cost risk
3. Your business partner and/or ideal customer won’t work with you if they are not reassured about your credibility and commitment
4. Your operation will require hiring employees sooner rather than later (aka short-term goal)
5. You are planning on doing business AND staying in Austria for a couple of years
6. You will be applying for public funding* or looking for investors
7. You want to optimize your taxes
And of course: what can I do for you in all this?
If you have been following my blog or my content on LinkedIn you might have stumbled upon a piece of content on the right legal form for your business.
From my point of view – there is always at least one legal form is the best fit for your business idea. But this certainly does not mean that you have just one option.
People often come to me with the question whether they should choose to found a GmbH (Limited Liability Company or ‘LLC’) or register as self-employed. Like most things in the world of business in Austria – there is no generic answer for me to give.
In fact, comparing a limited liability company with self-employment is like comparing apples and oranges.
Yes, they are both fruits and you can eat them, but they also have very distinct features that makes them unique and different to the other. Whilst I would recommend making a pie with apples, I’d be more hesitant to say the same about oranges. You don’t need to peel apples before you eat them but you really should with oranges (anyone out there who wants to challenge me on this?)
The legal form you choose for your business needs to be looked at in the context of your short-term and long-term goals, and the specifics of your business operation. The form you choose, will allow you to run your business in a particular way, so a particular form won’t be wrong per se but rather less suitable, less tailored to you and your business.
So if you’re still with me and haven’t gone off to google what would happen to you if you eat orange peel, you might be asking yourself a couple of more essential questions.
- What do my short-term and long-term goals have to do with any of this?
- Why hasn’t she mentioned the words “tax optimization” yet?
They say good things come to those who wait. And I’ll reward your patience by answering those two important business questions soon.
First things first though.
How to decide if you should set up a GmbH in Austria, rather than register as self employed
It is more beneficial for you to found a GmbH instead of registering as self-employed if:
1. You have enough starting capital
A GmbH requires a starting capital of EUR 35 000, 50% of which must be deposited in a bank account at the moment of registration.
If you’re feeling confused now because you heard that it takes EUR 5000 to found a GmbH – let me explain. This lower amount is the so-called “privileged founding” that allows you to start with a decreased capital of EUR 10 000 – 50% of which you need to deposit at the moment of registration. Then, you are given 10 years to collect the rest of the €35 000 capital.
If you don’t have any starting capital and don’t have approx. EUR 1500 for separate registration costs, this legal form won’t work for you.
2. Your business operation requires high costs transactions and/or high cost risk
Unlike a LLC, a self-employed person is fully and personally liable for all damages and debts that are incurred because of their business activity.
What is more, their personal assets can also be used to settle these damages and debts.
A LLC on the other hand, is only liable up to the amount of its capital and the available business assets.
Take a property selling business, for example. From a liability point of view, it’s going to make more sense and incur less personal risk, to found an LLC.
3. Your business partner and/or ideal customer won’t work with you if they are not reassured about your credibility and commitment
Some business requires a certain image that, no matter how professional and capable you are, self-employment just can’t project. Having a LLC conveys that you are serious about what you do – not only does it take an investment to found it but the running costs are much higher than those of a self-employed person. This can be taken to mean that your business is doing well enough to be able to cover all that. Or that your idea was solid enough to convince investors to invest in it.
And since it takes more time to register or close it down, it could be reasonably assumed that you are in for the long-run.
Combined with what we considered in point number 2, it will be no surprise that a GmBH
is also more suitable if you have a business partner. Especially, a partner who you don’t know that well.
4. Your operation will require hiring employees sooner rather than later (aka short-term goal)
You can, of course hire employees if you are self-employed. But it is much riskier. Guess who is fully liable for damages that were caused by their employees in the process of work? Yep, the self-employed person!
5. You are planning on doing business AND staying in Austria for a couple of years
I feel like based on what we’ve talked up to this point, this one is self-explanatory – it cost significant time, finances and paperwork to set up and run a GmbH. What might be less self explanatory is that it also cost money to close it down. And if you plan to leave Austria after closing your business, that will cost you, too. There is a special tax you pay when exiting and leaving the country with your assets. It is called Wegzugbesteuerung (withdrawal tax)
When assets from a business in Austria are moved to another country, or when assets from abroad are brought into Austria, it’s the Income Tax Act that determines how taxes are applied.
Ever heard of “hidden reserves”? This a future profit that you have not made yet but could make, because you have the assets to make it with. According to Austria tax rules, If there are any hidden reserves that have been built up in Austria, they will be subject to taxes when assets are moved abroad. Similarly, any hidden reserves from abroad will also be taxed when they are moved into Austria.
Even though the legal situation is the same on other countries – like Germany, France and Switzerland – you’re not alone if you think this is an outrageous set up.
I am right there with you.
6. You will be applying for public funding* or looking for investors
If your business idea is built around receiving outside significant investment and funding from government or other public bodies, then setting up an LLC would make good business sense for you. It is a very common funding requirement that your business will continue to exist for a minimum of 2/3/5 years after the funding is awarded to you.
Equally, investors are looking for a winning combination – a good idea AND stability in the business they will invest in. Often, they want to see you have invested your own money before you ask for theirs.
In addition to the old liability issue we looked at earlier, choosing to found an LLC for your business, communicates commitment, longevity, and reliability. Qualities that can help increase your chance of successfully applying for funding.
*This does not mean there are no funding opportunities available to sole proprietors. Check out WAFF and Vienna Business Agency if you are a sole proprietor and looking for financial support for your self employed business.
7. You want to optimize your taxes
There you go, I told you we would get to this part!
I have left this for last because even if this factor seems to be the most attractive reason to found an LLC – it’s actually the most relative and ‘case specific’ one.
If you are self-employed, you will only pay
- (potentially) VAT on your turnover
- and then income tax on your profit.
As we know, Austria has a progressive tax system, i.e. the more you make, the more tax you pay – starting from 20% and up to 55%. That’s not nothing.
So it’s no surprise that when people hear that an LLC is advantageous because it results paying less taxes, they’re rushing to put things in place to set one up.
An LLC has to pay corporate tax on the profit. And although, unsurprisingly, Austria has one of the highest corporate tax rates in the EU – 25%**, it’s still less that than the 26-55% tax fee for the self employed.
However, generally speaking, it only makes sense to attempt tax optimization by founding a GmbH, if your profit is at least EUR 90 000. Why?
Here is a helpful calculation from the book “Steurrecht” by Werner Doralt:
Profit of the GmbH: EUR 100.000
25% corporate tax: EUR 25.000
27.5% dividend tax: EUR 20.625
Total cost: EUR 45.625 = 45,625% of the profit.
Whatever is left afterwards, you receive as dividends. And dividends are subject to a special tax rate of 27.5%.
In comparison, a self-employed person whose profit is EUR 100.000 will be charged with 48% income tax.
The difference in percentage is not as big as we tend to think. And considering the extra hoops to go through before setting up an LLC, I would highly recommend talking your business idea or plan through with a qualified advisor if your main motivation is to reduce your taxes.
One of the tax advisors I work with has shared with me that she has clients with turnover of EUR 500 000 for whom it is still more beneficial to be self-employed rather than have an llc because of the specifics of their business operation.
** temporally, because of the inflation that rate is 23% for 2023 and 2024.
So there we have it, 7 reasons a GmbH (LLC) might be the most suitable legal form for your business activity.
Hopefully you now have a more comprehensive view of when it is better to found a GmbH instead of registering as self-employed.
And I hope you are now feeling relieved knowing that there isn’t really a wrong legal form for your business. If the time comes when it might make sense to change your legal form, rest assured, almost anything can be remedied
You might not like what it will take to make the change from one legal form to another : money (that’s a given) , time and energy (for sure) and professional help (most likely, especially if you want to optimise the time and energy cost)) , but that is a topic for another article.
If you’re sensing that an LLC might be the right legal form for you and want an experienced, strategic and qualified business consultant with a legal background, to confirm your decision and expertly guide you on your journey :
Hi, I’m Miglena – drop me an email hello@miglenahofer.com and let’s talk.