You know what they say: “If you want to go fast, go alone. If you want to go far, go together”. Having a co-founder is great for many reasons and it is no wonder that so many of us want to start a business with a friend.
Not only you will have a different, richer skill set, but you will be able to talk to them about the business, because they too, will be thinking about it all the time. Your other friends will share the excitement for a while, after that, you will really need to start talking about something else. Your romantic partner might not be thrilled about you bringing work home every day (especially if they have a 9-to-5 job). And let’s face it, you pay your therapist by the hour. Using your sessions to tell them about your social media strategy will get expensive.
Your business partner, however, will be always interested in what’s on your mind. I know, because I have one in two of my ventures and I’ve collaborated with a great team on the Complete guides to self-employment initiative.
But let’s get back to you and your friend starting a business together. I would like to talk to you about the various legal constellations your business partnership can take the form of. That way, you will be able to pick the one that makes most sense in your individual set of circumstances.
Joint Venture (GesbR – Gesellschaft bürgerlichen Rechts)
When two or more persons or entities join forces to achieve a common goal, they can establish a joint venture.
Legal personality: The joint venture itself has no legal personality, meaning it is each of you who carries out all responsibilities and rights you have obtained in the course of work. A joint venture cannot be entered in the company register and it is not an entrepreneur. Instead, each of the partners is an entrepreneur.
Both, private and legal persons, can be partners in a joint venture.
Liability: Each of you is fully liable with your entire personal property for the entire amount of damages done, regardless of how much their part in the partnership is. Each of you is liable for the entire operation.
Foundation: The joint venture is founded once the partnership agreement has been concluded. That agreement has no mandatory form. It is enough that the partners agreed to found the joint venture.
Participation: Partners can contribute to the achievement of the joint goal with their work, with capital or with other property.
Commercial registry: The joint venture has no legal personality and it is not an entrepreneur, so it cannot be entered into the commercial register. Its partners can in their individual capacity.
Name: Since the joint venture is not eligible for entry in the commercial register, it can also not have a firma (the official name under which a company operates). It can, however, have a name. For example, “Best book club” (if your venture is a book club).
Starting capital: None needed.
Business license: If the activity the joint venture does requires a business license (Gewerbe), each of the partners has to obtain it, so the joint venture can operate.
Assets: Since the joint venture has no legal personality and cannot carry rights and obligations, there are no assets that belong to the venture. These assets are in equitable ownership of the partners.
Taxation: The joint venture is not a tax subject, unless it comes to VAT. If the turnover of the joint venture exceeds EUR 35 000, it will have to pay VAT.
Each of the partners pays income tax/corporate tax on the share of the profit they have received.
Social security contributions: If the partners are natural persons, they are subject to compulsory social security as business license owners. The general rules for exemption of the compulsory contributions apply here as well.
Management and representation: If nothing else is provided in the partnership agreement, each of the partners can represent and manage the joint venture.
Commercial Partnership (OG – Offene Gesellschaft)
Unlike the joint venture, the OG obtains rights and obligations in its own name. It requires a minimum of two partners each of which is capable of holding legal rights and obligations. To establish the OG, you need a contract between the partners. The OG can have any type of activity and purpose, and not necessarily a commercial one.
Legal personality: The partnership has its own legal personality.
Liability: Each of you is fully liable with your entire personal property for the entire amount of damages done, regardless of how much their part in the partnership is. Each of you is liable for the entire operation.
Foundation: The partnership is formed the day the partners sign the partnership contract but is founded after its commercial register entry.
Participation: In the contract, you can decide how each of you will contribute and how the ownership is divided (i.e. with money, services, and work, respectively – 50/50, 70/30, etc.). For third parties, however, unprejudiced from the inner agreement between you, each partner is fully liable for the entire amount of any financial obligation. That means that the creditor can choose to go after only one of you.
Commercial registry: The partnership is not founded until it is successfully entered in the commercial registry.
Name: The name of the partnership has to include the words “offene Gesellschaft” or the abbreviation “OG”.
Starting capital: None needed.
Business license: If the activity the partnership does requires a business license (Gewerbe), one of the partners has to obtain it, so the partnership can operate. Please note, that while one of the partners has to be appointed as the statutory manager of the business license, the entire partnership operates under the license.
Taxation: The partnership is not a tax subject, unless it comes to VAT. If the turnover of the joint venture exceeds EUR 35 000, it will have to pay VAT.
Each of the partners pays income tax on the share of the profit they have received.
Social security contributions: Each partner has a compulsory insurance and cannot opt out of it.
Management and representation: If nothing else is provided in the partnership agreement, each of the partners can represent and manage the partnership.
Limited Commercial Partnership (Kommanditgesellschaft – KG)
The limited commercial partnership has at least two partners, but unlike the OG, at least one of the partners has an unlimited liability. The other one’s liability is limited to a particular amount.
To establish the KG, you need a contract between the partners. The KG can have any type of activity and purpose, and not necessarily a commercial one.
Legal personality: The partnership has its own legal personality
Liability: As mentioned above, there must be at least one partner who has unlimited liability (Komplementär, general partner). The other partner(s) (Kommanditist, limited partner) is liable to the amount agreed upon in the articles of association.
If the amount of liability is equal to the amount of the capital contribution of the limited partner (as agreed upon in the articles of association), the limited partner’s liability is cancelled.
Foundation: The partnership is formed the day the partners sign the partnership contract but is founded after its commercial register entry.
Participation: In the contract, you can decide how each of you will contribute and how the ownership is divided (i.e. with money, services, and work, respectively – 50/50, 70/30, etc.). The general partner is the one responsible for the operation and the one making management decisions.
The limited partner’s role is to provide the financial means to the partnership. They also have certain participatory and controlling rights.
Commercial registry: The partnership is not founded until it is successfully entered in the commercial registry.
Name: The name of the limited commercial partnership has to include the words “Kommanditgesellschaft” or the abbreviation “KG”.
Starting capital: There is no requirement for starting capital, unless you are founding a special form of a KG – GbmH & Co KG.
Business license: If the activity the partnership does requires a business license (Gewerbe), one of the partners has to obtain it, so the partnership can operate. Please note, that while one of the partners has to be appointed as the statutory manager of the business license, the entire partnership operates under the license.
Taxation: With regard to business taxes (e.g. sales tax, payroll taxes), the KG is considered a taxable entity. However, just like the OG, the partners pay income tax on the profit they received from the partnership.
Social security contributions: The general partner is mandatorily fully insured by the social security. The limited partner, if they don’t contribute to the management and the work of the partnership, has no obligation to contribute to the social security.
Management and representation: If nothing else is provided in the partnership agreement, the general partner is the managing director of the partnership and is taking care of all usual business activities. The limited partner has no right of objection.
Limited Liability Company (GmbH – Gesellschaft mit beschränkter Haftung)
Austria has a significantly more complicated regulation of limited liability companies, compared to most countries. That applies especially to the required amount of starting capital.
Shareholders in the llc can be individuals and entities. Unlike the previous 3, llc are always considered to be conducting business and are therefore, always treated as such.
Legal personality: LLC has legal personality and can obtain rights and obligations.
Liability: The llc is liable to the amount of its corporate assets. The shareholders are only responsible for the capital contribution they committed to in the articles of association.
Foundation: The articles of association have to be in the form of a notarial deed (meaning you will need a notary). If you have not appointed a managing director in the articles of association, one has to be formally done in writing, before you register the company in the commercial register.
Participation: Each shareholder has one share of the company. The value of each share can differ depending on the part of the capital you contributed.
Commercial registry: Registration is mandatory.
Name: The name of the limited liability company has to include the words „Gesellschaft mit beschränkter Haftung“ or an abbreviation of them.
Capital: The minimum required starting capital is 35 000 Euros*. 17 500 Euros have to be paid at the moment of registration. The capital can be in the form of cash or assets.
Business license: For activities that are subject to the trade regulations, a business license issued to the company is required. A business license of a shareholder is not sufficient. Furthermore, if the license requires specific education and qualifications, the managing director must have them. Only the said managing director or an employee who is employed in the company for at least half of the normal weekly working hours and is fully subject to social security contributions can be appointed as managing director for the needs of the business license. They also must act accordingly in the company (I.e. not just be the managing director for the business license on paper).
Taxation: The llc is tax subject and is taxed with corporate tax at the rate of 25%. For all limited liability companies founded after June 30, 2013, the minimum corporation tax is EUR 500 per year for the first five years and EUR 1,000 per year for the following five years. It is important to note that the minimum corporation tax must be paid, even if the company makes little or no profit.
The dividends paid to shareholders are taxed with a special rate of 27,5%.
Management and representation: Shareholders can serve as managing directors (Gesellschafter-Geschäftsführer).
Social security contributions: Shareholders who DONT serve as managing directors, don’t owe social security contributions. However, if they DO serve as managing directors, social security contributions are mandatory. This is where it gets tricky – if the value of their share is under 25%, they are insured as employees and the company pays the contributions to the social security fund for employees (ÖGK). If the value of their share is above 25% but under 50%, and their working relationship with the company fits one between an employer and employee, the social security contributions are to be paid to ÖGK. If that is not the case, the payment the shareholder receives is considered income from an independent work and the social security contributions are paid to the social security fund for self-employed (SVS).
If the value of the share is over 50%, the payment is always considered to be income from an independent work and the social security contributions are paid to SVS.
*Privileged LLC:
There is an exception to the requirement for the amount of the starting capital. Instead, 35 000 Euros, you can start with 10 000 Euros, 5 000 Euros of which are paid at the moment of foundation. You have 10 years to contribute the other 25 000 Euros.
However, the company is still liable up to 35 000 Euros (at least).
Two sole proprietors (Einzelunternehmer) contracting with one another
If you are not sure whether working together is for sure a good idea, you can also start as two self-employed individuals who cooperate.
One of you can hire the other to perform certain part of the work. If you choose this possibility, you cannot be entered in the company register as partners. In terms of liability, each of you will be liable for her own actions only.
That was A LOT, wasn’t it? It takes time and consideration to choose the right legal form for your business. The good thing is, you can always change it. I get asked often when it makes sense to found a limited liability company. LLC has advantages beyond the limited liability if your turnover is at least 90 000 Euros/year. Then, you save approx. 5% from taxes. So, you either do it at a later stage when your business has sustainable grown, or, if you have enough starting capital and the operational costs will be high to start with.
There are a few other legal forms I have left out because they are not used as often. Mostly because of the high starting costs and the relatively complicated regulations they are subject to. These are stock company (Aktiengesellschaft – starting capital is 70 000 Euros), European Economic Interest Grouping (Europäische Wirtschaftliche Interessensvereinigung – a supernational legal entity), etc.
I have prepared a simple graphic, so you can see at a glance the most important characteristics of the legal forms.
If you are still wondering which one fits you best, let me make that easier for you by booking a consultation with me.
