Ask HN: Should I incorporate a company for software side projects?

You have to pay taxes in Germany, it doesn&#x27;t matter if you found a company in the US, Estonia or somewhere else, you are living in Germany and that&#x27;s the important thing that decides you need to pay taxes there.<p>In Germany you could do a &quot;Nebengewerbe or Einzelunternehmen&quot;, where you can write invoices in your name, this is a fast way to get started.<p>Otherwise you have the UG, which can be created with 1 EUR &quot;Stammkapital&quot;, or the GmbH with 25k EUR, but you only need to have 12,5k when founding it.<p>Which taxes have to be paid is different if you do the &quot;Einzelunternehmen&quot; or found a company (UG&#x2F;GmbH). With the company there is the Körperschaftssteuer instead of the Einkommenssteuer, additionally the regular Umsatzsteuer (19%) and also you have to pay Gewerbesteuer. Gewerbesteuer, Körperschaftssteuer and Einkommensteuer all have a free amount per year, if you don&#x27;t hit that limit you don&#x27;t have to pay it.<p>I would advise against founding in a different country, because taxes have to be paid in Germany and founding a company outside of Germany makes it a mess and really expensive.

Yeah, you should incorporate. Not only that, keep separate accounts such as hosting, email, payment gateway, etc.<p>Incorporating abroad spares you of a hassle dealing with German bureaucracy as a company. Not as an individual. Same goes for tax liabilities. Whatever you draw from a company either as income or dividends gets taxed wherever you happen to be a resident.<p>What many of my Germany-based friends, relatives, business associates do. They incorporate abroad and pay income to their Germany registered gewerbe (for those unfamiliar with German system, it&#x27;s like sole trader).<p>A cousin is a steuerberater in Hamburg while a close friend is a wealth manager in Berlin. If you think they could be of any help, feel free to reach out to me.

Check out <a href="https:&#x2F;&#x2F;www.leapin.eu&#x2F;" rel="nofollow">https:&#x2F;&#x2F;www.leapin.eu&#x2F;</a> for an easy way to set up an Estonian company and manage the accountancy around it. You can probably also contact them how it works with their German customers, and what your obligations and taxes would be exactly.<p>Pretty sure if you keep all your revenue inside the legal entity, you don&#x27;t have to pay any taxes. Only once (if?) you distribute profits or pay yourself a salary it&#x27;ll require paying taxes and might become a bit complicated due to you being based in Germany. From what I understand that&#x27;s not yet your intention, which would mean it&#x27;s pretty simple.

- only if your idea is already profitable beyond ramen profitability, i.e. you can quit the job and survive from the income, and you have a financial buffer for ~1-2 years<p>- hire an accountant, 100EUR&#x2F;month and you don&#x27;t have to care about taxes that much, unless you go wildly profitable<p>- LLC&#x2F;GmbH is a better idea than having your life on the line if SHTF (though corporate veil might require at least 2 partners in some countries&#x2F;states)<p>- Estonia doesn&#x27;t seem very recommended lately (the only easy part is to get e-citizenship but the rest seems to be overly complicated). UG in Germany might be what you need, but your taxes will still be around 50%. Did you think about moving to Switzerland&#x2F;Luxembourg instead?<p>- think about having a company in Delaware for flexibility reasons. International taxes are more complicated though and Germany would still be your tax domicile, and demanding its share of your profits while bombarding you with unending bureaucracy, often years after

As a German, I would strongly advise against incorporating too early (at least in Germany). I once made the mistake of founding a UG for a small side project and had to realize at some point that all the required bureaucracy was keeping me from doing the actual work. Let me break down the work for you because I hadn&#x27;t been fully aware of what was awaiting me:<p>- double-entry bookkeeping: This is easier than it sounds because there&#x27;re lots and lots of rules. I mean, even though I had learned this stuff in school for a bit and my mom actually used to teach bookkeeping, it was still hard. An Excel sheet won&#x27;t cut it! (In fact, Excel is not allowed anymore as it can be manipulated after the fact, so you&#x27;ll need actual bookkeeping software.) Sure, you could hire a bookkeeper but then you&#x27;d be spending even more (see below).<p>- Umsatzsteuer-Voranmeldung: monthly, for the first two years<p>- Umsatzsteuererklärung, Körperschaftsteuererklärung, Gewerbesteuererklärung, Handelsbilanz, Steuerbilanz&#x2F;E-Bilanz: 6 months after the end of a fiscal year (usually May 31). Make no mistake, this is <i>tons</i> of work.<p>And then there&#x27;re the costs:<p>- Founding: at least ~300€<p>- Mandatory IHK membership fee: ~160€&#x2F;year<p>- Business bank account: at least 10€&#x2F;month<p>- Bookkeeping software: at least 15€&#x2F;month (unless you want to use pen &amp; paper)<p>- Sending E-Bilanz &amp; Handelsbilanz electronically to the tax authorities &amp; the Handelsregister: ~50€&#x2F;year<p>So yeah, unless your ramen-profitable as people call it, I&#x27;d say: Don&#x27;t do it [in Germany]!

You&#x27;re selling software, which you can exclusively purvey on a different continent, and you&#x27;re probably unhappy about relinquishing quite a bit of coin to VAT and&#x2F;or other taxation. Am I right in thinking this is why you&#x27;re considering incorporation?<p>While it may very well be true that if you try to incorporate some alter ego of yourself as an LLC or similar in another jurisdiction (e.g. the US) and thus you&#x27;d be subject to local taxation, there&#x27;s probably a much simpler approach, of simply being the majority investor in an established overseas corporation.<p>You buy say a 51% stake, it sells your software (with your marketing and continued development efforts) and it acts as a passthrough, keeping your hard-earned money (probably earned largely outside the EU) away from the watchful gaze of local tax authorities. You derive any income in the form of dividends or draws held in overseas accounts. (The minority owner might also be some form of you, or an agent willing to own 49% and do nothing for a reasonable fee).<p>The US is not exactly paradise for all entities and purposes but buying a Wyoming-based shell corporation can be done for under 1000 EUR. This can provide you with a US situs for the business, which unlocks all kinds of doors for legitimacy, particularly when it comes to accepting payments. Am not a tax expert but it occurs to me that taxes can be legally avoided through this approach, given the size of the &quot;shell company&quot; industry in Wyoming (and a few other states) and the level of foreign interests therein.

There are two main reasons to incorporate - the 1st is to shield your other assets from liability - this is more or less important depending on if you have substantial assets and how likely the business is to incur liability (everything has some risk). The second is that with good accounting practices and proper structuring it is often the case that running a business as a legal entity will be more efficient for tax purposes - but this only starts to matter as your business starts to really make $.

You should first check your employment contract very carefully. There may be a no-compete clause that could prevent you from doing related work on your own.<p>If there isn’t one, then it really is no business of your current employer whether you start a company while employed. Still, you should be very careful of anything that might be construed as taking advantage of confidential information gained through your employment. Don’t use your work computer, steer clear of their customers, and so on.<p>Starting a corporation in a different country can be overwhelming. Estonia is relatively easy compared to other countries but you can’t do everything online.<p>In particular you’ll need a bank account to receive invoice payments. Are you prepared to travel to Tallinn and visit local banks in person to try convince one to open you a business account? If not, just incorporate in your home country and start with the bank you’re already using.<p>I’m not a lawyer or financial adviser, but generally and purely anecdotally speaking, taxation of EU corporations isn’t as complicated as some make it sound. If your company pays you a salary, it’s taxed as income. If you pay a dividend at the end of the year, it’s taxed as capital gains. It doesn’t make a substantial difference whether the company is in another EU country.<p>If you do create an Estonian corporation, there’s one nice thing about their tax law: corporate profits are not taxed until you actually withdraw money as dividends. Most other countries have a corporate tax charged from annual profits, which means that if your Year 1 goes great but Year 2 ends up losing money, tough — you’ve already paid taxes from Year 1 profits so there’s no way to subtract the loss retroactively. In Estonia, if you kept the profit in the company, you’d get to subtract Year 2 loss and pay tax only on the net profit when you finally do pay yourself the dividend.

Having some sort of legal entity that stands between you and your clients is always a good idea. It isn&#x27;t that expensive to get set up, and the peace of mind.<p>One thing that you never want is to be stressed out about getting personal sued into oblivion - it has the potential to irreparably financially damage you.

The reasons I&#x27;d start an LLC * You are selling expensive services or something where you could be sued. (ie selling children&#x27;s clothes in America I&#x27;d definitely do it) * You expect it to be profitable and want to take advantage of tax breaks for small businesses or similar. * You want to sell the company on, raise money etc I don&#x27;t know much about this route<p>If you&#x27;re doing a side project for interest, make a little money I don&#x27;t think its worth it unless you think you could get sued. If its a serious small business maybe there is someone in local government that can help you - maybe even govt&#x2F;EU grants and such.

Entity choice is usually due to 2 reasons: Taxes and Liability. Work with your CPA and Attorney, find out from them the cost benefits of the various forms and the mitigation you think appropriate at this time. Review periodically.

Fellow EU resident here.<p>Keep in mind that even if you incorporated in Estonia, you still might have to pay taxes in your country of residence. Failing to do so might result in unpleasant meeting with your local tax collection state representative.

It’s definitely worth it. In many states you can do it online for less than $100.<p>If you wrote a bug that cost one of your clients to loose a sale you could be personally liable for the full amount.<p>Just spend an hour doing it and don’t risk losing all of your savings. You don’t want to go to court with a company that has many more resources for lawyer than you.<p>This is a no brainer. Advice saying not to do it is just plain wrong.<p>It’s ridiculously easy, you pay your taxes almost identically to how you currently do if you make an LLC and are sole owner.<p>—edit I see you are not in US. My advice is more specific to US.

i&#x27;m not an attorney, nor should my advice be taken as legal advice. i would strongly suggest getting a lawyer to handle this.<p>i can suggest, however, the main things to consider are separating your personal and business income tax and absolving yourself of personal liability in case something overbearing happens like a lawsuit, these are good things of incorporating.<p>again, i&#x27;m not a lawyer, and this is not legal advice, i know nothing of eu laws either.

Incorporate when you have a sale set up. That is the same for any product, any industry.

You could also look for opinions on the e-residents Facebook group: <a href="https:&#x2F;&#x2F;www.facebook.com&#x2F;groups&#x2F;eResidents&#x2F;" rel="nofollow">https:&#x2F;&#x2F;www.facebook.com&#x2F;groups&#x2F;eResidents&#x2F;</a>

I have 2 friends who incorporated but they both raised funds. One used Stripe Atlas for incorporating in Delaware, USA and not sure if the other incorporated in Germany or abroad. Lemme know if you want an intro!

Feel free to contact me any time. My email is ck at domain. I’m running www.firma.de&#x2F;en&#x2F; and we help entrepreneurs to setup their business properly. Happy to talk through some options.

Estonia is a very good option. When and if you make profit you will pay in Germany for the dividends but until you take out money from your company in Estonia the taxation is zero.

Are your clients based globally or solely in Germany?<p>I would look into Stripe Atlas in any case.<p><a href="https:&#x2F;&#x2F;stripe.com&#x2F;atlas" rel="nofollow">https:&#x2F;&#x2F;stripe.com&#x2F;atlas</a>

If you already have customers, it’s probably a good idea to at a minimum create a legal entity to be liable and insured for the work that you do for said entity.

if your located in the U.S. a single member LLC is one of the most convenient ways to go.<p>You should strongly consider incorporating in the jurisdiction where your business operates as just because you form the company somewhere else does not stop local tax liability (and in fact if done wrong could incur new additional tax liability in the other jurisdiction where you incorporate)

in most states you can file to open an LLC online (or by printing and mailing a form and a check) - 2nd step is to apply to the IRS for an EIN (tax id) for the new entity. then you need to do annual filings with the secretary of states office of the state your in (This is all applicable to the U.S)

Chances are you are legally obliged to report work done in the country you live in. Since you&#x27;re doing software, a very remotable business, there&#x27;s a fair chance you can get away with it, but an accountant will probably tell you you&#x27;re not supposed to.<p>Whether it&#x27;s a good idea to incorporate while having a job, that depends mostly on your relationship with your employer. Some will care, and some will not.

You probably need an accountant to answer tax questions.

My typical advice, is ince you have customers, create an LLC as it protects you from some liability. A lawyer costs a bit of money, but is worth it.<p>In terms of where you are located, there may be different laws and protections for an LLC. So be careful to read them. Youll also likely have taxes to pay (I create my LLCs in wyoming - where taxes are much lower - I think just a fee)<p>Good luck