Finding the Perfect Fit: When is it the right time for The Limited Liability Company (GmbH)
Starting a business in Austria is like embarking on an exciting adventure, full of dreams and opportunities. But, like any journey, it requires careful planning, and one of the most critical decisions you'll make is choosing the right legal structure for your business. The idea of registering an LLC may seem tempting, but there are important questions you must ask yourself before making this decision.
In this comprehensive blog, we will discuss the hidden pitfalls in the process of registration, which, if not considered will be sure to spring unfortunate surprises in the future.
To make the LLC structure more understandable, after each legal requirement or problem, we will follow with the stories of three entrepreneurs: Chris, Alex, and Sarah, introduced in the previous blog here.
Understanding the Basics: What is an LLC (Limited Liability Company)?
Before we dive into their stories, let's get a grasp of what an LLC is. In Austria, an LLC is a legal entity distinct from its founders. This means the company itself, not the individuals behind it, is considered a separate legal entity. It has its own assets, debts, and legal responsibilities. This legal structure is designed to protect the interests of the market and secure business operations.
Registered Capital: Chris's Story
Our first entrepreneur, Chris, is a tech enthusiast aiming to launch his software company in Austria. To protect his personal assets, Chris opts for an LLC. But he quickly encounters one of the essential requirements for registering an LLC:
The registered capital. According to Austrian law, the minimum registered capital is 35.000,00 euros, and half of it must be transferred to a specific Austrian bank account during the process of registration. Once the bank confirms in front of the court that the money has been transferred, the registration process can be completed. The GmbH Light is an option that requires a registered capital of 10,000,00 euros and 5.000 euros in the bank. Here, the shareholders are obligated to increase the capital to 35.000 euros within the next 10 years.
This is to ensure that the company has the financial means to cover its debts in case of bankruptcy. For Chris, this provides peace of mind, knowing that his personal assets are shielded from business liabilities.
Initial Investment: Alex's Restaurant Dream
Meet Alex, a culinary enthusiast with dreams of opening his restaurant in Austria. He's intrigued by the LLC structure but concerned about the associated costs. Registering an LLC demands a more substantial investment compared to other legal forms.
Cost for registration: In addition to the €5,000 / €17,500 required for the company bank account, there are extra expenses to consider. These include fees for shareholder agreements, notary deeds, and document verification, ranging from €1,500 to €2,000. Plus, there are court fees, typically between €350 and €500, unless specific exemptions apply. Alex realises that starting his restaurant as an LLC requires meticulous financial planning.
Salary Structure: Sarah's Consulting Services
Sarah, a marketing expert, plans to offer her consulting services in Austria. She is eager to understand how she can draw income from her business. Sarah has two options: hiring herself as a managing director and receiving a salary, incurring additional costs like income tax and social security payments, or paying herself dividends, which come with extra taxes for both her and the company. Sarah understands that she needs expert guidance to structure her income efficiently.
The manager’s salary: As a sole proprietor, it is easier to “pay yourself” for the work you are doing within the business. Sole proprietors have revenue streams, expenses and the rest of their money is considered “income”. As a sole proprietor, you can transfer the income to your personal account, and this will be considered your “salary”. However, with the LLC things are a little more complicated. As a shareholder or managing director, you are not allowed to transfer any amount from the company account to a shareholder’s private account.
Protection for All
All three entrepreneurs, Chris, Alex, and Sarah, appreciate the limited liability aspect of an LLC. This means their personal assets are protected in case the business faces financial challenges. However, they also understand that there are exceptions. During registration, shareholders are personally liable for the company's obligations. They're also obligated to cover the gap between actual assets and registered capital. This knowledge underscores the importance of operating their businesses with care and responsibility.
Limited liability: As we already said the Limited Liability Company is a separate legal entity from its shareholders. It is liable for all companies’ assets and obligations, but not with the assets and the income of its shareholders. To secure the interests of the company's creditors, there are exceptions to this rule. During the process of registration, the shareholders are limitlessly liable for all obligations they go into in the name of the company. Secondly, the shareholders are obligated to the company for the difference between the actual company assets and the registered capital. This means that the shareholders are obligated to secure the registered capital up to the value of their shares.
The Ongoing Journey
To illustrate, Chris, anticipating substantial profits from software sales, wonders when the ideal time to transition to an LLC would be. Tax experts suggest different thresholds, depending on factors like turnover, profit, reinvestment plans, dividend decisions, and the number of shareholders. Chris knows he needs to continuously assess his financial situation to make a tax-efficient decision.
Taxes and bookkeeping: The corporation itself is taxed at an annual rate of 25%. However, where shareholders opt to receive dividends, they will be subject to a fixed annual tax rate 27.5%. Remember, this is because, at law, both the company and shareholders are distinct legal entities. It is important to note that taxation on dividends only occurs at the time of distribution or payout. If there is no distribution, the profit remains in the company and is available for investment.
Conclusion: Navigating the Austrian Business Landscape
Selecting the right legal structure for your Austrian business is a multifaceted decision influenced by various factors. As we've seen through the experiences of Chris, Alex, and Sarah, each entrepreneur has unique needs and aspirations. They navigate this complex terrain with the help of legal and financial experts, who are crucial to helping you ensure that your choice aligns with your business goals and offers you the protection and financial advantages you need. Remember that the legal and financial landscape may evolve, so stay informed and seek professional guidance to make the best decision for your entrepreneurial journey.
When you are ready, we would love to navigate your business journey with you. Please feel free to reach out to us on the email below:
