How I would start my next startup in Germany without a GmbH (2020)

I think this is one of the reasons why Germany doesn't have a startup ecosystem.

People who are loosely playing with the idea of running their own tiny company (e.g. as a student side gig, not with the "I'm planning this like a businessperson and here's my plan how to turn it into a unicorn and how to exit" approach) take a look at the system and bureaucracy, and simply give up and forever write off the concept of running your own company as a worthwhile option.

Even becoming an independent contractor is fraught with many of the same hurdles. This creates a strong push towards employment vs. doing your own thing.

Thanks for the post.

Reading this made me quite angry - politicians here in Germany always talk out of their asses about improving the situation for startups, but when it comes to removing these ridiculous administrative hurdles, absolutely nothing happens.

In Austria, where I live, it's even worse. It's not even possible to start a limited liability company without at least 35k starting capital in the bank.

> Kebab costs 2€

This is a very very outdated price, and as far as I remember it was only possible due to some very doggy things going on.

Even a few years back the price was around 3.5€ (in cheaper areas of Germany).

Before COVID the price was more around 4-4.5€.

Now it's 6€.

(Prices based on cheaper areas of Germany).

Great post!

We just did the flip and it was painful.

I’d add that in Germany there are archaic requirements that all documents need to be signed in person on paper in front of a notary. Such a waste of time & money.

I think that the concept of the GmbH in general is a good thing, although I share some of the complaints from the article, notably that getting it started still requires a lot of physical paperwork instead of digital processes. But requiring a starting capital of 25,000 Euros in exchange for limited liability is a fair deal. It is quite an effective barrier against a lot of scams (of course, it makes them not impossible). And no one hinders you to start a business without limited liability with zero Euros. Arguments that this is a major obstacle for startups therefore do not seem convincing to me. I worked as an IT freelancer for eight years before I founded my GmbH. Even without a GmbH I could include clauses of limited liability into my contracts. And if one could not in principle raise 25,000 Euros for a startup, it propably is not such a good business idea in the first place. Also note that you only have to pay half of the money into the GmbH at the beginning and only have to top up the amount when the first 12,500 Euros have been used up. In addition, you can use the capital to pay your own wages from the beginning, so in practice you can withdraw a considerable amount of money from the GmbH until it is profitable.

> “In order to start a GmbH in Germany you will need to buy-in. While you can most likely lend the money, it’s a risk you need to keep in mind. If you’re a solo-entrepreneur, that’s a whooping 25.000€ for you.”

That sounds pretty uncompetitive when compared to other EU countries such as Spain and the Netherlands, where it's 3000€ and 0.01€ respectively. In Ireland it's also 25.000€, but corporate taxes are much, much lower.

Oh God, this thread will be the usual Germany bashing. There is nothing fundamentally wrong with how Germany handles corporations. The German corporate law is actually pretty good. If I could change two things, I would make IHK membership optional and allow free filings of the financial reports. These are changes that a willing government could implement in a heartbeat.

And I think no country should handle corporations like the US does. The US is a tax haven and the corporate system doesn't benefit anyone but the owners.

This issue wasn't about starting a startup in Germany as a GmbH, though.

The issue was "flipping" that GmbH into a Delaware C-Corp, by request of YCombinator.

I will play devil's advocate and defend some parts of the German system. Although my actual personal opinion of some of those institutions may vary, I will try very hard to keep this simple and just take the opposing side.

- IHK: Not bad, see German apprenticeship system

- GEZ: Not bad, see American media landscape (e.g. Fox News vs. CNN)

- Paying 25.000 € for your own GmbH shares: (1) These are not shares. (2) There are other options. (3) Your company keeps the money, you are not paying anyone. (4) It is only 12500 € up front, you can guarantee for the other 12500 € (5) You get rid of personal liability, so it is fair for everyone to know, there is at least some money within the newly created entitiy.

- Notary, having registers with names etc.: Not bad, see tax havens

- (Seemlingly) not having to pay taxes when your company is sold by a holding company: It is not the same thing. While a holding company selling shares is taxed a miniscule amount, it is actually taxed as soon as the money is paid out to you personally, making you effectively pay more taxes overall in addition to the operating costs of the holding company. The holding gets the benefit of being able to reinvest the gross amounts.

> The goal of an UG is to have limited liabilities from the start, however you need to convert it into a full GmbH, once you have generated €25.000. It still baffles me, that you need to buy your own shares in Germany, in order to receive the “status” and protection of being a fully incorporated company.

I hope I am not too far off the truth, please correct me if I am: "mbH" in "GmbH" means "mit beschränkter Haftung" = limited liability. In case of insolvency, creditors will only be paid from what the company has and that's where this money comes in. To avoid potentially screwing creditors over right from the beginning, (co)founders have to pay in that amount into the company pockets so that there is some money that could be used to pay creditors in case of insolvency (or half of that =12.5k€ and be personally liable for up to another 12.5k€ in case of insolvency, right?).

Also: Döner for 2€? Really? Good Döners in my city are 5-6€, I can't (and don't want to) imagine what a 2€-Döner must taste like.

i get ptsd reading about this and would rather die than having a gmbh again even though i had a holding ug from the start. what also no one tells you is that to get rid of these companies if it does not work out takes one to 2 years and costs a few thousand euros and many nerves you likely don't have anymore at that point. if i start again i am moving to estonia and start a OÜ.

Do not forget about expatriation tax („Wegzugsbesteuerung“) when sfter a few years move to another countries. The tax is about 350% of your share of the average of last 3 years profits (might be reduced a tad, but will always be extortionate)

The Germans requiring everything on paper with people witnessing signatures is of course rather silly, but whether it takes 3 weeks to form a company or 3 days is ultimately not going to be a real difference. I think the thing here is more that American companies have trouble handling non American companies and hence the flip. I sold a Dutch B.V. to an American company once except they didn't want to buy the company because they didn't understand it and instead we ended up selling the assets and taking a tax hit.

Also if you are in the EU you can just start an Estonian company and run that in Germany

Wait until you need to dissolve a UG, that’s a long painful and expensive process

Great post, fully agree. Also, if you plan on leaving Germany you can save a lot on taxes if you do it before 100k profits/year and as a Personengesellschaft (without limited liability, so no UG/GmbH).

Basically because the Wegzugsbesteuerung (moving away tax) only affects limited liability entities and Personengesellschaften are only affected by the Steuerentstrickung, which can be minimized by saying your profits are equivalent to a salary you'd be making elsewhere.

great post! having been through it I can confirm that it is a really bad idea to start your startup business in Germany with a GmbH. You end up doing more paperwork than your own business.

However I have one question in your proposed schema. Germany Holding UG ... it owns the Delaware C-Corp right ? how would you deal with the paperwork and taxes of that Holding UG ? isn't it also time consuming and painful ?

As a software dev freelancer I was using the Single-Person-Company (Einzelunternehmer) option that Germany offers. Personal liability is a risk of course (that can be mitigated by getting insurance and was never an issue for me) but in terms of upkeep it was very easy thanks to my tax consultant. This option is however not recommended if you want to get investors, especially from abroad.

Here's[0] how you set up a Ltd company in the UK. The hardest part is thinking up the name.

[0] https://www.gov.uk/limited-company-formation/register-your-c...

I'm not sure this would fly well for Germany.

Generally, in most European countries, if you're resident in one country and open a company in another one (and start paying corporate tax there) you need to prove there's a valid reason to have the company there.

It can be hiring people there, having a director there, having an office, having your board meeting there.

Otherwise the company where you reside can argue that your foreign company is actually done to avoid paying taxes in the country you reside and ask you to pay corporate tax rate as you would in your country of residence.

Maybe having shareholders (Y-comb) is proof enough you can claim to be a Delaware company - but for small German businesses I don't think it's as simple.

Happy to be corrected.

Looks like his real problem was that a US VC wanted the company incorporated in Delaware for their convenience, but wasn't willing to pay the costs of doing that.

I find it a pity that YC requires companies to found a parent company in the US in order to invest in them. That's the only reason I have not applied.

As someone who also has fought a lot with the German bureaucracy, I'd tend to use another jurisdiction in the future as well.

I'd be more than interested in hearing your opinions about what the best jurisdiction for internationally distributed teams actually is: https://news.ycombinator.com/item?id=31620700

You should not start a startup in Germany at all. It has the highest taxes in the world. As a result 200.000 highly qualified people leave Germany every year. Those people are replaced with unqualified immigrants mostly causing additional costs thanks to the generous welfare system which makes sure that the taxes won't be lowered any time soon.

It's a clusterfck regardless of which way you do it.

There are 3 problems with the structure he describes:

(1) In the early days, you might find yourself being a 1-person business, with that 1 person living in Germany and all the business partners you might end up interacting with in real life would be in Germany (especially banks, regulators, etc.) In that situation, it's a bad look if you make your business partners contract with your Delaware C-Corp. It's an even worse look from the angle of money laundering prevention, which is going to be the primary point of view of the bank that you're trying to get an account from, the accountant you're trying to hire, etc. etc.

(2) A P.O. box in Delaware will not be enough to convince German tax authorities not to tax your Delaware C-Corp. They will want to see that your Delaware C-Corp has an actual office with actual people in Delaware, before they give any level of credence to the notion that they shouldn't just tax your Delaware C-Corp as a German GmbH/AG-like entity. If you're already at the stage where you have people contracting for you who actually are in the U.S., maybe you can get away with that. If you're just one or two people in Germany and a P.O.-box in Delaware that won't fly. I tried doing that in Austria where the relevant laws are basically the same, and the court wanted to send an emissary fom the chamber of commerce to visit my supposed office in Delaware. Now, even if you do clear that hurdle, Germany will still try to tax profits that your Delware C-Corp generates in Germany. But how do you determine that number? By doing accounting, based on German accounting standards of course. -- So now the clusterfck really starts to unravel, once you have an actual American wanting to invest in that vehicle, when you've never done accounting the way you were supposed to, from their point of view.

(3) German law recognizes the "Scheingeschäft" [1] and "Umgehung" which is a situation where two people draw up a legal contract that differs from the way they truly arrange their business in real life. E.g. Buyer buys house from seller. They draw up a sales contract for the house for $1M and a contract wherein buyer gives a gift of $1M to seller. They tax $1M as a sale of a house and $1M as a gift, which might come to less than the sale of a house for $2M. German law says that such an arrangement is null and void, and the contract should be treated as if they had contracted to sell a house for $2M in the first place. -- This same theory applies to more complicated situations involving businesses etc. So German law might look at your Delaware C-corp as basically just concealing what is in real life a German GmbH, and might start treating your Delaware C-corp as if it actually was a German GmbH. -- Now you have German law and Delaware law looking at the same legal structure in entirely different an incompatible ways. That's a total nightmare.

SOLUTION: You'd have to add at least a third layer below your Delaware C-Corp, which is a GmbH that actually does business in Germany.

You'd need:

- Max Mayer GmbH, a holding which serves as Max Mayer's alter ego.

- Startup Inc, a Cayman corporation 100% owned by Max Mayer GmbH.

- Startup GmbH, a German Gmbh 100% owned by Startup Inc with a provision in the partnership agreement that says something like: Startup GmbH must return 100% of all profits in excess of $1M to Startup Inc.

Now, for the early part of your growth curve, Y-Combinator wouldn't be involved, and you wouldn't earn $1M: Startup GmbH is now the only thing that matters. Your business partners won't much care who owns the entity they interact with (except for purposes of money laundering prevention, but the only thing they care about is that Max Mayer ultimately owns the whole thing not about what goes in between). The situation of Startup Inc from the pov of German law would still be precarious but it wouldn't really matter. It would have no revenue, no costs, no bank account, nothing, so it wouldn't be something that tax authorities would much care about.

When Y-Combinator comes along, you'd sell them shares in Startup Inc.

When Startup GmbH starts making more than 1M, then Startup Inc will start to handle money for the first time. At that point it becomes a relevant entity from the point of view of tax authorities, banks etc. But also: At that point there's a lot of money involved, you might have actual people and a physical presences across the globe, etc. so you'd just be like any other trustworthy multinational. (As opposed to like a hustler with big plans and nothing to show for it).

When Startup Inc start generating capital gains, they'd go to Max Mayer GmbH where they're initially tax-free (until they're actually returned by Max Mayer GmbH to Max Mayer).

But that's a pretty complicated setup! It may be what you'll wish you had done when your revenue actually takes off and/or investors want to start throwing money at you. But it'll be more expensive and cumbersome in terms of administrative overhead than if you had just done one GmbH and left the complicated bits for later. Remember: Most startups fail. Most Y-Combinator applicants do not get in. So it's not necessarily good advice to broadly give to people to always go for that structure from the outset.

[1] https://de.wikipedia.org/wiki/Scheingesch%C3%A4ft

Does anyone know if having a Gewerbe would be just as difficult to transition to a C-Corp?

The whole process of registering a UG or GmbH is ... not so straightforward while registering a Gewerbe (especially if using the Kleingewerberegelung) sounds like a good starting point. Not sure if you can raise money that way though.

Solution looks problematic if you want to hire a team in germany (since the deel shdnt work with regular staff). If you stay lean it sounds interesting. Waiting for the next article 'why you shd not hire people on a C corp owned by UG'.

There is also the UK Ltd as an option. Can also be done from home. It’s a possible replacement for a UG or even GmbH. AFAIK SoundCloud initially used this model.

Wouldn't I have to pay 21% US taxes and the German taxes as well if I do it like this?

Anyone have any advice for a similar situation except for UK company instead of Germany?

Also had a (failed) startup in Germany, with a slightly different perspective. Possibly outdated.

> It still baffles me, that you need to buy your own shares in Germany, in order to receive the “status” and protection of being a fully incorporated company.

It depends on how you read it, but it isn't true that you have to put in 25.000 in cash on the table. A GmbH is a Limited, which needs to have a value of at least 25.000EUR, so anyone trading with you knows, you are at least good for that amount.

The easiest way is to put the money in cash into the account of the company.

But it can also be done via transferring the ownership of either tangible or intangible assets into the company. The problem here is, especially with software, that the evaluation of assets is not for free and difficult.

> Now, you don’t need to convert the UG to a GmbH but if you want to be taken seriously in Germany by customers and investors, it can be a huge factor doing business. For our investor, it was a must-have.

The feedback I got from institutional investors was the following:

- If you are not willing to put down 25k, while asking for millions, it doesn't send much of signal of confidence in your proposal from your side.

Maybe it is a matter of German risk averseness, but I think it is reasonable, especially paired with the next advice:

- You will take a top level management position in your new company, your salary should reflect that. You have to strike a balance of not asking too much (you are after all a startup), but also not asking enough (you need to know the market value of your position). But chances are, the increase in your salary by your "promotion" should pay your initial investment in two years time.

In Germany, composition is much more salary based.

> I don’t know what to tell you, other than this process can take up to 3–4 weeks to get finished. Even most challenger banks (neo banks) are not really faster.

> How do I know? We’ve incorporated another holding company UG and wanted to use a Berlin based challenger bank — it took us almost a month to get done.

> Choose your bank provider wisely or at least switch early. We went with a 0$/month neo bank and it was horrible.

Yeah, we went with a traditional physical bank. Costs a fair bit more than 0€/month, but it took a couple of days, maybe?

> A mail popped up along the lines of: “We would like to do a 10 minute interview in Mountain View with you. We compensate your travel expenses”

And I think, that is the most striking difference in culture between the US (or at least SV) and Germany. Those guys where trying to safe a couple (granted couple of thousands) Euros, and a couple of Euros per month for the bank, and the investor is paying the travel costs probably coming close to the founding costs for a 10 minute interview.

Bruh, 2 Euro for a Döner?

Very, very helpful.