Fidas

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Why Choosing the Right Company Legal Form Gives Startups a Head Start

Florian Huber / Managing Director, Partner at Fidas

Taxation

If you’re starting up in Austria, says Florian Huber, it’s vital to understand all the implications of the different legal forms your company can take. Certain types of business are easier to set up and initially seem more attractive, but it’s important to take the long view and think about factors like liability, corporate governance, taxation, future investors and exits.

As the managing director of Fidas Graz, Florian advises entrepreneurs and established businesses, helping them to structure their company in a way that reduces risk and tax burden and makes them more attractive to investors. He’s been with the firm since he was a business administration and law student in 2010 and specializes in business consulting, company valuation and international tax law.

When choosing your company form, Florian recommends first weighing up the risks involved in the business model. In Austria, the choice of legal form falls into two broad categories: sole proprietorships vs partnerships or corporations. Examples of partnerships include general commercial partnerships (Offene Gesellschaft, OG) and limited commercial partnerships (Kommanditgesellschaft, KG). Corporations are usually private limited companies (Gesellschaft mit beschränkter Haftung, GmbH) or public limited or joint stock (Aktiengesellschaft, AG). It’s cheaper and more straightforward to set up a sole proprietorship or partnership, while to set up a corporation, you need a notary and minimum share capital of €35,000 ($41,900), €17,500 ($21,000) of which must be in cash at the time of incorporation. If that’s an issue, founders can invoke a “foundation privilege” and specify a minimum contribution of at least €10,000 ($12,000) over the first ten years, with just €5,000 ($6,000) in cash.

The fundamental difference between the forms is liability. With a partnership or sole proprietorship, founders’ private assets are at risk along with whatever they’ve put into the company. With a corporation, personal assets are protected, so it’s a safer option for high-risk businesses. Corporate governance is another factor.

Most important tips for startups:

Weigh up all the pros and cons before choosing a legal form. Think about risk, taxation, liability and attractiveness to future investors as well as the costs and bureaucracy involved in incorporating a company.

- Protect your personal liability. If your business model is high risk, setting up a corporation rather than a partnership or sole proprietorship protects your personal assets if you run into difficulties.

Opt for flat-rate tax whenever you can. This way, you won’t pay more than you need to on higher amounts.

Find out what subsidies and tax breaks you could be eligible for. Certain activities like R+D or hiring employees in the first three years offer the possibility of exemptions or loans.

In a partnership, all the partners are obliged to get involved in running the company. In a corporation, management and ownership can be separate, which is useful if you need to bring in management expertise the founder team lacks. Corporations are also taxed at a flat rate of 25 percent, compared to progressive rates of up to 55 percent for individuals, and investment capital gains tax is withheld from the distribution of profits to shareholders. On incomes of over €100,000 ($119,800), this can mean a lower overall tax burden compared to personal income tax. Plus, you can invest back into the company because profit is not immediately taxed in full, unlike partnerships and sole proprietors.

Despite this advantage, Florian doesn’t recommend basing your decision on taxation alone. “At the end of the day, the right legal form is the one that best fits your business model. A sole proprietorship is great to turn your hobby into a side hustle, while an OG [general commercial partnership] suits smaller businesses with several partners directly involved and no investors.” However, he believes a GmbH (private limited company) is a good option for startups aiming for rapid growth and investing heavily in the early years, especially as limited liability is more attractive to investors and business angels.

“Of course,” says Florian, “you’re not obliged to stick with the same company form forever. Many startups change as they grow and seek to reduce their tax burden or take on investors. Switching from a sole proprietorship to a GmbH is very common, for instance, and Austrian law provides for these changes tax-free in certain circumstances.” Other tax breaks startups can benefit from include payroll tax exemptions for hiring in the first three years and credit for expenses related to R+D. When it comes to exits, Florian always advises selling shares, which are taxed at a flat rate, rather than progressively taxed assets.

Whatever stage or form your company takes, Fidas prides itself on coming up with practical, understandable solutions to save you time and money. “We speak our clients’ language,” says Florian, “and we aim to be a sparring partner for all economic issues, not just tax. Our credo is: keep it simple but powerful.”

About

Fidas Steuerberater Group is a rapidly expanding business and tax consultancy that acts as a proactive partner for companies at any stage in any industry. The Group has fifteen branches across Austria, each of which operates independently but collaborates with other offices, so clients benefit from a deep understanding of local markets as well as the Group’s combined experience. With fifty-five specialists, Fidas Graz is the largest partner and offers specific expertise in international tax law, real estate and entrepreneurship and innovation.

[Contact] Email: office@fidas-graz.at Telephone: +43 316 47 35 00

We speak our clients’ language, and we aim to be a sparring partner for all economic issues, not just tax. Our credo is: keep it simple but powerful.