A good idea is often enough for many founders to start a startup. But even when starting startups, you should think about long-term taxes. The risks are already lurking in the question of the optimal legal form. The positioning and structuring of holdings and subsidiaries also play a role in the taxes of a startup. Thus, start-ups of subsidiaries abroad are quite popular in the startup scene, although from a tax point of view only makes limited sense. Furthermore, the inclusion of investors and the allocation of subsidiaries are critical factors. The negotiations are often against the background of whether a startup makes profits. Losses can also have a positive effect. At the latest at the exit, it must be shown whether the use has also been worthwhile for tax purposes. Thus, the taxes on the sale of a startup can be between 1.5% and 30%.

Successfully supervising and selling startups: Expert interview with StB Steffi Zacharzowsky

Startups and Taxes – Two Separate Worlds?

Whoever starts a startup is usually initially only the development of his company in the foreground. Sure, all the details when organizing a new and often innovative company require all the attention of the founder. With a lot of skill, you may soon have won a first investor for the project, so you slowly start to think about how the company might one day generate fruit. However, this inevitably raises the question of which taxes to expect in the medium and long term. In particular, the exit of a startup can then reveal one or the other unexpected surprise in terms of taxes. Therefore, consulting startups with regard to their long-term expected taxes is one of the first actions that we as tax consultants ideally recommend even before they are founded.

2nd Startups and Taxes: Legal Form at Founding

So we start with the first steps. Even the establishment of a startup can hold essential foundations for the medium- or even long-term taxation of the company and thus the amount of taxes. If you lay this foundation already solid, no later conversion of the company is necessary to carry out a tax-optimized sale of the startup.

2.1. Startups and taxes: Establishment of a corporation

Experience has shown that founding a GmbH has proven to be the right choice in most cases. Because a GmbH offers companies that reinvest their profits in order to continue to grow optimal opportunities. This is especially true for startups. Although this is now also possible with partnerships, the design of a startup by means of a GmbH in terms of taxes is still the generally preferred variant. Because here, in addition to the taxes that startups will have to pay in the future, especially liability plays an enormously important role. In addition, the establishment of a UG (limited liability) in certain cases represents a more favorable alternative. But even in this case, this is only an intermediate step on the way to the GmbH.

2.2. Startups and taxes: Establishment of a partnership

Nevertheless, partnerships should also be given space when considering starting a startup. Especially the GmbH & Co. KG is quite attractive due to the possibility of hybrid taxation.

But it must always be about the company form fitting the framework conditions of the company. This is why the in-depth advice at the beginning is so valuable for startups.

Startups and Taxes: Establishment of Holdings

Whether a capital or partnership, the establishment of a holding company should also be the subject of advice on the establishment of a startup. Because the taxes from the current profit of a startup can be designed with a holding just as targeted as those from the future sale. This applies both with regard to the distribution of profits and the associated capital gains tax and with regard to possible managerial salaries.

Startups and Taxes: Establishment of Subsidiaries Abroad

Since we are already talking about starting companies, we also focus on another phenomenon that is often observed in this scene with regard to startups and taxes. Many startups establish subsidiaries abroad in the course of their development. There may be many reasons for this. On the one hand, it can be about expanding into new markets abroad. The USA location in particular may be of interest here. On the other hand, some startup entrepreneurs may believe that starting a business abroad, especially in a tax haven, can save their startups taxes. But whether this is actually the right step can often only be explained to them by a tax consultant who is particularly experienced in international tax law.

After the successful founding of their startup, their founders are often soon looking for investors who will provide their company with the necessary capital to give their business idea as much space as possible in the market. Because a good idea alone is hardly enough nowadays to actually achieve success. After all, especially in our globalized world, there is a great risk that a financially better-positioned imitator will outperform their own startup.

However, the support of an experienced tax consultant is also recommended in this step. Because the design of the inclusion of an investor may also have an impact on the taxes of a startup. The inclusion of an investor by means of a capital increase is the most common way to go. However, other alternatives are also possible for partnerships.

3.2. Subsidisation

And since we are already talking about the inclusion of investors, one should also immediately consider the provision of subsidiaries. Finally, the later sale of the startup can lead to considerable taxes of the respective participants. Therefore, in this respect, a detailed consultation in advance is also very useful.

Although the inclusion of investors makes the granting of subsidiaries rather unlikely, because investors prefer to negotiate with as few shareholders as possible. But if, for example, the addition of another shareholder provides the company with important know-how, then this may also make sense to investors.

However, there are also alternatives to adding additional shareholders, such as the provision of phantom shares or an agreement on performance-related bonuses. But here too, the tax consequences must always be taken into account. After all, all shareholders of a startup want to save equally on exit taxes, right?

Startups can also save taxes before exiting. Actually, it sounds paradoxical, because they should basically not make profits, but losses. Because startups with profits must of course also pay taxes on it. Therefore, it is sometimes more useful if you allow the startup to invest heavily with secured liquidity, so that the tax balance sheets show a loss in the end. Because the loss can be seen in a way as a balance that helps the startup in the future to minimize profits and save taxes.

In addition, it is now possible to sell corporations with carried forward losses without losing their loss carry forward. In this respect, loss carry-forwards of a startup can also be seen as a selling point for a higher selling price. Of course, the company must understandably stand on a financially sound foundation. However, nowadays most investors and buyers are able to recognize exactly these connections and appreciate them if necessary.

Which brings us to the final chapter of our contribution, the exit. Because it is only with this event that most founders of a startup connect the goal of their pursuit. Only at this time can you actually quantify the success of your own startup. But what good is a successful exit if the taxes from the sale of the startup divert a third of the proceeds into the cashier of the financial administration? At this point at the latest, it should be clear what good tax advice can do right from the start. Because with the right structure you can achieve that the sale of the startup only 1.5% tax, but basically, following the wording of § 8b (1) sentence 1 EStG, actually remains tax-free.