Germany: Einzelunternehmen next to day job, questions about liability
I'm currently evaluating whether I can set up a small company (in Germany) to monetise some aspects of a popular SaaS page I'm running (Alexa Top 50k). I don't think that it will generate a lot of revenue initially, but I want to be ready for the time when it starts doing.
Some of the revenue might come from "ads" (sponsorship logos, job postings, referrals) while the rest of revenue will likely be generated through monthly "pro" subscriptions to the service. The target market is international, though most customers would be US-based F500 the way I see it.
While the service is very popular, I still don't have a good handle on whether / how I can monetise it. Hence I don't want to spend a great amount of resources initially to incorporate. My plan was to set up an Einzelunternehmen, get a subscription to something like ChargeBee to do international VAT-compliant invoicing, get a lawyer to look over terms-of-service and GDPR and IP things and then start charging people, basically. Am I missing something vital? How would I handle transfer of the existing IP / product into a newly formed corporation?
One thing I still haven't completely figured out yet is the difference in liability between a UG (Haftungsbeschränkt) and Einzelunternehmen in Germany. As an Einzelunternehmen, you (as the sole proprietor) are liable with your private assets for any outstanding bills etc, I get that part. But is there anything else you're on the hook for? Am I'm missing something?
Let's say I started a SaaS company as an Einzelunternehmen. What's the risk for me personally since I can always spin up and immediately cancel cloud resources with hourly billing as customers come and go?
I know these are a lot of conflated questions, but I haven't found a good definitive resource yet which covers starting a SaaS company in Germany which targets international customers. If you need to know more details please PM me, hesitant to post the URL at this point in time.
Why do you think you're only liable for outstanding bills as Einzelunternehmen? AFAIK you're on the hook for everything. If you get sued for any reason for example.
I know your problem. I don't have a business yet that's generating revenue (except for my freelance work) but I knew I wanted to do my own projects and build a business. I wanted to have limited liability and this is why I chose to form a UG.
If you need any help feel free to ask. This is a really painful process in Germany. Are you German by the way?
Let me put it another way that explains what I don't understand: Am I really more personally liable with an Einzelunternehmen if you leave standard unpaid bills aside. If my corporation is sued because I did something shady or because of a GPDR violation or patent infringement, would having a UG/GmbH really protect me if I'm the only employee and CEO? What does the Liability Limitation really look like, in practice?
And yes, I am German, and the reason I'm trying to find a way around UG/GmbH is the bookkeeping requirements and fees. Any good resources would be welcome apart from the standard sites that explain the different corporations in high-level terms for the umpteenth time.
Yeah, it's difficult to find good resources.
In certain cases, you're also liable when you have a UG. That's right. But I guess it depends on you doing something on purpose or "fahrlässig". There may be a lot of different scenarios were somebody would sue you. Another reason would be if your product causes some damage. For example, you provide a DB service and it goes down. A shop that is using your service cannot sell for a day.
I'm not a lawyer in the end. So if you really want to know if you would profit from limited liability a legal consultant may help you better. But I think there are so many possible ways we wouldn't think of that could damage you. I would never feel comfortable to no limited liability when running a software business.
Hello John,
with the UG/GmbH you are protected, as long as yo do nothing that is "grob fahrlässig" or "vorsätzlich". Which is about 99% of the stuff you do if you act in the best interest of the company.
The bookkeeping isn't that much more. It is just different. Also you should have a "Steuerberater" anyway to assist you at least at the end of the year. This is also the way I do it. I do the bookeeping myself and let the Steuerberater handle everything related to the Jahresabschluss and the like.
EU Value Added Tax (VAT)
Remember, too, that you will have to charge VAT once your turnover reaches a particular threshold.
In the UK, that threshold is £85,000 a year. Germany will have a similar provision so check your tax department's website for more information.
And here's a gotcha: even if you do not sell enough to have to register for VAT in Germany under ordinary circumstances, you absolutely do have to register for VAt the moment you sell to a customer in another EU country.
So if I bought your goods and services from the UK, you would have to register and account for UK VAT charged to me at the UK rate (20%) and then chjarge VAT to all your German customers (19%) even if your turnover is lower than the domestic VAT threshold.
That applies no matter what sort of legal entity you are when you trade: sole trader, partnership, private or public limited company, it makes no difference.
For this reason, and because of the current uncertainty as to what the rules will be next April, I have made a decision not to sell into the EU when I launch my product. The bureaucracy involced for what could theoretically be a single sale of €1.00 simply is not worth the hassle - especially as everything might change six months from now.
Or might not.
Similarly, unless you think you can make good money from the UK which would be worth the bureaucratic pain, I would use IP address tracking to direct UK visitors to a "Sorry, we can't sell to you because" page, at least until we all know where we stand.
The simplest way to handle VAT is to use paddle or fastspring. They'll act as a reseller and they have to file VAT. You as a seller to paddle or fastspring only need to handle the payments between them and you, not to the end customers.
Unless you do something horribly wrong, it's very doubtful that server bills will be a significant risk. The real question is liability to your customers in general.
Are you giving medical or legal advice? Are you sharing information that people could somehow use to hurt themselves and have a credible lawsuit against you? These are the kinds of questions I'd be thinking about.
I can only speak for UK law but I imagine German law will have similar provisions.
In the UK, you can trade as a sole trader, partnership, private limited company or public limited company. As others have stated, if you want to create a public company, you have to have a minimum amount of working capital.
In the UK, when you create a limited company, there is what as known as the "veil of incorporation" between you and your company. In other words, you are one legal person and your company is a wholly, separate, different legal person.
Howver, there are circumstances, mostly around fraudulent trading, where the law says "in reality, you are the company, aren't you Mr Naughty Company Directr?".
These situations arise when the limited company is what is called a "close company" in the UK. A close company is one which is owned and run by five (I think) or fewer directors who are closelty involved with the management, direction and day to day running of the company.
Where this is true, the Courts may choose to "lift the veil of incorpration" and, in effect, say, "John, we all know that you were using the company as a front for tax evasion. We know you own the company and you are the only one who is allowed to make business decisions for the company so we are going to proceed against your company as if you and your company were the same legal person".
This does not happen with larger companies where the owners give responsibility to other employees to make the business decisions.
From the tone of other answers here, it looks to me as if Germany has similar laws.
So, in practice, what does this mean? It means that the level of protection you have against creditors or those who wish to sue you for malpractice may not always be as strong as you might think. If, for example, I could show that you continued to trade with me long after you ought to have known you could not trade profitably, then I could possibly go against your personal assets. The reason, of course, is that the first thing you would do is transfer assets out of your company and into your personal ownership in order to save yourself. Courts do not like that sort of behaviour.
Incidentally, if you need to obtain credit, you may find it more difficult as a sole trader than as a limited company. Right now, it may be equally difficult. A few years down the line, there may be a big difference in how you are perceived as a sole trader rather than as a limited company.
There is another issue to consider, which may or may not matter to you. It depends on who your customers are. If you are targetting business customers, they may be reluctant to deal with you as a sole trader. They may just be reluctant to deal with "the little man". So you set yourself up as a business in order to look bigger and more established than you are. Get a relative (preferably with a different surname) or a very trusted friend to act as a second director so your letterheads look more impressive. This is nothing to do with the law and everything to do with how you present yourself to the market.
If this is something which is applicable to you and you have done yet done so, register immediately so you seem to have been in business for longer.
Also, for God's sake get insurance if your business is at all critical to your future customers' operations. And make sure your terms and conditions EXPLICITLY set out the limitations of your liability to customers. Have a read of the terms and conditions of big companies on the internet: they all limit liability and make the acceptance of the terms and conditions a condition of doing business.
Pay close attention to the clauses which limit liability - and copy them!
Those two steps will potentially save you more grief than any other.
Short answer:
Sole trader / partnership: personally legally responsible for any claims against you, whether creditors or grievance holders.
Limited company - offers some protection of personal assets provided there is no suspicion of illegal / negligent practice. If there is such suspicion, the Courts may choose to proceed as if you are your limited company are the same legal person. I can't be definitive because it is up to the presiding Judge to decide.
Best protections: watertight terms and conditions which limit liability ahead of time and form part of your contract with your customer. Personally, I would record the date and time the customer ticks that box and store it with their other user data.
The other best protection is to take out a liability insurance policy. Speak with a specialist commercial broker to understand the risks associated with your particular business.
Unfortunately, German law is so different from UK law, that your advice is not to the point.
Having a corporation in Germany has different obligations than in the UK.
Have you any examples of the differences?
Sure, in the UK, when you run a Ltd it's quite straight forward from an accounting point of view.
In Germany, for a GmbH, accounting is more involved and needs to take into account enumeration requirements for the owner/director. This has quite some tax implications. Also healthcare insurance requirements are different.
The registration of the business is more involved.
However, as a German, you can register a UK Ltd easily (at least before Brexit). :-)
Just found this:
https://www.howtogermany.com/pages/busi-setup.html#taxes
Church tax? Solidarity surcharge? 18% local business rates>
How in hell's teeth is an entrpreneur supposed to make any money doing business?
The rest did not actually look too different in principle from UK trading forms although, obviously, there will be differences in detail. UK companies legal obligations towards employees although our social contributions are limited to business rates (based on property tather than income) and Employer's National Insurance, leveied on top of salaries.
Obviously, we are also taxed on business profits.
As for accounting. we hsve to meet certain minimum standards and most businesses would go down the double-entry book-keeping route just because it is easier to keep track of things, especially if buying and selling on credit. For a simple business, single entry book-keeping is acceptable provided you can prove it is accurate.
Hi,
As Johannes already said, as Einzelunternehmer you are liable with your whole private assets. If you get sued and own a house, you could end up losing it.
The better way is to have a GmbH or a UG (haftungsbeschränkt). Then you are only liable if you do something grossly negligent or do something stupid on purpose. The difference between a UG (haftungsbeschränkt) and a GmbH is the starting capital. You can theoretically start a UG (haftungsbeschränkt) with 1€. Whereas you need 25000€ for a GmbH. The GmbH is often better if you work with other businesses, as it implies more trust and shows that you as a company can take a hit and are still going.
If you want to save a few percentages on taxes, you could even go for a "GmbH & CoKG".
Hello Stefan,
as I said to Johannes, I'm aware of the well-known differences between the UG/GmbH/Einzelunternehmen. What I'd like to know is what you'd be liable for in practice, especially if it comes to a SaaS. Give me an example of where a SaaS would be sued for damages that does not fall back to me (as the CEO/sole programmer) as negligence. For example: If I had a bug in my software that exposed customer data and get sued by my customers as a result, would having a UG/GmbH really protect me from personal liability in this case?
In practice, you would have to be:
a. deliberately seeking to damage your clients
b. deliberately trading fraudulently
c. running a mission-critical business which is acknowledged as such by you and your clients (which is why terms and conditions are so important)
d, making false statements:
Aloud to customer : "Our infrastructure is triple redundant and offers 99.99% uptime; whispers to self, "I hope to God my €5 a year, shared web-hosting environment as provided hy Heinrich down the road on his Windows 2.1 system is up to the job"
e. failing to perform aganst specific, agreed performance measures for which there are agreed penalties
You would be protected by a UG /GmbH for bugs that expose customer data, as long as you did not include them on purpose. Even if you did put them in on purpose, you are not liable until they prove the opposite.
Thanks, that's the exact answer I was looking for. With that in mind a UG really looks like the go-to option.