Tax Changes for Start-up Companies

While the sale of a business is not a primary focus for traditional companies, startups often go from founding to a lucrative sale in just a few years. A great deal is done during this time to build the company’s image. Start-up losses are accumulated, and venture capitalists as well as key management personnel are given equity stakes in the company. Planning for the upcoming sale consists of these diverse facets. The typical stages of a company’s life cycle are particularly relevant for tax advisors. It is important for them to understand the development of young companies. This is particularly relevant if they wish to respond proactively and, with the help of conversion tax law, provide the appropriate recommendation regarding legal structure. Your tax advisor in Düsseldorf and Oberhausen has summarized for you the life stages of a startup and the associated tax implications.

First Start-Up Phase: Founding

The idea is at the heart of the startup’s formation. After all, innovation potential is particularly important when founding a young growth company. It is not uncommon for the business to be focused on the internet sector. A startup is defined as a young company that is in the (pre-)founding process and is seeking funding. This can refer to all young companies, regardless of the products or services they offer.

Start-ups typically have high capital requirements. This capital is needed for research, development, and the market launch of products or services, as well as for further building out the company’s structure. Banks are usually skeptical about providing financing due to the high risks involved. Therefore, startup founders obtain the necessary risk capital from traditional investment firms or venture capital firms and so-called business angels.

Profit generation is rarely a goal in the initial phase of a startup. Often, founders continue to work as employees alongside their activities as startup entrepreneurs. This is the only way they can finance their living expenses during this initial phase. To ensure the most efficient use of losses, only the legal form of a partnership can be recommended in this first phase.

Second startup phase: Investors and performance incentives

The period from the company’s founding until the startup’s initial growth is characterized by the raising of venture or risk capital from investors.

Clear trends now indicate whether the startup is growing toward a corporate structure or a holding company model. This is important for the venture capitalist as well as for the startup itself.

Another growth process is the search for highly qualified employees. Employee (and executive) stock options prove beneficial for the company’s further development. Despite the new regulations introduced regarding employee stock options, virtual stock options are usually more effective than “real” stock options. This is because, on the one hand, from the perspective of the founders or venture capitalists, there is no further actual dilution of shares, and on the other hand, there is no taxation of the benefit received at the employee level. The transfer of “real” shares can become a problem. Whether it occurs free of charge or at a discount, the associated monetary benefits are generally taxable as wages at the time the shares are granted. In many cases, startup employees would be unable to pay the associated taxes without actually receiving the proceeds.

Third Start-up Phase: Measures for the Sale

With regard to the sale, the holding model with corporations offers the greatest possible tax advantage. This is the case because the 95% tax exemption combined with the tax-shelter effect applies here. If you consider setting up a holding structure with corporations, you can take advantage of benefits later on. The immediate utilization of losses by partnerships during the start-up phase can also be combined with the advantages of a holding model. In this case, the founder also holds a silent partnership interest in the operational start-up GmbH. If the sale of the start-up GmbH by the holding corporation is imminent or if profits are expected at that level, the atypical silent partnership should be dissolved in a timely manner.

Tax Consulting in Düsseldorf and Oberhausen

Do you have a question or concern regarding tax law? The team at Trimborn . Partner can assist you as quickly as possible with our many years of experience and professional expertise. Are you looking for a tax advisor? Then please contact us. At our offices in Düsseldorf and Oberhausen, we are happy to assist you with all your tax matters.