Realitätscheck: Steuern bei einer GmbH

Reality check: How much do you really pay in taxes for a limited liability company?

I often see figures in business plans that are completely up in the air and which thus present business owners with a tax problem: The payments that the company will actually have to make in the future will bring the owner crashing back down to earth in future years. In the worst case, such “pie-in-the-sky” calculations mean that insolvency proceedings have to be instigated.

There are usually two reasons for establishing a limited liability company: A successful sole proprietor wants to combine the advantage of limited liability in his legal form or a brand new company is about to be founded. Read more

Profit sharing between shareholders: What you should be aware of

As a shareholder of a limited liability company, you are generally entitled to have your profit shares paid out after the end of a profitable business year. That may be easy if you are the sole shareholder. You get all the profits.

But what happens if there is more than one shareholder? Are you worried about profits not being fairly distributed and would like to know what you need to watch out for?

In this post, I have compiled the most important aspects that need to be considered to ensure the fair distribution of profits. I also warn you against a trap that many business owners fall into.

#1: First the theory: Shareholders and one condition

Shareholders are contractual partners who have contributed money to the company’s share capital. Only shareholders are entitled to receive profit shares.

Salaried employees – no matter what role they have in the company – receive a salary, bonuses, etc. but not profit shares.

Important: If the decision is made to distribute profits, shareholders always have a legal claim to the amounts paid out for the profit shares.

If you have a qualified majority in the company, then you are the shareholder who can determine the distribution of profits yourself and without the input of anyone else.

What happens if you do not hold the majority?

Then you only get a profit if the majority of the people who hold the company shares decide to distribute profits. This is different from a partnership.

Profit is the condition

In order for any profits to be distributed, the company itself must be profitable.

To know whether profits have been made, you need the balance sheet. Unless you still have profit carried forward from profitable previous years.

#2: Proportionate vs. disproportionate profit distribution

There is absolutely no reason to worry that profits will be distributed unfairly. This cannot happen.  Section 29, paragraph 3 of the German Limited Liability Companies Act (GmbH-Gesetz) stipulates the following in respect of profit distribution:

“Profits shall be distributed in proportion to the shares held in the business.”

Source:, May 2, 2018.

In practice this means: The way in which profits of the company are distributed is determined by  the number of shares in the company you own.

You can also define other rules on distribution in the articles of incorporation. This refers to the disproportionate or incongruent distribution of profits.

In other words: The way in which profit is distributed is not determined by the share held in the company but instead by the resolution on the distribution of profit.

But only if the articles of incorporation provide for the option of a disproportionate payout.

Performance-dependent profit share? Is that possible?

It is not possible to arrange the profit share in such a way that reflects your performance. This is because the profit of a company does not depend on the performance you have rendered.

The only way of doing this is to focus on the  salary. That means: Shareholders who perform better receive a higher salary, royalties or bonuses, etc.

Be careful not to confuse the two: Profit distribution is not the same as a salary payment.

The distribution of profits in a limited liability company is not to be deemed the same as salary payments. This is because salaries are paid out before profit distribution and reduce the profit subsequently available for distribution.

Taxation in case of profit distribution

The distributed profits you have received as part of the profit distribution must be taxed.

Put simply: 40 percent of the amount distributed is tax-free, while 60 percent is taxable and subject to your personal tax rate.

All in all, it is often the case that the total tax burden of a limited liability company amounts to 48 percent. This is six percent more than what could be payable in income tax.

#3: Variable profit shares: You must be aware of this to avoid falling into a trap.

If you would like to change the profit shares, the articles of incorporation need to be amended. This can only happen with the consent of every shareholder.

You must be particularly careful here to avoid falling into a trap. There are indeed limited liability companies that provide for disproportionate profit distributions in the articles of incorporation.

If you participate in such a company and buy a share, it may all come down to a single sentence on profit distribution in the articles of incorporation.

If you do not have a clued-up tax advisor who draws your attention to this point, you run the risk of receiving a share that is different to the one you had hoped for.

Conclusion: Fair profit distribution guaranteed by law

This post has shown that lawmakers have ensure that profits are fairly distributed. They are paid out either in relation to the number of shares held in the company or in another way as stipulated in the articles of incorporation (= disproportionate).

Above-average performance on the part of shareholders can only be remunerated by way of their salary. It is not permitted to summarily increase the profit distribution.

If you decide to participate financially in a company, you must pay close attention to the articles of incorporation. In case of doubt, ask your tax advisor.

Kind regards,

Thomas Breit

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Knowledge for business owners: Do you have to keep all employees when taking over a business?

When you want to take over another company, the employees are often the ones that can tip the scales in one direction or another. Most buyers would prefer to get rid of unprofitable employees and keep profitable ones. But is it as easy as that for you as a business owner? In this post, we have set out the most important aspects you need to consider here.

What options are available generally speaking when you want to take over a business?

There are two ways of taking over a business in Germany: by way of an asset deal or a share deal.

A share deal involves you buying shares in a corporation (normally a limited liability company [GmbH] in Germany). These shares are always for the entirety of the corporation. That means: If you buy 100 percent of the shares in a limited liability company, you are also buying everything contained within this limited liability company – including its employees. If you buy a certain percentage, you will only acquire a certain share of the company, but again with everything in it. This also includes each and every employee working at the company at this point in time.

Put bluntly, a share deal basically means that you buy what it looks like, but you get what’s inside it.

An asset deal involves you buying “objects” from a corporation. That means: You can buy anything from a single asset (e.g. just a pocket calculator) to all the assets, including the goodwill, of the entire company.

If you are now thinking to yourself: “Hey, great! I can just buy the patent and the production machinery and warehouses for product A from the company XY by way of an asset deal. At the same time, I can leave the longstanding, expensive employees with the seller,” then you will need to think again. It is not as simply as all that when it comes to an asset deal.

Put bluntly, an asset deal basically means that you buy only (parts of or) the (entire) inside and only get when I sell using what’s inside. But beware: If what I buy is of material importance to the company and its ability to operate as a going concern, then I also have to acquire the employees. Even if they were not part of the purchase agreement.

The law states that employees are inseparable linked to certain parts of a company.

Lawmakers introduced a number of labor market regulations so as to prevent wage dumping practices and high levels of unemployment in the country. This is where Section 613a of the German Civil Code (BGB) comes in.

Without getting caught up in the details, it can be summarized as follows: If material foundations of a business are acquired, any employees associated with these parts must also be kept.

The same also applies when dismissing employees (in company with more than ten employees), in that the must be a business-related reason for this.

What this means for the seller is the following: The seller is not allowed to make the sales offer look more attractive and then say, after selling, that there is no more work for individual or all employees because he has sold the material foundations of the business to someone else.

By the same token, the buyer cannot simply decide to fire individual or all employees because he does not want to keep them or expressly stated that he was not acquiring them.

Employee rights are and remain protected.

Is the buyer able to change employment contracts unilaterally?

If the employee is disadvantaged, then no, you cannot change the employment contracts. And if you did, any such changes would be legally invalid.

Employees are also protected here by Section 613a of the German Civil Code (BGB).

Is it not beneficial for your internal planning to keep all employees? What are you allowed to do when taking over a business?

Employees are protected by Section 613a of the German Civil Code (BGB). There is no way around this. However, what you can do is offer such employees a settlement that encourages them to object to the business transfer (which happens legally). This would mean that they would leave by way of a termination agreement.

However, the employees in question won’t simply object. You need to offer them something. At the end of the day, no-one voluntary gives up a (good) job.

And remember that you won’t get it for nothing. You need to make a good (normally financial) offer. There are a number of models to choose from here: severance pay model, partner severance model [Abschichtungsmodell], retirement model, etc.

These costs are (yet another) part of your purchase price for the material foundations of the business.

And remember: The offer should be made to unfavorable employees before the material foundations of the business are bought and the employees object.

Exception: Business-related termination

As already mentioned briefly before, there is only one legally effective reason for firing employees: the business-related termination.  A business-related termination generally relates to circumstances when there is an urgent business need and it is no longer possible to continue employing them in another position of equal value in the company. For example, a carmaker would have the option of exercising special termination rights if the market for car XY no longer existed. In this case, the company would be allowed to dismiss all employees involved in the production of car XY if this situation meets the criteria for business-related termination.

In contrast, grounds for a business-related termination do not exist if you acquire a business and would be able to reduce the workforce by 20 percent by taking advantage of synergies (e.g. with your existing business). In such cases, you would need to make and agree on an offer with the employees as described above and determine what would be in the best interests for your business in the long term.

What needs to be considered from a business administration and tax law perspective?

As a businessman, you would only like to buy what you want to have. But it is not within your power to decide against having to acquire associated employees, isn’t it? Legally speaking, that’s true. But this is not the case for the commercial side.

The price being paid for the material foundations of the business should also include the additional expense incurred for employee severance pay models. It is not simply a price for a (material) item.

How do you go about doing that? You deduct the costs for the employee model from the price for the material foundations of the business. This will enable to you to make a preferred offer to employees without having to pay more at the end of the day.

And under tax law?

There is also a major difference here from the tax perspective: Personnel costs have an immediate impact on profit whereas the costs for acquiring foundations of the business do not (cost breakdown for business-owned property: 33.3 years, for goodwill: 15 years, for machinery: it depends on the remaining useful life).

That means: You ultimately only pay the price for the foundations of the business, but create immediate and deductible loss potential.

How do I recognize an obligation to keep employees?

Under Section 613a of the German Civil Code (BGB), you are required to keep employees if they are transferred to a business or branch of business (not to be confused with business part(s)).

A business is defined as an organizational unit comprising (functional and qualitative) work equipment. A distinction is to be made here between “business” and “company”: A company relates to the commercial and legal entity (limited liability company or partnership [GmbH, GmbH & co.KG]). A branch of business is an independent entity in the company.

To make this clear, consider the following:

A business is something that has work equipment (such as machinery) and that organizes work in such a way to be productive. That means: If you buy the material assets required for a business, this equates to buying a business (or a branch thereof).

It is normally assumed that you are buying a business / branch of business if you buy functional and/or qualitatively important assets belonging the business.

Whether an asset is materially important or not can be determined from two features:

On the one hand, what is important is how the actual asset is used in the company and how it fits into the business activities (referred as the functional consideration). On the other hand, the existence of considerable levels of hidden reserves constitute a material foundation of the business (referred to as the quantitative consideration). In all cases the question of material foundations of the business must be assessed on a case-by-case basis(referred to as norm-specific consideration).

If you only purchase assets of lesser important (to the business’s ability to function as a going concern), you are not acquiring a business. If, however, you buy at least one material asset, you are also acquiring a business.

This means that you do not always have to buy everything for you to have acquired a business from a legal standpoint. On the other hand, you might not have acquired a large of number of assets, but yet still have bought a business. This can only be determined on a case-by-case basis.

Conclusion: Only take over a company with employees with legal support and detailed calculations.

As you see, there are a number of things to consider, both from a legal and business standpoint, when taking over a business that has employees. Please remember that this post does not serve as a substitute for legal advice. 1. I am not allowed to give such advice as a tax advisor and management consultant. 2. The idea here was just to give you a small insight into the legal aspects that should be considered. You will certainly need support from an attorney specializing in labor law.

You will also need to draw up a concept and a cost/benefit calculation for the employees in question. The key thing to remember here is to balance the cost of higher one-off expenses against long-term lower costs, and to base your decision on this.

My aim in writing this post was to show you what you need to consider when taking over a company that has employees.  I hope that I was able to help you become a little more familiar with the topic of business takeovers and with everything that comes with these.

Kind regards,

Thomas Breit

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Taking over a limited liability company – when is it worth the risk?

Taking over a company rather than setting up your own one sounds like an attractive proposition for shareholders, yet there are both advantages and disadvantages to be had here for you as a shareholder.

What I would like to do in the following post is give you an idea of what you should consider when buying an established limited liability company.

What are the advantages for a shareholder of taking over a limited liability company?

Taking over a limited liability company saves you as a shareholder from having to do a lot of ground work. Some of the advantages include the following:

  1. No share capital contribution

As the company has already been established, the requisite share capital has already been paid in. What this means for you is that you do not need to invest any funds to establish a limited liability company and instead you can get started immediately with your ‘new’ company.

This is, however, only an advantage if the purchase price is lower than the share capital contribution. Make sure you closely inspect the books and the future prospects of the company if the purchase price of the limited liability company is indeed as low as that.

  1. Existing articles of incorporation

The same applies here: Articles of incorporation were drawn up when the limited liability company was established, which you can now simply adopt (and adhere to!).

Make sure that the provisions contained therein actually reflect what you want.

  1. Immediate limitation of liability

Moreover, in the case of an established limited liability company, the limitation of liability is effective immediately, meaning that you avoid the so-called ‘pre-company phase’.

  1. No need to search for employees and production machinery

You already have the employees and machinery required for production, which means that you do not have to take any steps here. Taking over a limited liability company thus saves you as a shareholder a lot of time and effort.

  1. Market data available

As the limited liability company was founded before you took it over, the company was able to gain some experience in its field of work, which you as the new proprietor can draw on instead of having to start from scratch.

  1. Image-boosting history

The fact that your future company may have already existed for several years or even decades plans right into your hands as a shareholder. You can use these many years of experience to promote the company.

What additional action do you need to take during a takeover?

What you as a shareholder and future proprietor of a limited liability company must do is draw up a purchase agreement. This is the only way for you to take legitimate possession of your company.

You should also find out about the financing options available to you. When buying a company, these are similar to those available to founders.

Under Section 613a of the German Civil Code (Bürgerliches Gesetzbuch), you as a shareholder are not required to find any new employees when taking over a limited liability company, but you are required to keep the existing ones. You do not have the right, as the new owner, to amend existing employment contracts in your favor. When you take over a limited liability company, not only are you buying what it does but also who does it.

Source:, September 21, 2018.

I set out the options available to you when taking over a business and its employees in my post entitled: “Knowledge for business owners: Do you have to keep all employees when taking over a company?” If you are interested, just click on the following link to be redirected to the post: Knowledge for business owners: Do you have to keep all employees when taking over a business?

What are the potential risks you face when taking over a company?

The list of risks that you may face when taking over a company is just as extensive as the one of your advantages. When buying a limited liability company, you should bear the following four points in mind:

  1. Employees and their pensions

When you acquire a limited liability company, you are the new, official employer, which means you are required to both keep the existing employees and make payments for their pensions. The contracts agreed with your employees must not be changed.

  1. Incorrectly stated enterprise value

Before taking over a limited liability company, you should first assess the value of the company in question. There are many factors to consider (e.g. sales figures, equipment, liabilities) when determining the value of company.

Throughout this process, remember: While trust is good, control is certainly better. If you only realize after making the acquisition that you were given an incorrect enterprise value, then it is already too late. You are the official owner of the limited liability company – regardless of how much it will cost you in the future.

  1. Liabilities and creditors

When taking over a company, you also step as shareholder for the company’s obligations. That means: If the company has amassed debts and owes creditors money, you are required to service and pay these off as the proprietor of the limited liability company. It is immaterial whether you knew about them or not.

  1. Future taxes payable for previous years

Don’t be blinded by the company’s success when buying it. You may be liable for taxes in the future as the new owner of the limited liability company, depending on how much income was generated in previous years, which means that you must bear these additional costs in mind when making your decision.

When does it make sense to take over a limited liability company?

I would recommend you take over an established company if you are fully committed and you really want to take over the business. In such cases, the legal form (e.g. limited liability company) should not generally represent a barrier for you. Limited liability companies often come with a number of business-related advantages if you take the “right” approach.

It could also open the door to a number of other favorable options for you: If, for instance, the limited liability company has loss carryforwards, this will (put simply) reduce the taxes on your profits in the near future. This will allow you to position yourself in an economically favorable way in the meanwhile.

The potential for tax-free distributions from the existing limited liability company also means more profit for you at the end of the day.

Conclusion: Takeovers with full commitment and solid figures

Whether it makes sense to take over a limited liability company or not must be determined on a case-by-case basis. As set out in this post, both financial and personal factors are very important here.

If you are toying with the idea of buying a company, I can only recommend that you first work out what the advantages and disadvantages are. Only with solid and reliable figures, together with the proper tax services, can you determine whether buying a company is the right thing to do.

Kind regards,

Thomas Breit

Photo: © Syda Productions –

Vor- und Nachteile einer Holding

Holdings: When are they an advantage, and when do they pose a risk for limited liability companies?

At first glance a tempting idea for many entrepreneurs: to control several companies under one holding. But is it really that simple?

In addition to many advantages of forming a holding, this also bears risks that the owner will have to bear in mind. In this post, I will discuss whether these risks outweigh the advantages, or whether the formation of a holding makes sense for you.

What exactly is a holding?

A holding (often also referred to as “parent company”) can be a partnership or a corporation holding shares in other corporations. These are commonly referred to as “subsidiaries”.

With regard to the parent-child relationship of a holding, we differentiate between four different models:

  1. The financial holding

This type of holding is defined by its interest in the subsidiaries under its wing. The financial holding company exerts no influence on the management of its subsidiaries but merely exercises its rights as a shareholder (e.g. at general meetings, in drafting the articles of association etc.).

  1. The management holding

The management holding, on the other hand, has at least a bare majority in its subsidiaries and is therefore in charge. The subsidiaries are dependent on such type of holding, and the holding is also responsible for their management.

  1. A holding that performs services for its subsidiaries

There are also holdings that provide services for their subsidiaries. The holding may for example take over bookkeeping, consulting etc. for individual subsidiaries.

  1. A holding with its own business activities

In addition to these services provided to subsidiaries, the holding company can also have its own business activities. For example: one subsidiary produces cars, the other navigation systems. The holding itself, however, produces tires. Neither the businesses of the two subsidiaries nor the business of the holding company are directly related to each other. All three companies could also maintain their business activities independently from the business activities of the others. Nevertheless, the role of the holding is to manage the joint profits and losses in the best interest of the entire group of companies.

6 potential advantages of a holding

If you already own more than one limited liability company (or hold the majority interest) as owner or managing director, forming a holding may be worthwhile. This will bring you 6 useful advantages, serving to improve the profitability of your companies:

Advantage #1: 95% tax-free profit distributions

A holding is often formed for tax reasons. The reason behind this is that 95% of the profit distributions of subsidiaries is transferred to the holding free of tax. This applies to all holdings without a profit and loss transfer agreement.

If, however, a profit and loss transfer agreement is in place, the profits of a subsidiary initially go to the holding company 100% free of tax. The holding takes on the responsibility for taxation and offsets profits with any losses that might have occurred in the group of companies.

Please note: The profit and loss transfer agreement may sound tempting, but it can also lead to problems. If a subsidiary is in financial difficulties, for example, its losses may put the parent company at risk (due to offsetting these losses against other profits).

The holding company automatically assumes the role of tax debtor for the revenue of the entire group.

Advantage #2: Joint taxation of all profits and losses

However, if you are aware of the latter risk for the parent company and manage your group of companies cautiously from a risk perspective, you could benefit from a tax advantage. That means: all profits and losses of the subsidiaries are netted before any tax is deducted.

For example: Ltd. A generates a profit of EUR 100,000, and Ltd. B generates a loss of EUR 100,000. If the two companies were taxed separately, Ltd. A would have to pay taxes. Merely Ltd. B would not pay any taxes as it made a loss. However, if there is a holding Ltd. C that owns 100% of each company, the profit of Ltd. A and the loss of Ltd. B are netted, and no taxes are due in total.

A formation of a holding thus has the advantage that the profits and losses of the individual companies are no longer viewed in isolation.

Advantage #3: Asset building instead of profit distribution

This advantage is related to the retention of profits. The concept is easier than it sounds: retention means that profits are not distributed at the end of the financial year, but remain within the company. Therefore, the formation of a holding enables you as the owner to develop new strategies for asset building in your group of companies.

Advantage #4: Separation of risks

By forming a holding, you are in a position to distribute the risks related to certain business operations across several subsidiaries. This mitigates risks across the group. If you only had one company with several departments, a single department that generates losses could drag the other departments with it into financial problems.

In the holding structure, the other companies are not affected by financial difficulties of one of the subsidiaries. And yet, all profits and losses of the subsidiaries are netted in one gross asset value (GAV).

Advantage #5: Enhanced public image

The formation of a holding enhances the public image of your group of companies for you as the owner or managing director. This way, all your subsidiaries can benefit from the positive public image of the holding company.

Advantage #6: Preventing a hidden profit distribution

The holding maintains an overview of all subsidiaries. This way, tax risks – such as hidden profit distribution – can be minimized. As the owner of the holding, you can distribute 95% of the profits of all limited liability companies free of tax, use it to offset the losses of individual subsidiaries etc.

Risk: parent-child dependency

Having listed so many advantages of a holding, I must now also draw your attention to its risks. The biggest disadvantage of a holding is the dependence of its subsidiaries.

In other words: if the continued existence of your holding company is ever threatened, the subsidiaries will share its fate. Even if the other limited liability companies generate high profits and are well positioned in the market, they will go under if the parent goes under.

In the case of several sister companies that do not belong to the same tax group, in contrast to the holding structure not all limited liability companies would automatically be affected if one of them goes into financial difficulties.

Further risks arise during the formation and management of a holding

These 5 points must be taken into account when founding a holding:

  1. Five-year minimum execution period for the profit and loss transfer agreements
  2. Legal uncertainties in the event of errors with regard to the application of law
  3. No utilization of losses carried forward
  4. Fiscal unity in the tax group may be lost because of accounting errors
  5. Incorrect computation of majorities

Conclusion: forming a holding always makes sense for owners of several limited liability companies

If you own several limited liability companies, you will benefit from both tax and administrative advantages by forming a holding company. For you as the owner it is important, however, that no major errors occur. After all, if the continued existence of your holding is under threat, this will also affect equally your other corporations.

My recommendation is therefore to carefully weigh up the advantages and disadvantages of a holding structure before you set it up. For this purpose, you should consult your tax adviser in Hamburg to calculate all possible scenarios.

If you have any further questions regarding the formation of a holding or would like my advice, please feel free to contact me by phone (+49 40 44 33 11), e-mail ( or contact form.

Kind regards,

Thomas Breit

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