Most freelancers are at first individual entrepreneurs when they start out on their own in Germany – either as Freiberufler or tradespeople. For them, this means an easy and risk-free start as well as other advantages. If they generate high revenues, however, the top tax rate is quickly applied to them. Setting up a GmbH can then be an interesting alternative.
Saving taxes with a GmbH as a freelancer
As a Freiberufler or tradesperson, the profits of a freelancer are taxed one-to-one as personal income. From an annual income (sales minus operating expenses) of about 58,000 euros, the top tax rate of 42 percent already applies. In contrast, the profits of a GmbH are only taxed at 30 percent. This results from 14 percent trade tax (which, by the way, must also be paid by freelancers who are not classified as Freiberufler but as tradespeople) and 16 percent corporate income tax.
For freelancers, this means that when they set up a GmbH, they can pay themselves a salary that covers their living expenses, and the remaining profit remains in the GmbH and is taxed there - at a lower tax rate. This money can be used, for example, for a company pension plan or to invest in shares. There is the additional advantage that the final withholding tax on share profits of private individuals is significantly higher than the tax rate that a GmbH has to pay on them.
In this webinar recording, Alexander Keck explains in more detail how freelancers can save taxes with a GmbH (in German):
Further advantages of a GmbH
You might have heard of false self-employment as an issue in Germany. This means that a freelancer is formally self-employed, but in practice is treated like an employee by the client. Because this can have serious legal consequences for companies, many are reluctant to work with freelancers.
With a GmbH you can counteract this, because only natural persons can be false self-employed. Problems can only arise if the GmbH was only founded to disguise a false self-employment. Therefore, as a GmbH, you may be more attractive to potential clients. In general, the reputation of a GmbH is higher due to the established legal form and the required start-up capital.
How you can keep the risk of false self-employment as low as possible even as a freelancer without a GmbH, you will learn in our article.
Another advantage is the limited liability, which is already reflected in the name (GmbH is short for Gesellschaf mit beschränkter Haftung, meaning limited liability company). This allows you to protect your private assets, because the liability only applies to the company capital. As a freelancer without a GmbH, on the other hand, you could eventually be liable with your personal assets.
When the sole proprietorship images more sense
If your income is significantly below the limit for the top tax rate and/or you need it almost completely for your living expenses, a GmbH is not a good idea for you as a freelancer. You will not be able to benefit from the tax advantages, and you will also incur additional costs. The formation of a GmbH costs about 1,000 euros and for the more complex accounting by a tax consultant you have to calculate with another 1,000 euros.
With the GmbH you will have additional administrative effort, which you should know about in advance, for example more complex accounting or business reports. In addition, you need a starting capital of 25,000 euros, of which you must contribute 12,500 euros directly.
So you see: Whether a GmbH is worthwhile for you as a freelancer depends on your personal circumstances.
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Please note: We have prepared this text to the best of our knowledge, but it does not replace legal or tax advice.