FlexCo – A New Legal Entity in Austria

I. What is the FlexCo and why was it introduced?

The Flexible Kapitalgesellschaft, or flexible company, which is required to use the abbreviated designation FlexKapG or FlexCo, was introduced in Austria effective 1 January 2024. This additional legal entity was particularly created to offer an internationally competitive option to startups and founders. The FlexCo is not exclusively open to startups but offers a modern and flexible legal form of business to all companies.

The FlexCo was introduced because the limited liability company (Gesellschaft mit beschränkter Haftung - GmbH) no longer fulfils the demands of a dynamic economy in some cases, and the joint stock company (Aktiengesellschaft – AG) is first suitable for companies which have attained a certain size.

II. Key features of the FlexCo

Generally speaking, the rules applying to the GmbH also apply to the FlexCo, unless something different is stipulated in the Austrian Flexible Company Act (FlexKapGG). The FlexCo and the GmbH both have the same corporate bodies with the same competencies: general meeting of shareholders, managing director and a supervisory board if certain criteria are met. However, there are several key changes and differences distinguishing the FlexCo from a GmbH:  

1. Company value shares: the most striking and innovative new feature as regulated in the Flexible Company Act is the creation of company value shares (Unternehmenswertanteile), also known as enterprise value shares. In addition to conventional company shares, the new regulations allow for an additional share class, which is particularly designed to give startups the option of enabling employee participation in the company’s success. Owners of such shares are entitled to participate in the balance sheet profit (dividends) and liquidation (exit) proceeds, but as a rule do not exercise voting rights.
2. Fractional shares: the transfer of ownership is facilitated by the fact that the articles of association allow for dividing shares into units (Stückanteile) with a nominal value of at least € 1. In this case, shareholders do not have one uniform type of share, which applies to the GmbH, but may own shares from different classes with distinct rights and responsibilities which they can also dispose of separately (as regulated by stock corporation law).
3. Capital raising measures: another major change stipulated in the Flexible Company Act is increasing the flexibility of capital raising measures. The FlexCo can acquire and hold its own shares to a greater extent than the GmbH. In contrast to the GmbH, the FlexCo can not only raise its share capital through an ordinary or nominal capital increase, but through a conditional capital increase (bedingte Kapitalerhöhung) or by means of authorised capital (genehmigtes Kapital).
4. Easier transfer of share ownership: the Act on Limited Liability Companies requires a notarial deed for the transfer of shares. In the case of a FlexCo, share transfers can be documented through a private deed issued by an attorney or notary. Company value shares can even be transferred in written form (signature) without the need for a notary or attorney.
5. Circular shareholder resolutions: in contrast to the GmbH, the articles of association of a FlexCo can stipulate that written circular shareholder resolutions are possible without the consent of all shareholders to this form of passing a resolution.
6. Minimum share capital/minimum initial contribution: the minimum share capital of the FlexCo equals € 10,000. Within the context of introducing the FlexCo, the minimum share capital of the GmbH was also reduced to € 10,000. Of this amount, at least € 5,000 must be paid up as the initial contribution. The reduction in the legally stipulated minimum share capital represents a meaningful change in Austrian corporate law but is not only an advantage enjoyed by the FlexCo. For a FlexCo, the minimum shareholder contribution can be as low as € 1, whereas the minimum contribution of GmbH shareholders must amount to € 70.

1. Company value shares

• Company value shares confer the entitlement to participate in the balance sheet profit and exit proceeds but are generally not entitled to vote on resolutions.
• A particular advantage of the FlexCo for startups is the possibility to issue such company value shares to employees, although their issuance is not limited to employees. Company value shares represent an employee participation scheme which is conceptionally tailored to startups.
• In the early phases of founding, a company frequently only has limited financial means at its disposal. In turn, this makes it difficult for them to suitably pay highly qualified employees. This situation entails the risk that employees are not retained but are lured by better paying employers. Or else, they may be made co-shareholders or partners who are fully entitled to all rights and privileges “out of necessity” and not out of conviction by the actual founders of the startup. The issuance of company value shares is a means of dealing with this problem. Company value shares enable employees to participate in the business success of the company in a simple manner, which in turn strengthens their loyalty to the company.
• The possibility to issue company value shares must be expressly stipulated in the articles of association. The total value of the company value shares may not exceed 24.99% of the share capital.

- Tag-along rights: in contrast to “normal” shareholders, individuals holding company value shares have a mandatory tag-along right. This means that in case of an exit by the founding shareholders, they are allowed to dispose of their shares under the same terms and conditions which the founding shareholders benefit from. They are also allowed to dispose of their shares independently from such an exit event. This can be done in an uncomplicated manner i.e., in written form (handwritten signature) and, in principle, without the approval of the company.
- More favourable taxation of company value shares:
Under certain conditions, the following preferential treatment exists with respect to the taxation of company value shares:
i)    Delayed taxation: income tax is not due at the time of the transfer of company value shares to the employee, but at the moment these shares are sold (exit).

ii)   If certain conditions are fulfilled, a more favourable or lump-sum taxation is applied.
iii)  There are other privileges with respect to social security contributions and non-wage labour costs.

2.    Simplified transfer of share ownership

• For the GmbH, a notarial deed is required to transfer ownership of shares, for transfer declarations and capital increases. In some cases, this formal requirement is seen as detrimental, especially to foreign investors, and is partly considered to be an outdated practice. In particular, the startup scene views this as annoying due to the costs and time involved.
• As an alternative to the notarial deed, the FlexCo allows for normal shares to be transferred via a private deed issued by either an attorney or notary. This represents a significant improvement and simplification. In particular, the advantage is that the parties involved do not have to be simultaneously present and the private deed does not have to be read aloud by the notary or attorney at the time of signing.
• Lawmakers have gone a step further with respect to the company value shares and allow for ownership of these shares to be transferred in simple written form (signature) without the need for an attorney or notary.

3.    Simplified passing of resolutions

• The GmbH only allows for written resolutions if all shareholders agree to this form of decision making. The FlexCo has enhanced the flexibility of the decision-making process. Legal regulations have fulfilled a wish expressed by the startup scene. In contrast to the GmbH, the articles of association of the FlexCo can specify that the approval of all shareholders is not required for the specific form of passing a resolution. The only requirement is that all shareholders entitled to vote have the possibility to actually cast votes.  
• The shareholder base of startups is frequently expanded, especially within the context of capital increases. However, it is naturally difficult to bring together a large number of shareholders to in-person shareholders meetings in which a quorum is achieved, especially shareholders residing abroad. Furthermore, the costs of such a shareholder meeting places a burden on startups.
• Furthermore, the FlexCo allows for voting in text form, enabling decisions to be made e.g., per e-mail.

The FlexCo is not only suitable for startups, but also for other companies. It offers numerous options for enhancing flexibility which can but need not be leveraged. At the same time, there are hardly any objective drawbacks compared to the traditional GmbH.

Potential disadvantages of the FlexCo:

• Many commentators consider the obligation of a FlexCo to appoint a supervisory board earlier than is the case with a GmbH to be a disadvantage. This obligation for a FlexCo already applies if the FlexCo is categorised as a “medium-sized corporation.” This means a supervisory board may have to be appointed much earlier than in the case of a GmbH. From my point of view, this is not necessarily a disadvantage, apart from the related costs for the supervisory board members. Quickly growing companies are well-advised to have a functioning monitoring and control mechanism at their disposal.
• As a legal form of business, the FlexCo is not as well-known as the GmbH. For this reason, it may not have the same social prestige as the GmbH. However, there is no objective reason for this lower level of confidence in the new type of legal entity and should change with the passing of time.
• The designation “flexible company” and the abbreviated designation FlexKapG or FlexCo are not considered to be good or attractive by some people. In fact, the designation for this legal entity does not contain a meaningful message for the market. The “flexibility” mainly refers to shaping the relationships of shareholders in the company but not to potential business partners on the market.

The flexible company offers everything that a GmbH can offer and even more. The FlexCo provides numerous advantages, such as the possibility to issue company value shares, simplified formal requirements and flexible structuring and financing options. One can leverage these possibilities but does not have to. In other words, the FlexCo represents an expansion of the range of legal options available to companies. Some experts and legal advisors say there is no reason anymore to establish a traditional GmbH or to distinguish between the laws underlying the FlexCo and GmbH.

One cannot assume that the FlexCo alone will lead to a boom in the number of startups established in Austria. Many factors are involved in deciding to set up a company or in favour of a specific business location, such as the general economic climate, the interest rate environment, the willingness of investors to provide financing and the tax framework. Nevertheless, the suitability of the available legal entities remains an important factor in itself. The new legal form of business offered by the flexible company entails many advantages for founders and startups and thus comprises an improvement for the business location.

Up until now (end of May 2024), close to 400 flexible companies have been founded in Austria. Based on a conservative estimate taking account of such companies established in the first half of 2024, it can be assumed that approx. 800 flexible companies will be founded in the year 2024. In a given calendar year, about 15,000 limited liability companies are established. Thus, considering the number of newly established GmbHs compared to the FlexCos set up until now, the FlexCo accounts for about 5% of all new companies. Whether the companies set up as a FlexCo are startups or other legal entities is another matter altogether.

 With the passage of time, the FlexCo as a new legal form of business will gain in popularity and the share of FlexCos as a percentage of new companies will continuously increase. At this time, the limited awareness, and misgivings on the part of users and advisors are still playing a role in explaining why more companies have not decided for the legal form of the FlexCo despite its advantages and the virtually non-existent drawbacks.  

The author of this article is Claudio Arturo, an attorney at Petsch Frosch Klein Arturo Rechtsanwälte OG.