Posts by "lexpro"

Regulatory and Legal Considerations for Non-Fungible Tokens (NFTs) in Switzerland

There has been an increase in the popularity and use of non-fungible tokens (NFTs). There are more and more startups developing and trading NFTs or providing advice on NFTs in Switzerland’s Crypto Valley. Likely, some legal and regulatory issues will still need years of clarification – both for developers and users.

Towards the end of 2014, Justin Biber purchased a non-fungible token (NFT) from the Bored Ape Yacht Club collection for about $1.3 million. The trading of NFTs on platforms such as OpenSEA, Rare and Nifty amounts to hundreds of millions of dollars every week.

What exactly does buying an NFT entail?

NFTs are digital tokens that are anchored on the blockchain and are linked to goods (usually digital). NFTs can be physical or immaterial goods from the real world. There are practically no limits to the possible links, but currently, the focus is on art and gaming accessories.

NFTs must first be created or “minted”, like all tokens. It is not necessary to have any prior technical knowledge to create an NFT on the specialized platforms. An NFT is a unique, special form of token.

An NFT is given an identification number during minting. As well as providing it with information about the work, such as a short description, its design information, ownership information, and transaction history, the software also provides metadata like its location or hash value. 

In what way do NFTs help?

  • Ownership: Until now, digital files could be reproduced indefinitely and interchanged. ERC-721 is the first standard that combines digital and original. NFTs are scarce because they cannot be duplicated and can be printed in only a limited number of copies by the minter.
  • Market: It is also possible to trade a good once ownership is secured. Previously, there were no markets for goods traded through NFTs. In the future, licensing could potentially cut out middlemen from the economic cycle in-licensing and perhaps one day in real estate and mortgages.
  • Copyrights: It is now possible for authors to receive a certain percentage of resale proceeds without having to share the proceeds with record companies.

The main risks associated with purchasing or creating NFTs

  • Preliminary clarifications are not required. It would be ideal if the artist minted his work himself, or if he had legally acquired the rights to mint it. Unfortunately, this might not always be feasible.
  • Link problems. URL locators allow NFTs to find data anywhere on the Internet. The NFT’s link leads nowhere if the website has problems. There is no centralized control over IPFS, which is a decentralized network for storing files. An IPFS address can be assigned to any file within the IPFS network.
  • Wallet. An NFT can currently only be created or traded on specialized platforms. A platform may cease to exist or be closed if, for some reason, it is no longer operational. To buy and sell an NFT, like any other type of token, you will need a wallet. You need to check if your wallet accepts NFTs before purchasing.
  • Confusing copyright rules. When an NFT is acquired, copyrights to the underlying work are not automatically transferred. A license right is only granted for private use, which can be used for personal and non-commercial purposes. A certain amount of revenue is usually allowed per year for commercial use, but sometimes it may be restricted. Thanks to NFTs, the Swiss go-it-alone approach will be a thing of the past. This will also result in Swiss artists being able to enforce their licensing rights. Similarly, EU laws already recognize unbridled royalties on second-hand sales. Royalties cannot depend on the platform on which an NFT is sold.
  • Terms and Conditions. NFT platforms vary in their rulings regarding licensing rights to material linked to the NFT, some of which state the rights are solely the creators. For example, despite providing free personal licenses to its buyers, the terms and conditions of Bored Ape Yacht Club do not mention or indicate any license fees in their commercial licenses.

Conclusion

We expect that NFTs will become established in a wide range of economic sectors as a result of their many possible applications. NFTs can be applied in an almost infinite number of applications, and the technology is constantly evolving. It is wise for minters and developers of NFT- projects to find out in advance how the Swiss regulations apply to them.

Swiss Substantive Law: A Viable Choice for International Contracts

The Swiss legal system is highly stable. As an example, both The Civil Code and the Code of Obligations came into effect in 1912 and have remained unchanged since then. A modernization is generally known years in advance, and amendments are not retroactive.

Statues in Switzerland are intentionally written in plain language, unlike those in some other countries. Aside from European law, there are fewer special laws, so it is less likely to get lost in a maze of parallel statutory rules. Lastly, the courts in each part of the country are unbiased and professional, ensuring equal treatment and application of the law. Furthermore, a consistent application of statutes throughout the country is ensured by the Federal Supreme Court.

Swiss law is also known for its flexibility. As a result, there are relatively few statutory provisions – for example, in employment law or lease law – that are compulsory. As a result of this reality and the solid general principles of Swiss private law, Swiss law has been able to remain up-to-date and respond flexibly and predictably to changes in the economy and in international trade.

In addition, there is little danger of contractual gaps leading to the invalidity of entire contracts under Swiss law. Any gaps that may exist in a contract can and will be filled by reference to general principles and non-compulsory statutory law, as long as both parties agree on all the essential elements of the contract (in essence, performance, and counter-performance). This has several benefits, including the fact that even complex and high-volume contracts can be reduced to a handful of pages in principle, which dramatically reduces the time and cost of contractual negotiations.

Swiss law should not be applied randomly in contractual negotiations despite all these advantages. Involving Swiss counsel early on in the contract negotiation process is essential to ensuring predictability of choice of law and forum clauses. Having a single source of legal advice also streamlines things when they may get contentious.

Capital Band under Swiss law

As part of the “Major Company Law Revision” Swiss limited companies, as well as corporations, have the opportunity to introduce a so-called capital band into their articles of association (art. 653s-653v CO).  

So what are the possibilities the new capital band will bring to the table?

The capital band gives authority to the Board of Directors of a limited company to gather for a general meeting in order to pass a decision to raise or decrease the ordinary capital share registered in the commercial register. This can be done for a period of five years at most, within a bandwidth of up to 50% (meaning the capital share could be raised up to 150% or decreased down to 50% from the initial amount).

Conditions and limitations of the capital band

In order to pass a decision at a Board of Directors’ general meeting about the capital band, a qualified majority is required, pursuant to article 704 paragraph 1 no. 5 of the Swiss Code of Obligations (A resolution by the general meeting requires at least two-thirds of the voting rights represented and an absolute majority of the nominal value of shares).

In all cases, the Board of Directors cannot decrease the capital share below CHF 100,000, which is the legal minimum for Ltd.

Also, the raise or decrease of capital share is allowed for a period of a maximum of five years.

If a company’s article of association provides a capital band with the option to decrease the capital share, such a company is obliged to have its annual financial statements audited on a limited basis. It is no longer possible to waiver the limited audit for purposes of creditor protection. Companies with capital bands that only allow the Board of Directors to increase the share capital, still have the right to waiver the limited audit.

Rules for combining the capital band with existing capitals

The existing share capital retains validity until expiration but can’t coexist with the capital band. However, when a capital band is in place, the existing authorized share capital has to be revoked.

Conditional share capital is a different situation. When a capital band is introduced, two options are possible, it can remain valid together with the capital band, or become an integral part of it.

In cases where the general meeting passes an ordinary increase or decrease of the capital share, or the currency of the capital share is changed for the period of the capital band’s existence, then the article of association has to be amended accordingly.

Taxation of the capital band

The tax assessment of the capital band (especially with respect to stamp duty and the repayment of capital contributions reserves) is only carried out at the end of its term after a net assessment of any increases and reductions.

A new requirement for the notes to the annual financial statements is that all capital increases and decreases made by the board of directors within the capital band should be included unless this information can already be derived from the balance sheet or income statement (article 959c paragraph 2 no. 14 Swiss Code of Obligations).

Overview of the Insurance Business in Switzerland

Foreign investors can find an attractive business environment in Switzerland. The government encourages foreign investment through economic policies and laws such as comparably lower taxes and an extensive network of trade treaties to circumvent double tax schemes with European nations and other countries globally.

Switzerland has easy access to the European market through its dynamic innovation, political and monetary stability, and central position in Europe. Switzerland has clear and straightforward regulations with a friendly regulatory and tax environment.

Swiss companies hold a dominant position in the services field, especially in private banking and insurance. Insurance is a complete and profitable market in Switzerland. The Swiss insurance system is robust, allowing for a range of products and prices. 21% of the average Swiss citizen’s budget goes to insurance- a higher percentage than in other countries.

Most noteworthy is that Swiss insurance companies make more than half their income abroad. Switzerland is the leading European exporter of insurance.

Types of Insurance Legally Required in Switzerland

Health Insurance

It is mandatory to sign health insurance (unless you are an international official, diplomat, or family member). 90% of basic medical services and hospital expenses are covered by mandatory medical insurance. Visitors spending longer than 3 months in Switzerland must arrange health insurance within their first 90 days.

There are also circumstances in which someone not living in Switzerland must get Swiss insurance. Included in this are EU and EFTA citizens who benefit exclusively from a pension in Switzerland and live in the EU, Iceland, or Norway (this applies to family members who are unemployed as well). This also applies to Swiss citizens living in Iceland, Norway, or the European Community.

Travel Insurance

Travel insurance can be basic (including illness, accidents, or sports injuries) to extensive (including loss, theft, luggage damage, abroad departure cancellation, and airline bankruptcy).

Switzerland is also part of the European health insurance equivalence program. This means if you are on a temporary journey to a member country, you get urgent treatment as if you were a local.

Life Insurance

Life insurances cover disability and death risks and can stand in as a provision for old age. There is a difference between individual insurance and collective insurance. The former is a private pension, while the latter is an occupational pension. Employers or pension funds will often provide it as a benefit.

Home Insurance

Building and fire insurance is the building owner’s responsibility and is compulsory.

Personal property insurance includes insurance against fire, flood, and other major disasters. The insured amount depends on people living together and the number of rooms. Each insurance company has its own recommendations dependent on these criteria.

Car Insurance

Basic third-party cover insurance covers damage to third parties caused by the insured vehicle. It is mandatory and regulated by law. This covers physical and material damage and loss of income after an injury. It also protects the insured’s legal interests in the event of unmeritorious claims, covering expert and legal fees. There is also the option to add full insurance, comprehensive or semi-comprehensive, to cover damage to the insured car.

Registering an Insurance Company in Switzerland

Steps to registering an insurance company in Switzerland:

  • Choose a trading name for your company
  • Choose a business structure to represent this company
  • Open a bank account and deposit a minimum capital
  • Notarize documents for setting up the company
  • Submit documents for setting up the company to the Commercial Registry
  • Register company with relevant tax authorities

Insurance is Booming in Switzerland

Switzerland has a rich and vibrant insurance business. This business is far-reaching and conducive to growth on a global scale.

FINMA and Swiss Regulation on Cryptocurrency

Presently, Switzerland is a hub of a thousand crypto businesses, thanks to its progressive crypto laws. Also, the Bank of International Settlements (BIS) has its seat in Basel. 

The Swiss Financial Market Supervisory Authority, also called FINMA, regulates Switzerland’s financial markets and service providers. Based in Bern, Switzerland, it is an independent institution with control over banks, insurance companies, stock exchanges, securities dealers, and collective investment schemes. It is responsible for preventing money laundering and for resolving financial problems when necessary.

In addition to the licensing and monitoring of the supervised institutions, FINMA ensures that they comply with all the requirements of the laws, ordinances, directives, and regulations, as well as with the conditions for granting licenses that must be met at all times.

An application for a license from FINMA is required if a VASP (Virtual Asset Service Provider) wishes to operate in Switzerland.

Exchanges of cryptocurrencies are legal in Switzerland, provided they are licensed and regulated by FINMA. In Switzerland, exchanges (or, more generally, VASPs, or Virtual Asset Service Providers) are legal and regulated.

Exchanges must conduct Enhanced Due Diligence regarding AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism).

FINMA granted cryptocurrency trading and custody licenses to two financial institutions (FIs) in 2019. By doing so, these banks can maintain business customer accounts and support the wider blockchain economy infrastructure.

Financial Institutions, exchange-traded funds (ETFs), and other financial products and services are incorporating crypto assets into their portfolios and adopting distributed ledger technology. Following Switzerland’s Blockchain Act, two more Financial Institutions were granted licenses in 2020 as a result.

Swiss ICO regulations

Swiss crypto laws are strict when it comes to ICOs. Switzerland is a hot spot for ICOs (Initial Coin Offerings). Its wealth concentration, its connection to financial markets, and other factors contribute to its popularity.

Swiss regulator FINMA adopts the ‘same business, same rules’ approach to ICOs, meaning that new technologies are not treated differently if they perform the same function. As a regulatory body, FINMA believes ICOs can be regulated under existing financial securities laws, however, it has provided insight with its “ICO Guidelines.” 

ICOs are governed by legislation relating to money laundering, terrorism financing, securities trading, and CISP law.

Swiss Crypto Tax regulation

In 2020, the canton of Zug passed a law that allowed the residents of the canton to pay their taxes in crypto up to CHF 100,000.

Additionally, the Swiss Federal Tax Administration recognizes Bitcoin, Ethereum, and other popular cryptocurrencies as assets. This means that any profit made out of crypto is subject to taxation and therefore must be declared.

The Swiss Blockchain Act

The Swiss Parliament passed the Blockchain Act in 2020, as a set of amended laws. It will bring the creation of tokenized capital shares, art, and other assets that are traded via blockchain platforms. However, It is important to note, that the Blockchain Act does not involve the Central Bank’s digital currency.

Things You Need to Know About Buying a Listed Property

When you buy a listed building, you are taking on its preservation responsibilities. Buyers should be aware of the possibility of later remodeling or refurbishment work. Discover what historic building owners need to know.

Buildings from bygone eras serve as memorials to historical events, artistic achievements, or social and technological achievements. The cantons in Switzerland have the discretion to record these buildings on inventory lists and to place them under monument protection. Depending on the monument, the canton determines how much protection is needed and assesses or encourages structural measures.

Renovations must take monument preservation into account

If a building is to maintain its historical character, renovations must be approved by the cantonal monument preservation office. To find out if a property is subject to monument protection, speak to the vendor or municipality before purchase.

Protection levels

The Monument Preservation Office or municipal administration of each canton maintains a list of building inventory in each municipality. Renovating property owners can submit evidence in support of the inclusion of their building in the building inventory.

Buildings at least 30 years old can be considered for protection or preservation in the building inventory. Generally, all cantonal properties deserve protection. A “listed” building refers to one that has been entered into the land register by contract or by a resolution of a cantonal council. All renovation work on these buildings must also be notified to the cantonal monument preservation office.

Conditions imposed by the cantonal monument preservation office can be difficult to predict. Any modification of the building’s structure can be prohibited by the office, for example. A specialist office might not permit the inside walls to be painted if the facade is protected.

Renovation planning

  • As part of your planning process, contact the cantonal monument preservation office. Consultations are free and will give you an idea of which modifications are compatible with monument protection, and which are unlikely to be approved. Financial support is also available.
  • Talk to an architect who has experience with monument preservation. He will prepare the documents for filing the building application.
  • Upon submitting the building application to your municipality, it will be examined and forwarded to the cantonal monument preservation office for review.
  • Work on the renovation project can begin once the building permit is granted.
  • Afterward, the municipality approves the construction project.

Specialists should estimate renovation costs

When restoring hardwood floors in a historical building, costs can exceed expectations. It is advisable to choose a financing solution that offers flexible repayment rates since it is difficult to predict the progress of a renovation. In some cases, an insulation layer should be placed under the floorboards, which means that the floorboards should be removed and reinstalled correctly.

Listed building owners are eligible for subsidies

In addition to preserving value, subsidies apply to the improvement of that value. Unless you receive a monument preservation subsidy, work done to preserve the value of the property is tax-deductible. If you are interested in financial assistance, you must contact the cantonal specialist office.

History can be a fascinating experience, but not everyone enjoys living in a historical building

Making compromises is part of living in a historical building. A complete conversion cannot be accomplished legally if you are interested in the property. But think about it: Would you fit the latest gadgets into a vintage car, or would you restore it to its original condition and take great care of it?

How to Buy a Home Together? Joint Mortgages and Home Ownership in Switzerland

For many married couples, purchasing a home is a very significant topic. When applying for a mortgage, what should you keep in mind? Can you cohabit? Here are some suggestions for married couples purchasing a home.

Calculation of the affordability of buying a home

Generally, mortgage lenders do not make a distinction between married and unmarried borrowers. Especially in the cases of newlywed couples, the affordability of the wedding is an imperative consideration. If one of the partners will receive a lower or no salary shortly due to family planning, the mortgage framework could be lowered.

A retired couple may also face affordability issues. As a result, spouses receive a pension that is only 150 percent of the pension that a single person would receive. In other words, pension income is usually insufficient to support. The “marriage penalty” has a negative effect in the affordability calculation. The tax burden on two gainfully employed individuals after getting married is often higher than when they lived together as single people.

Mortgage obligations are shared by married couples

In most cases, married couples need to sign their mortgage contract together. Hence, each spouse is responsible for paying mortgage interest and amortization costs with assets and income. The property is usually financed by both partners, but this is not unusual. The reason for this is that real estate is currently very expensive.

Make sure the property type you choose is suitable

Couples buying real estate can choose from the following forms of ownership:

  • Sole ownership: A single party owns the property
  • Common ownership: Both parties own the property
  • Joint ownership: Each party owns the property based on the amount they contributed financially

How does a divorce affect the mortgage?

The mortgage can be continued in the event of separation in several ways.

  • Selling the property or terminating the mortgage: Mortgages can be terminated before the end of their contractual terms. Banks are entitled to compensation in this case, called early repayment penalties. The amount of compensation will vary depending on how long the remaining term is.
  • Continuing as-is: Despite only living on one side of the property, the mortgage remains in its original form.
  • One of the partners takes over the mortgage: The sole owner of the property can be one of the partners if one can afford the mortgage alone. The bank must, however, make a positive credit decision to make this possible.
  • Mortgage transfer to a new property:  A new property can be acquired after the first property is sold. If the first property has a loan, it can be transferred to the second property.  

Be careful when choosing joint mortgages

To find the most suitable mortgage, you need to conduct extensive research. Mortgages are usually long-term investments. The most effective approach is to look at various mortgage models and interest-rate scenarios, weighing all their advantages and disadvantages. By doing so, you will be able to determine what’s most relevant to you in a mortgage.

New Swiss Company Law: Capital Loss, Insolvency, and Over-Indebtedness

The new Swiss Company Law is coming into force on January the 1st 2023, and it will bring several novelties regarding capital loss, insolvency, and over-indebtedness.

  • Monitoring the solvency

Monitoring the solvency is mandatory. Companies need to monitor both, the liquidity, as well as the balance sheet regarding a possible loss of capital. The board of directors must act if their company is at risk of going bankrupt. Further measures must be taken if necessary to restructure the company, or such measures must be proposed to the general meeting of shareholders if they are within their jurisdiction. 

Monitoring the liquidity continuously is important. The draft of the law, though, specifies that a liquidity plan is not required. Liquidity is not mandated to be monitored or analyzed beyond a specific timeframe in the law. There was a suggestion that a company should undergo an ordinary audit every six months or every twelve months in the case of companies that are required by law to do so. The suggested time interval should nevertheless serve as a guideline.

  • Audits on the preliminary financial statements

When a company has a capital deficit, a licensed auditor must conduct a limited audit of the last annual financial statements before the annual general meeting of shareholders approving them if there are no elected auditors in place. A board of directors needs to make sure the economic situation does not worsen than what has been presented to them. They must appoint a licensed auditor. The board of directors may waive this auditing requirement if it applies for a debt-restructuring moratorium. 

The board of directors must as before, immediately prepare preliminary financial statements at going concern values and liquidation values if there is reasonable concern that the company’s liabilities are not covered by its assets, that is if the company is over-indebted. In practice, the interim financial statements at liquidation values can be waived as long as the ongoing concern assumption is made. In addition, the consolidated financial statements carrying concerned values do not show any overindebtedness. 

A licensed auditor must be appointed by the board of directors to audit the interim financial statements unless the board elects auditors to do so.

  • Bankruptcy

The board of directors must inform the court, which will initiate bankruptcy proceedings if the company is over-indebted according to both interim financial statements.

There is no requirement for the court to be notified if creditors defer or subordinate their claims (including interest claims) to the extent of overindebtedness.

In connection with the bankruptcy process, it is now explicitly stated that the claims of creditors whose claims have been subordinated behind all other creditors are not to be included in the calculations of the company’s losses. By amending this provision, the Federal Supreme Court intends to correct its case law, which suggests that a bankrupt company’s board is responsible for subordinated claims. 

The court notification may also be omitted in cases where there is a realistic prospect that the over-indebtedness can be repaid within a reasonable time, but no later than 90 days after the audited interim financial statements are available, and if there is no additional jeopardy to the claims of the creditors. In practice, the matter of notifying the court of bankruptcy is frequently raised, and this clarification is very welcome.

Coming into Force on January 1st – What Will the New Swiss Company Law Bring?

Basically, the company law must be adapted to the current economic climate. A number of provisions found to be impracticable under the current law will be amended or repealed, as well as shareholder and minority rights.

What will be the most important changes? 

·               Capital regulations will be more flexible

The share capital can be denominated in the following currencies: USD, EUR, GBP, or JPY if it is essential for the business activities of the company in that currency. It is acceptable for a share to have a nominal value less than 1 cent as long as it is greater than zero. In place of the authorized capital increase, the board of directors can increase or decrease the share capital within a range using a statutory instrument called the capital band, which is valid for a maximum of five years.   

·               Simplified general meeting process

The general meeting will be able to be held virtually or abroad. During the Corona pandemic, the COVID 19 Ordinance 2 introduced the possibility of holding virtual general meetings, while COVID 19 Ordinance 3 extended it until the new company law entered into force. Under the new company law, if a virtual general meeting is to remain possible, however, a statutory basis must be established and, in principle, an independent representative must be elected.

 The Board of Directors may also vote electronically. Moreover, the list of resolutions that require a qualified majority by law for approval at a general meeting will be extended.    

·               New rules for treating insolvency and over-indebtedness

The law specifically requires the board of directors to monitor solvency and initiate restructuring measures in the event of imminent insolvency. If a company is over-indebted or has a corresponding concern, the board of directors must act. Now, it is clear under which circumstances the bankruptcy court notification can be omitted when the company is over-indebted. 

Amending the Articles of Association 

If the Federal Council has approved the proposed revision to the Commercial Register Ordinance, the articles of association can be amended in advance with the commercial register office. There must, however, be a clear statement in the articles of association that the new provisions will only apply when the new company law takes effect.

All other amendments required to comply with the revised constitution can also be passed this year, however, it can only be registered with the commercial register office once the revised constitution has taken effect. This amendment to the articles of association must be passed by the general meeting under the condition precedent that the new company law will enter into force. The amendment to articles of association can be registered with the commercial register office as soon as the new company law becomes effective. 

Nevertheless, there is no requirement to amend the articles of association before the new company law enters into force. A period of two years will be given to companies to amend any provision of their articles of association that isn’t consistent with the new law.

Swiss Bookkeeping Regulations

It is mandatory for all legal entities-partnerships and corporations alike to keep books. Nevertheless, this principle is not without exceptions and special cases.

As of January 2015, every legal entity and sole proprietor in Switzerland is obliged to keep accounts, even the ones that are not registered. Sole proprietors who generate more than CHF 100,000 annual turnover are obliged to get registered in the commercial register. However, the ones that generate less than CHF 100,000 annual turnover are not released from the obligation to maintain records and accounts. 

Simplified bookkeeping 

Partnerships and sole proprietors who generate less than CHF 500,000 annual turnover are allowed to do simplified bookkeeping. This also includes those associations and foundations that are not required to register in the commercial register. Simplified bookkeeping means that the proprietor has to keep track of records of income and expenses in a way that makes it easy to read the net worth.

Types of companies who must do bookkeeping pursuant to the Swiss Code of Obligations 

These are the types of companies that are obliged to keep in compliance with the rules of the Swiss Code of Obligations: 

  • Legal entities (GmbH, limited partnerships, associations, AG, and foundations);
  • Partnerships and sole proprietors that generate more than CHF 500,000 annual turnover;
  • Partnerships and sole proprietors that generate less than CHF 500,000 annual turnover – as previously mentioned, these proprietors have to maintain a simplified bookkeeping system. 

In order to maintain accounts, it is necessary to prepare an inventory, a comprehensive balance sheet, and a profit and loss account with the necessary supporting documents.

It is mandatory for companies to keep bookkeeping records and reports for a minimum of ten years, and special provisions apply to documents stored electronically.

Closing the financial year 

A financial year in most laws, including in Swiss law, lasts from the 1st of January to the 31st of December. Sometimes, companies and proprietors are allowed to select different dates. 

Newfound companies are allowed two options on how to end the financial year. One is to go for a short year ending, which means if the company was established on the 01st of July, the annual accounting closes on the 31st of December the same year. Another option is the long year-end which means that the company can choose to close the financial year at the end of next year. This means that the first financial year can last up to 18 months. However, the rules may vary in different canton laws. 

Taking into account that the first financial year brings many expenses, most newfound companies and proprietors opt for the long year-end. This way, the high expenses that come with starting a company can be offset against the profits that will accumulate later on.