Starting a business in Germany: the overview you were looking for.

Starting business in Germany

So, you’re flirting with the thought of starting your own business. You’ve got some ideas, plans even, and want to know what the process is to open a company in Germany. Maybe you’ve got some financing options on the table and just need to know how to get things rolling.

Good preparation is key to succeeding with starting a business in Germany. You can’t half-do it here. You should know what type of business you want to create, where it’ll be located, what the market is like, whether you need any permits, and the legal requirements.

You will also need to map out a full business plan and consider your financing options. Go through all the calculations until they are truly realistic. Depending on your goal, you’ll end up taking very different paths, so it’s important to do LOTS of research before launching your new endeavor.

The process to open a company in Germany starts long before you fill in any registration forms at the trade office. While only you and your advisers can figure out your business plan and financing, it’s to look at the requirements and legal structures for company formation in Germany.


Be warned, there’s no way around it – this is going to be some heavy legalese.


The different corporate entities in Germany

PICKING THE RIGHT LEGAL FORM

Company formation in Germany falls under several categories based on the number of founders, available funds, level of liability and business model. Important to know – German corporate law differentiates between the civil code (Bürgerliches Gesetzbuch – BGB) versus the commercial code (Handelsgesetzbuch – HGB). Small and one-person businesses are usually regulated under civil law, while larger commercial enterprises with high turnover are defined as commercial activity and follow commercial law. Also, there is a differentiation between unlimited (unbeschränkt) and limited (beschränkt), the first meaning a partner’s personal funds can be affected (i.e. bankruptcy, legal cases, etc.) and the second meaning that the liability is limited by the initial capital.

A partnership is probably the right legal form if you and at least one other person or entity are creating a company together. Here is a quick overview in this table (adapted from gtai.de), with more details underneath:


Legal/Establishment Form

Minimum Number of Partners

Minimum Share Capital

Legal Liability

Establishing Formalities

Civil Law Partnership (GbR)

Two partners

Not required

Personal unlimited liability

Very low

General Commercial Partnership (oHG)

Two partners

Not required

Personal unlimited liability

Low-moderate

Limited Partnership (KG)

Two partners: general partner and limited partner

Not required

General partner: personal unlimited liability Limited partner: limited share liability

Low-moderate

GmbH & Co. KG


Two partners: general partner (GmbH) and limited partner (the general partner is typically the limited partner of the KG)

Not required


General partner (GmbH): personal unlimited liability Limited partner: limited share liability

Moderate-high
  • Civil law partnership (Gesellschaft bürgerlichen Rechts – GbR) is the simplest form of a partnership and has fewer rules than the rest. As a result, this entity only allows you to conduct small trade business up to a certain level of commercial activity (capital, profit, number of employees, etc.). Once you pass that level you need to “upgrade” to a commercial law partnership, such as those below. Partners equally share full liability for the business and there is no minimum starting capital. There are countless examples of this legal form in use, such as designers, bands, doctors, and handymen.
  • General commercial partnership (OffeneHandelsgesellschaft – oHG) expands upon the GbR framework, but falls under commercial law, meaning that it must be registered in the Handelsregister. All partners are fully liable for debts and liabilities and there is no minimum starting capital. This is a good option if you and a few friends want to sell something at a higher profit than allowed with a GbR without founding a corporation.
  • Partnership companies (Partnerschaftsgesellschaft – PartG) is basically the GbR but for freelancers or small business owners that want to work together at a commercial level while being individually responsible instead of merging together as one company. Examples include doctors, lawyers and accountants. For some professions, it is possible to limit the liability to the partnership’s assets (PartG mbB).
  • Limited partnership (Kommanditgesellschaft or KG) is like the oHG but with at least one limited or silent partner (Kommanditist). The general partner (Komplementär) is personally liable while the limited or silent partners are only liable for their part of the capital. This means investors can become limited partners with less risk to themselves. No minimum level of capital is prescribed, but an amount has to be set in the partnership agreement. It is often used to attract more investors without making them fully liable.

Relevant for most people: the German LLC

A corporation is a better fit for larger, commercial enterprises. Generally, there are different shareholders that each have a stake in the company and work toward its success. The basic legal form is the equivalent of an LLC (Gesellschaftmitbeschränkter Haftung – GmbH) which represents a separate legal entity from its founders. This is the most popular legal form and works well for most industries. The main requirement is €25,000 in starting capital. Alternatively, if you are low on funds you can choose the “mini GmbH” option and form a limited liability entrepreneurial company (Unternehmergesellschaft haftungsbeschränkt – UG), which has a €1 minimum starting capital per founder. But you still need to reach the €25k eventually, because until then you need to set aside ¼ of your profit each year. Good news, once you reach that point you can upgrade to a full GmbH!

Starting a business in Germany with more money and a large group? A stock corporation (Aktiengesellschaft – AG) is another limited liability option if you can raise at least €50,000 in share capital. The company will then represent a legal entity and must have a supervisory board (Aufsichtsrat) as well as management board (Vorstand). You’ll have many more business opportunities as an AG but be ready for piles worth of paperwork.

And there’s more! If you’re interested in forming a non-profit, then you should look into the gUG and gGmbH legal forms, which are the non-profit (gemeinnützliche) versions of the UG and GmbH. There are also hybrid legal structures for company formation in Germany such as the Ein-Person-GmbH and Kommanditgesellschaft auf Aktien (KGaA). If you’re unsure about which legal form fits your business plan best, talk to a business consultant, especially for GmBH and AG forms.

Going solo? there is another guide for that

If it’s just you running the company, you’re probably self-employed (Selbständiger), as a freelancer (Freiberufler) or business owner (Gewerbetreibender), which I explain in-depth here. As a business owner without any partners you are considered a sole proprietor (Einzelunternehmer). This means that you are fully liable for your business activities, have full control over your activities and are funded by your own assets. Sole proprietors usually follow the civil code, with some exceptions.

A registered merchant (eingetragener Kaufmann – e. K.) is someone who want to sell items as a one-person business under the commercial code. This type of company has additional rules, including being on the commercial register, but the owner is still fully liable for the business. None of these legal forms has a minimum capital requirement and generally require less paperwork than other types of company formation in Germany.

How to pick the right option?

There is an excellent overview of the most important criteria for selection made by the Ministry of Economy. Find it hereafter


How to register a business in Germany

DOWN TO FORMALITIES

This is where the country gets its reputation for being overly bureaucratic. To open a company in Germany, you’ll need to fill out form after form and visit various government institutions as well as banks, notaries, and probably legal or financial professionals. Freelancers and small business owners have to follow less steps, as explained here.

1. Pick a company name

The regulations start with what type of name you can give babies – both human and corporate ones. The rules are pretty straightforward though. Small businesses that aren’t in the commercial register must include the owner’s first and last name in the official business name (Unternehmensbezeichnung) but can be a bit more creative with the trade name (Geschäftsbezeichnungen). A registered merchant on the other hand doesn’t need to include their own name, but still needs to pick a distinctive, descriptive name. The reason has to do with the differences between commercial and civil codes.

For other types of companies, you’re free to make up a business name as long as you include the legal form. The only conditions are that the name must be unique, in the sense that customers can identify your business through the name, and it should not lead to confusion about the nature of your business. For example, “Berlin Lawyers GmbH” and “Finance Institute AG” will likely not be allowed because they’re too general and potentially confusing to customers.

Once you have a name that works well, you can check with the commercial register (Handelsregister) if the name you have chosen is already in use and with the local court (Amtsgericht) as to whether you’ve fulfilled all the naming requirements. If you and more than one person is forming a company, you should also sit down with everyone involved to outline the company objective (Unternehmensgegenstand). The Chamber of Industry and Commerce (Industrie- und Handelskammer, IHK) offers a free check of your company name and objective, so take advantage of this service!

Worried someone might copy your name or brand? Talk to the German Patent and Trade Mark Office (DPMA) about protecting your intellectual property.

2. Visit a notary

An important step for starting a business in Germany is drawing up the articles of association (Gesellschaftsvertrag). This outlines the type of business, founding members, startup costs, any shareholders, how profits are distributed, and more. In some cases, you’ll need to have these articles of association notarized. They’ll confirm that everything, especially the financials, are in order and register you with the commercial registry (Handelsregister). This step is required for all commercial businesses meaning that freelancers and small businesses under civil code (such as the GbR) are exempt. Registration costs differ by type of legal form due to the different requirements, but expect to pay between €150 and €500, in addition to notary fees.

You can find a notary that speaks your language here.

3. Go to the trade office (Gewerbeamt)

This is where you apply for a trade license (Gewerbeschein) by presenting a thorough description of your company, as well as necessary permits. It’s required for all types of business except sole proprietors that are Freiberuflich, who can skip right to the Finanzamt step.

You may need special permits if you’re a liberal professional (doctor, chemist, architect, engineer, etc.), which you can find out from your respective chamber for liberal professions (such as the Architektenkammer or Steuerberaterkammer). For craftsmen (carpenter, glassblower, etc.), look into the master craftman’s certificate (Meisterbrief) from the Chamber for Skilled Crafts (Handwerkskammer – HWK). Also, if your business requires good hygiene (food services, working with minors) you may need a health certificate from the Public Health Office (Gesundheitsamt). If you’re unsure whether you’ll need a permit, speak directly with the IHK.

Regardless of your legal form, you need to bring the following to register a business in Germany:

  • Valid ID card or passport and visa for each founder
  • Meldebescheinigung (confirmation of address registration/residence) for each founder
  • Gewerbe-Anmeldung (business registration form) for your municipality
  • Registration fee between €10 and €40
  • Any mandatory permits or certifications (such as a craftsman license)
  • Police clearance (Führungszeugnis) if required
  • (Notarized) articles of association for corporations and partnerships

Don’t speak much German yet? In some states, such as Berlin and Hessen, you can fill out the necessary forms in English.

4. Register with the Finanzamt

Lastly, to register a business in Germany, you need to visit the local finance office (Finanzamt) with the filled out the tax questionnaire (Fragebogen zur steuerliche Erfassung). Corporations and partnerships will need to show copies of the articles of association, trade license, and entry in the commercial registry. Once everything is checked through, the Finanzamt will either ask for additional documents or provide you with a business tax-ID (Steuernummer) and a VAT ID number (Umsatzsteuernummer – Ust.-IdNr.) if you requested one.

Once you receive the VAT ID number in the mail – open the champagne! You can now finally start invoicing.



Starting a business in Germany: taxes, hiring, insurances, banking

GETTING THE BASICS RIGHT

You can’t open a company in Germany unless you understand the tax system. It will affect your profits and bookkeeping, regardless of business size. In addition to the taxes that you as an individual need to pay on your income, you should also learn about the value-added tax, corporation tax, and trade tax systems. Freelancers and small businesses are freed from some of these, so make sure to do your research.

The first step is setting up your accounts, preferably with the help of a licensed accountant or bookkeeper. You’ll need to establish an opening balance sheet (Eröffnungsbilanz) and at the end of the year a report of accounts (Jahresabschluss). Many of the things and services that you purchase for your business can be deducted from various taxes, including bookkeeping software, tax consultant, software, hardware, office supplies and furniture, tools for doing your work, etc. During the year, you should receive a statement from your accountant of your current business financials (Betriebswirtschaftliche Auswertung – BWA), from which you can also calculate your tax rates.

VAT

In Germany, most invoices require a 19% or 7% value-added tax (VAT), which is either called Mehrwertsteuer (MwSt.) or Umsatzsteuer (Ust.). When you pay this tax on goods and services you have purchased, it is called an input tax (Vorsteuer). You can deduct the input tax you pay as a business from the VAT you charge customers through the VAT return process (Umsatzsteuer-Voranmeldung). When you register, you choose between Soll- and Ist-Versteuerung. The first means you pay the VAT on invoices once you send them to customers and the second means you pay the VAT only once the customer actually pays the invoice. If you’re doing business across Europe, make sure you look into the VAT reverse charge and VAT recovery, two regulations for business across different EU countries. NOTE – as a freelancer or small business owner you can be exempt from the VAT if in your first year your profits were less than €17.500 and the following year they were under €50.000 (Kleinunternehmerregelung).

Income tax

If you are a sole proprietor or part of a partnership, you’ll be charged an income tax (Einkommensteuer) on your company profit. For small businesses, your income can be calculated based on an Einnahmenüberschussrechnung (EÜR), a simplified revenue and expenditure statement. For most other legal forms, you might be paying yourself a salary or earning income from shares, dividends, sales, etc. Regardless, you must report your income to the Finanzamt.

Corporation tax

As a corporation, you’ll be paying the corporation tax (Körperschaftsteuer) on your global taxable income. You may also need to pay a 25% withholding tax (Kapitalertragssteuer) on dividend payments if you have a parent company and a 25% final withholding tax (Abgeltungssteuer) on profits distributed to private shareholders.

Trade tax

The trade tax (Gewerbesteuer) is applied by the municipality to all commercial businesses (not civil) and varies between 7% and 17% depending on the local rate. Partnerships can offset this tax against the personal income tax, but still need to pay the full trade tax to the municipality.

If you want to open a company in Germany properly, get your books in order from the start and don’t put off finding a good accountant!


Requirements for hiring employees

Honestly, this is a whole article on its own, much like the legal and tax sections above. I’ll keep it short and sweet.

If you want to hire staff to work for you, register with the Federal Employment Agency (Bundesagentur für Arbeit) to receive an 8-digit company number (Betriebsnummer) for payroll (Lohnabrechnung). For each employee, you’ll be required to draw up an employment contract and pay your part for social security, health insurance, nurse care insurance and unemployment insurance. You will also need to calculate and withhold the income tax (Lohnsteuer) for your employee based on their tax class, in addition to the church tax and solidarity surcharge tax (Solidaritätszuschlag).

Make sure you understand the laws around work hours, sick pay, maternity leave, vacation and union representation – all covered in depth here.


Company formation in Germany for foreigners

You don’t need to be a German citizen to open a company in Germany, but you’ll need the correct visa or residency permit. If you only need time to set everything up with your German business partner, consider the 90-day Schengen visa for non-EU nationals. If you want to live and work in Germany, you’ll need a visa allowing self-employment (Aufenthaltserlaubnis für selbständige Tätigkeit) or full residency permit (Niederlassungserlaubnis).

You may need to provide additional paperwork when starting a business in Germany and must be present for the notary appointment. If that is not possible for foreign investors, you can look into legalization options. There may also be some difficulties registering for a business bank account as a non-EU national.

Ok, that sounded rather depressing. But the truth is, Germany wants foreign investors and companies if they’ll bring new jobs and money into the country. Look into the incentive programs and migrant entrepreneurship assistance. Also, you can set up a virtual office office through a lawyer if you prefer working remotely but want to have a nice business address – separate article to follow!


About insurances

Well, you’ve made it this far. Congratulations! You’re definitely hartnäckig, a great German word for stubborn. Oh, and you’re brave. How do I know that? Well you’re taking a risk by starting a business in Germany and being your own boss. But you don’t have to take on TOO many risks if you sign up for a few key insurances.

For self-employed people

  • Health insurance (Krankenversicherung) and nurse care (Pflegeversicherung) – choose between private or public
  • Pension insurance (Rentenversicherung) – choose between private or public
  • Daily sickness allowance (Krankentagegeld) – covers sick days, where you might otherwise lose income
  • Occupational disability insurance (Berufsunfähigkeitsrente) – basic income in case you’re unable to work anymore

For businesses

  • Corporate liability insurance (Betriebs-Haftpflichtversicherung) – covers potential mistakes of your employees, problems with suppliers, etc.
  • Professional liability insurance (Berufs-Haftpflichtversicherung) – this is important for freelancers and consultants, covers mistakes or bad advice with financial consequences
  • Business interruption insurance (Betriebs-Unterbrechungsversicherung) – covers wages, expenses and running costs in times without business income
  • Occupational accident insurance (Berufsgenossenschaft) – covers accidents in and around the office and for employees while working

You can read more about these and other insurances here.


About banking

A separate business bank account (Geschäftskonto) is required for legal forms incorporating capital (GmbH, UG, AG und KGaA). It will be used to process any ingoing (expense) or outgoing (revenue) invoices. That’s where the starting capital is located too. All banks offer a business account but conditions may vary widely. Common costs associated with business bank accounts are the following:

  • Costs for outgoing or ingoing transfers (Einzahlung oder Auszahlungen)
  • Monthly costs (Kontoführungsgebühr)
  • Costs for company credit cards (Kredit Karte Gebühr)
  • Bank transfer costs (Beleglose Buchungen)
  • Cash and check processing costs (Beleghafte Buchungen)

Self-employed people can use a normal bank account.


Helpful resources for starting a business in Germany

For in-depth guides, information, definitions, checklists, calculators, and forms that cover every little part of how to open a company in Germany, look through the following sites:

  • Existenzgründer – especially the key agencies and checklists (German)
  • Make it in Germany
  • Gründer Platform
  • Wir Gründen in Deutschland
  • Für Gründer
  • Federal Employment Agency

Hope this overview helped. Don’t hesitate to ask questions in the comments.

No Comments

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.