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EXPLAINED: The legal steps for starting a business in Germany

Aaron Burnett
Aaron Burnett - [email protected]
EXPLAINED: The legal steps for starting a business in Germany
When setting up a company in Germany - you need to think about which company type is best for you. Photo: Dylan Gillis, Unsplash

Whether it's a small start-up or a much bigger venture, there's obviously legal steps to bear in mind when starting up a for-profit business in Germany.

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Starting up a for-profit company in Germany follows different procedures than either forming a non-profit foundation (a Verein) or registering as self-employed.

If you need to register as a corporation, the first step is to figure out which of two general company types your venture would fall into in Germany. The first is a Gesellschaft mit beschränkter Haftung (GmbH), which is a limited liability company. This is by far the most common option. Another is an Aktiengesellschaft (AG) - or a joint stock company or corporation. While these two tend to be the most common, there are a few others as well.

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Setting up a GmbH

A GmbH is very common in Germany - and under it shareholders in the company aren't personally responsible for the firms debts. You can set up a GmbH with only one person or shareholder. If you have more than one, you'll need to draw up a notarised agreement between them.

A GmbH must also appoint at least one Managing Director (Geschäftsführer). The Managing Director is allowed to have shares in the company and is entitled to represent the company legally, whereas other board members are ordinarily not able to.

Shares in a GmbH are ordinarily only represented in notarised documents. There are no certificates which confirm that you have shares and those shares cannot be listed on stock exchanges. Shares, however, can be transferred through notarised documents.

The minimum start-up capital needed to form a GmbH in Germany is €25,000. If founders don't have this, they can start up as an Unternehmergesellschaft - or entrepreneurial company - for €1. However, these are considered as vehicles to get to the financial capital of a GmbH. As such, UG's are expected to set aside at least 25 percent of any annual surplus as savings. Once they hit the €25,000 mark, they need to change to a GmbH.

A GmbH is generally the most common type of corporation in Germany because the capital and administrative requirements tend to be less onerous - making it suited for small enterprises, for example. As soon as a GmbH enters the Commercial Register (Handelsregister), it legally exists as a company.

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Grounding an AG

A German AG is a company at a different level - and tends to be more for mid-sized to larger-sized business ventures.

In contrast to a GmbH - which needs only one member - an AG needs to have a minimum of five members.

The capital requirements are also twice as much as for setting up a GmbH. You'll need €50,000 for an AG. These shares can be listed on stock exchanges - although they don't have to be.

Choosing which legal model of company for your business in Germany depends on its size, your available capital - and how much liability you're comfortable with. Photo: Getty Images

You'll need articles of association, authenticated by a notary, to set one up too. As with a GmbH, an AG legally exists when it enters the commercial register.

An AG must also have a managing board (Vorstand). Members are officers of the company and make its day-to-day decisions. They do, however, answer to a supervisory board (Aufsichtsrat). They must also hold general meetings (Hauptversammlungen) to allow for shareholders to exercise control over overall policy.

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Other types of German companies

In general, GmbH and AG companies are the most common ones you're going to see in Germany. But other - mostly more complex models - exist.

These include an Offene Handelsgesellschaft (OHG), or General Partnership. This would often be for a company of two partners who had each contributed half the capital. They would share in half the profits but also each be liable for the firm's debts - to an unlimited amount. You may find that certain family-run businesses use this model. The risk here is that the partners would be personally liable - down to their own assets - for the firms debts.

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A variation of this is a Kommanditgesellschaft (KG) - or a limited partnership. This happens when one partner is entirely liable for the firms debts - down to their personal assets, while the other one is not. The limited liability partner would still be liable for the firm's debts up to and including the amount they had invested in the company itself though. This model might be common for family-owned businesses that bring in outside experts to run day-to-day administration - for example.

Another complex arrangement is a combination of a GmbH and a KG - to a GmbH & Co. KG. Essentially this joins a GmbH and a KG together in a partnership agreement. While very complex and not often used, this kind of partnership may serve as a way to limit the recourse a company creditor has to go after a company member's personal assets - with more liabilities tied up in the GmbH, which has limited liability.

More complex arrangements are available too for companies that want to have a presence in Germany but their head office might be abroad. These include a subsidiary (Töchtergesellschaft) and Zweigniederlassung - or a branch office. If you're dealing with these kinds of entities, it's recommended you seek tax and compliance advice to confirm which one is necessary. In general though, a subsidiary will manage many of its own affairs apart from its parent company. A branch office is likely to have only a small presence in Germany while the bulk of administrative tasks are handled elsewhere.

Knowing which one is applicable is important as it helps establish whether you need to make an entry in the commercial register or not - and what taxes will have to be paid.

Articles in The Local are not meant to replace professional legal or tax advice. We recommend speaking to an appropriated professional in case of further questions.

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