Which German legal form is suitable for my business?
Anyone wanting to register or establish a company in Germany will at some point face this question. In this article, we will guide you through the various possbilities and enable you choose the right legal form of your business in just a few steps.
In Germany, as in any other EU country, there are lots of options. Each form meets the needs of certain companies better than those of others. Whether you are launching your startup on your own or doing so with partners has a similar sway on your decision as the size of your company or the level of risk you are willing to take.
Until now, many British entrepreneurs who have moved their business to Berlin have retained their original legal form. This is possible because you can select your head office freely within the EU. With Brexit this could all change: If similar rules are applied to Britain as to non-EU members such as Switzerland, this would mean that the founder cannot apply the British law anymore. Instead, they must choose among German legal forms.
For founders with one or more partners, there are several options:
Gesellschaft mit beschränkter Haftung (GmbH): One of the most common legal forms in Germany. For founding a company of this kind it requires at least one person, whereby the contract determines the shareholders. The contract also describes the position of the managing director, which may be external. After the contract is certified by the notary, the “Limited Liability Company” has to be entered in the commercial register. The advantage with this form is that founders are not liable with their entire private assets, but only with the amount they contributed to the minimum capital. This is at least 25,000 euros, but can also be comprised of non-cash contributions such as machinery. The company pays corporate and trade tax. In the case of a profit distribution to the shareholders, the capital gains tax is added. Because of its entry in the commercial register, it is also obliged to keep double records.
Entrepreneurship (UG): Another popular legal form for start-ups and smaller businesses is the UG. The important difference is the amount of the minimum capital which the founder have to invest at the start. Shareholders do not need to provide 25,000 euros, but can already equip the UG with one euro, whereby assets in kind are excluded. On the contrary, the shareholders do not get the profit in full: at least one quarter of the profit is invested in the share capital. This is done until the UG reaches the minimum capital of the GmbH, which is 25,000 euros. Otherwise the same rules apply as with the GmbH.
Here is how to set up a GmbH or UG:
- Open an account at a bank of your choice. You will need it to present your equity capital to the trade register.
- Register your company with the trade register (“Handelsregister”). This will ensure legal certainty and protect your startup’s name. To register you need the company contract and a notary to certify it. If you need help finding a notary in Berlin, contact the chamber for industry and commerce (“IHK”). The cost for registration varies from 200 to 700 euros.
- Register your company with the trade office (“Gewerbeamt”). For this you need a valid ID or passport and the extract from the trade register. If you are opening a restaurant, selling electronics or else, you need more permissions which you also have to show. The costs at the trade office are between 10 and 40 euros.
- The tax office (list of offices in Berlin) will subsequently provide you with a tax number. If you have employees, you must also apply for a company number there.
- Register your startup at the local Chamber of Industry and Commerce (IHK) or Chamber of Skilled Crafts (HKW).
- Register with the professional association (“Berufsgenossenschaft”).
- If everything has worked out, you can get started within a few days.
Gesellschaft bürgerlichen Recht (GbR): The “association of civil right” is suitable for at least two persons and is often used for doctor’s offices or law firms. The foundation is simple: an entry into the commercial register is not necessary. An oral agreement among the founders is often already sufficient. A minimum capital is also not necessary. In addition, the GbR is tax-favourable since losses can be expensed against the income of the previous year. Entrepreneurs pay the turnover and trade tax as well as the income tax. The problem: in case of loss, the shareholders are also liable with their personal assets, which is why the form is particularly unsuitable for larger transactions.
Here is how to set up a GbR:
- Register your company at the trade office. Generally, all you need is your valid ID or passport. Depending on your business, you need additional authorisations. Presenting the company contract between the founders might also be of advantage, but in general it’s not necessary. Registration costs approximately 20 euros.
- After the registration the tax office will send you a tax number. As with the GmbH or UG, if you have employees, you also need to register them with the tax office.
- Register your company with the Chamber of Industry and Commerce (IHK) or the Chamber of Skilled Crafts (HKW).
- Register with the professional association (“Berufsgenossenschaft”).
- That was it! Now you can get started.
Kommanditgesellschaft (KG): If you want to be able to make all decisions on your business but want to involve partners with capital, too, the KG (“limited partnership”) could be interesting for you. It involves a formal agreement between the parties and must be entered in the German commercial register. As a consequence, the founder must submit the annual profits and losses to the tax office. Furthermore, the contract between the parties regulates the profit and loss distribution. A minimum capital is not required at the time of formation. The KG pays turnover and trade taxes and in the case of profits also an income tax. Should the company go bankrupt or accumulate debt, the limited partners are only liable with their investment while the owner’s liability extends to his private assets.
Offene Handelsgesellschaft (OHG): The Open Trading Company is particularly suitable for merchants. In order to establish an OHG, a formal partnership agreement between the parties and an entry in the commercial register is required. A minimum capital is not necessary, whereby in case of debts or bankruptcy all shareholders are liable with their private assets. At the end of a year, the founders also have to present a profit and loss account. OHG pays a turnover and trade tax; the shareholders pay the income tax.
Small Stock Company (AG): Among small companies, Kleine AG is a rather rare form. It is comparatively complex to realize this: the founders must first determine their statutes in a protocol and, for the sake of form, take over all the shares. Three persons form the Supervisory Board, which controls the activities. In addition, the client has to be certified by the notary and entered in the commercial register. Admittedly, founders do not have their private assets in this form, but they have to make a relatively high minimum capital. This amounts to at least 50,000 euros and can be provided partly by property, plant and equipment. The Small AG is an advantage for all those who want to quickly get to the equity: By selling company shares, founders remain financially flexible.
The Limited (Ltd.): The Anglo-American legal form is also liable in Germany and is most similar to the German GmbH. By setting up a private limited company, it becomes separate from the people who run it. Any profits made by the company can be pocketed after taxes are paid. The corporation's finances must be kept separate from any personal ones in order to avoid confusion.
Here is everything you need to know about setting up a Limited:
- Register your company with the British company register. For this you need a postal address in the UK. The place of business can be chosen within the EU, though. The British government describes on its website how to register. The registration is frequently handled by specialized service providers who require an annual fee of several hundred euros for the registration. To register, you need the Momorandum of Association and the Articles of Association.
- Register a branch with the Berlin Trade Register. The procedure is similar to that of other branches (for example a German company). For further information ask the Chamber of Industry and Commerce.
- Now you can start your business in Berlin. But beware of possible changes in the contract relations between GB and EU due to Brexit. Therefore, it is worth considering to use the German legal form UG from the start.
These are the options for individual founders:
Einzelunternehmen (Individual enterprise): The simplest and most favourable form of self-employment. Founders apply for a tax number and communicate their activities to the tax office. Usually, they do not have to register a trade. The founding process for merchants is somewhat different: They have to report their work to the commercial office and be entered in the commercial register. If freelancers gain more than 17,000 euros in turnover, they not only pay income tax, but also turnover tax. The downside: In the case of debts and mistakes the individuals are liable with their private assets. Therefore, for higher sums, experts advise against it.
One-Person-GmbH: All-founders can also set up a GmbH. As with several people, they need a minimum capital of 25,000 euros. Furthermore, a company agreement is also required for Ein-Personen-GmbHs, which stipulates the managing director. Because of limited liability, the form is attractive to many founders. The associated effort, however, must not be underestimated.
UG (Limited Liability): Similar to the GmbH, but with a crucial difference: the founder does not have to hold 25,000 euros of capital. One euro is sufficient for the start-up. However, the founder must deposit a quarter of the profit into the reserve in order to reach the share capital of 25,000 euros. Liability is assumed by the UG, not the founder personally.
Help along the way
You can always turn to ea.berlin (Point of Single Contact), a Berlin organisation that helps you in solving the most urgent problems by providing you with a service to register 24/7.
Berlin Partner also offers specific service packages that help you with finding the right business location for your business, offer support in financing and recruiting as well as access to innovation networks and diverse ways of collaboration.
A thorough beginner's guide about setting up your business in Germany can also be found through CCI (Chamber of Commerce and Industry) or via the startup portal of the BMWi (Federal Ministry for Economic Affairs and Energy).
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