In order to initiate your own business venture in Germany, there are a few points to consider. In this article, we will examine the prerequisites for establishing a business, the various categories of businesses, and other valuable advice for establishing a business in Germany.
Requirements to start a company in Germany
The following are the fundamental prerequisites for establishing a business in Germany:
- You must be at least 18 years old.
- The appropriate work permit or residence title is required.
- It is imperative that you are not prohibited from engaging in the profession in which you intend to establish a business.
Upon satisfying these prerequisites, it is feasible to establish a business in Germany:
- Determine the nature of your business: In Germany, you have the option to operate as a self-employed individual (gewerblich) or freelancer (freiberuflich) or establish a legal business structure that is distinct from your personal identity.
- Obtain a business license: You will be required to register in accordance with the nature of your business. Freelancers are required to register with the Tax Office (Finanzamt), while self-employed individuals must contact their municipal trade office. Registration in the commercial registry is mandatory for any other form of organization.
- Taxes must be paid by all enterprises to the local tax office or authority of Germany’s fiscal administration. The taxes that must be paid will be contingent upon the size, structure, and revenue of your business. Additionally, businesses are required to submit an annual tax return.
- Obtain the necessary licenses or permits: A special permit or license may be necessary to operate in Germany, contingent upon the nature of your business.
- Establish insurance policies: Even if you are a self-employed individual or freelancer, it is crucial to have the appropriate insurance coverage for yourself and your employees, if applicable.
- Examine contracts and regulations: Although larger organizations have personnel to guarantee compliance and execute contracts, freelancers, self-employed individuals, and small businesses are typically required to carry out the tasks independently.
If you are uncertain about your financial situation, it is recommended that you seek assistance from the Ministry of Economic Affairs to comprehend the resources that are available to you when establishing a company in Germany.
What types of corporate entities are there in Germany?
There are numerous alternatives available to your organization in Germany:
- Sole trader
- Limited liability company (GmbH)
- Corporation (AG)
- Partnership
- Subsidiary or branch of an existing company already registered elsewhere
Sole trader/Freelancer
The sole trader business structure is primarily designed for individuals who operate independently. A different form of corporate entity may be more suitable for you if you have employees. You are personally liable for your business activities as a sole trader, and you are required to pay both personal and business taxes as a single entity.
Difference between Self-employed vs. Freelance businesses
In Germany, certain occupations are classified as freelance versus trade. This implies that you are unable to arbitrarily determine whether you are a freelancer or a self-employed individual.
To put it simply, all freelancers are self-employed; however, not all self-employed individuals are freelancers. In Germany, there are distinct legal classifications for individuals who are either self-employed business owners (Selbstständiger) or freelancers (Freiberufler).
What is the significance of this? If you are self-employed, you are required to register your business or trade with your local government and may also need to obtain health or regulatory permits. Additionally, freelancers and self-employed individuals are subject to distinct tax liabilities.
Self-employed Tradespeople
- Register with the trade office
- Required to be a member of their local trade organization
- Pays the trade tax
- Is not registered as self-employed at the tax office.
- Typical trade professions include functioning as an intermediary or owning a restaurant business, as well as owning commercial and industrial enterprises.
Freelancers
- Doesn’t pay the trade tax
- Doesn’t register to the official business register
- Tax consultants, physicians, attorneys, and engineers comprise typical freelance occupations.
How to commence freelancing upon arrival in Germany
- Register your place of residence
- Get a German bank account
- Get health insurance
- Apply for a residence permit for freelancing or self-employment
Limited liability company (GmbH)
A limited liability company is a distinct entity from the individuals who established it. Consequently, the personal affairs of the proprietors are maintained in a separate entity from the business’s liabilities, including taxes.
Corporation (AG)
A corporation is also subject to limited liability; however, it necessitates a minimum of five individuals to establish it. The regulations governing this business structure are more stringent, necessitating a greater initial investment.
Partnership
The partnership model can be either a general partnership, in which the partners are jointly responsible for all of the company’s liabilities, or a limited liability model. It is also feasible to establish a partnership in which one partner serves as the “general partner” and the other restricts their liabilities to the sum they initially invested in the company.
Individuals or organizations that are independently established may serve as associates. It is advisable to obtain local legal advice if you are considering this model, as it is fairly complex, as is the case with other areas of company law.
Financial Investment for AGs and Partnerships
In Germany, certain types of corporate entities necessitate a minimum investment from the proprietors. A minimum initial stock quantity of €25,000 is required for a GmbH company, whereas €50,000 is required for an AG company. To establish a GmbH company, only one individual is required; however, a minimum of five individuals are required to establish an AG business.
The name of your GmbH or AG company must be derived from the work you intend to do, or in some cases, the names of the progenitors, in accordance with German company naming conventions. Ensure that you review the regulations for the type of business you plan to establish before becoming overly attached to your business name.
Legal obligations and responsibilities
Certain professions and occupations are subject to permits and licenses in Germany. This implies that specific qualifications are required to pursue employment in this field. Permits are typically required for the following types of businesses:
- Bookkeeping and financial services
- Security
- Travel, hotels and restaurants
- Employment agencies
- Real estate agents
Before commencing the registration process for your business, verify which permits you will be required to submit if it is located in one of these sectors.
If you employ others in your business, you are required to calculate and pay contributions for their unemployment insurance. You should ensure that you are aware of your obligations as an employer before you begin recruiting team members.