A GmbH in Germany can be as big or as small as you want. You can be a one-man show, without any support staff. Or you could be a massive conglomerate.
From the accountant who put together the posts Starting a Business in Germany: A Tax Guide for Freelance Expats and The English-speaker’s Guide to Filing Taxes in Germany, Daniel Schmaltz is back again with a ton more information as to how to set up a GmbH in Germany.
If you want to start a business in Germany, there are generally three types of corporations you can form:
- GmbH—Gesellschaft mit beschränkter Haftung aka “company with limited liability”
- UG—Unternehmergesellschaft haftungsbeschänkt aka a “mini-GmbH”
- AG—Aktiengesellschaft aka “public limited company”
A GmbH in Germany is the most popular business classification, so let’s talk about what it is and why you might want to set one up.
The main reason to set up a GmbH in Germany is to limit your liability. Should something go wrong, your company becomes the responsible party as opposed to you personally.
Life in Düsseldorf Tip: If you don’t have liability insurance yet, you should compare your price options before buying any plans. Legal insurance is another plan you should consider purchasing for your business.
Let’s say you run a marketing consultancy and decide to serve your clients as a sole proprietor. Should your advice result in profit loss for your client and the client decide to sue you, you personally would be responsible. If you don’t have that money, too bad. You may have to sell your house to pay off that client.
Now, when you have a GmbH or limited company, only your corporation is liable. In the same situation above, if your company doesn’t have the money to pay off that client, no one has to pay. Your private life isn’t at risk or subject to any liabilities of the company.
This applies to a whole range of companies. If you’re in construction and build a house for someone worth €500,000, but it burns down the day before your insurance kicks in, or the morning you hand the keys to your client. With a GmbH, your company may go bankrupt, but your personal effects or not at risk.
A GmbH can be as big or as small as you want. You can be a one-man show, without any support staff. Or you could be a massive conglomerate. Some of the biggest companies in Germany are GmbH. However, a GmbH cannot be traded publicly. If you’re a hopeful start-up with dreams of being the next Facebook, you’ll eventually need to become an AG. (Pro tip: Always start with a GmbH, you can switch to an AG pretty easily down the line.)
If this sounds like an option that’s right for your company, here are the steps you’ll need to take to set up your GmbH in Germany:
- First, find a notary.
In Germany, some contracts need a notary, specifically if you’re setting up a GmbH or buying property. Even if you and I were to make a contract, that contract is not valid until a notary signs.
So, to start a corporation you’ll need to first go to a notary. That notary will set up a contract for your corporation.
- Put money into your business bank account.
Generally, to be a GmbH, you need €25,000 in the bank. When you first start out, it’s okay to only put in half of that (€12,500). It doesn’t need to be there at all times, and you can use that money for your business, but it does need to be there. It’s very important, that the transfer of money is called Stammkapital.
- Show your notary proof of deposit.
Then you have to show your notary the bank statement that proves you paid that money into your account. Then he will register your business with the trade register.
He has to do it for you. You can’t do it by yourself.
This process can be fast but expect it to take around 4-6 weeks. Don’t worry, you can still work in your business during this time, as soon as the notary writes the letter to the trade register, your business is cleared to go.
How taxes work with a GmbH
Your VAT (learn more about VAT here) will stay the same regardless of whether you’re a sole proprietor or GmbH. But that’s where the similarities end. Taxes for a GmbH are more complicated and with more formalities.
To be honest, it’s not easy to do Gmbh taxes yourself. As you can imagine, German fiscal authorities are pretty strict—everything has to be at “arm’s length”, so to speak. If you’re not careful, you could get mired in a mess you didn’t mean to create.
Here’s what I mean…
Let’s say you’re the director of a company. You need an employment contract and salary. Should you change your salary, you’ll officially need to make an amendment to that contract. But since it’s your GmbH, you usually don’t set aside the time for such a small formality. Especially if you’re the only person at the company.
However, without this formality, the government may say, “Hey, it looks like that contract isn’t valid.” This could lead to fun things like double taxation.
The reason for all this boils down to some wise words from Spiderman:
“With great power comes great responsibility.”
Since you’ve passed liability on to your corporation, that corporation needs to take on a certain level of ownership. This is so people can trust in company structures and prevent business owners from taking advantage of the system. This is another reason why a GmbH must publicly release its financial statements at the end of the year—it’s another layer of trust.
Finally, tax rates for GmbH companies will vary, but at the corporate level, a GmbH must pay two taxes: corporate takes (around 15%) and trade tax (also around 15%). If you want to pay out money to shareholders there may be another tax, but that doesn’t apply to every company.
Can I just start a UG?
A UG is similar to a GmbH, but you don’t need €12,500 to start. You can start your company with just €1000. That’s why a UG is often referred to as a “mini GmbH”.
At the end of the day, a UG is great for very, very beginners. By using the UG label, people will know there’s no money in the company. You have the appearance of being a valid business, but you also come across as less trustworthy. Just something to keep in mind.
Fun fact: Your GmbH can be European-wide
To start a GmbH, you do need an office or address here in Germany. That doesn’t mean you or your directors/managers need to be German—you can all be foreigners.
In fact, you can start a GmbH in Germany if you live in another country. You just need an address. Some companies even specialize in providing foreign addresses in Germany. For example, Regus Coworking provides a room and address where mail can be delivered and they’ll even forward it to you.
Once your company is registered in Germany (or any other country in the EU), you can do business in the entire EU without starting a company in every country. Neat, huh?
Do you have any other questions about how to set up a GmbH in Germany? Email daniel.schmaltz@schmaltz-partner.de.
Do you have questions about taxes in Germany too? Check out some more of our posts regarding understanding your fixed assets, claiming child expenses in your annual income, how to obtain your tax number, how to file your taxes as a freelancer, what expenses you can deduct as an employee, and more!
