How to set up a company in Germany

A limited liability company - Gesellschaft mit beschränkter Haftung (GmbH) - is the most frequently used corporate legal form in Germany and the suitable legal structure for domestic subsidiaries of international groups.

Determining criteria for the choice of legal form are in general the intended function of the shareholders, issues of liability and the applicable tax regime.

The GmbH must have its own share capital, management, and accounting system. The minimum start-up capital requirement is Euro 25.000.

The advantages of a GmbH:

• formation of a sole shareholder GmbH is possible and foreign natural or legal entities can be founders. The GmbH may also have more than one shareholder;
• the liability of the company to its creditors is limited to the company´s assets;
• the personal liability of the company’s shareholder(s) is excluded if the capital for which they have subscribed is fully paid up;
• the subsidiary will operate independently from the parent company and can carry out additional business activities as needed in Germany;
• a subsidiary operates under the same tax regulations as all other companies in Germany.

The “mini-GmbH"

As an alternative an Unternehmergesellschaft (UG), commonly known as a "mini-GmbH", can be established with capital of only one Euro, or any other sum up to the minimum Euro 25.000 required for a regular GmbH.

But 25% of a mini-GmbH's (UG) annual profit must be contributed to its capital reserves until they reach Euro 25.000 at which point the UG can become a regular GmbH.

The UG has a management board, is subject to corporate taxes, can acquire property, own assets, sue and be sued. The UG company's name must contain the title “Unternehmergesellschaft haftungsbeschränkt” (Business Corporation limited in liability).

Advantages of the UG are its relatively low initial capital requirement and simple administrative procedure.

This means, that the Articles of Association are usually a standard template and in this case the costs for the lawyer who will not need to compose an individually tailored Articles of Association and for the notary are a lump sum which are quite low compared to the costs of the Articles of Association for a GmbH.

Its principal disadvantage however over a standard GmbH is that a “UG” is not considered as really creditworthy in German business circles and in particular by German banks.

Therefore, we describe in the following answers the requirements and procedures for establishing the GmbH.

The minimum share capital required to establish a GmbH is Euro 25.000. It can be contributed in cash or in kind. The minimum number of shareholders is one.

For registration in the Company Register at least one half of that minimum share capital must already be provided.

German law does not explicitly define who may be an owner. Any foreign natural persons may be shareholders or owners.

But where a GmbH is established by foreigners whose German residence permits do not allow gainful occupation in Germany, the purpose of the enterprise may be deemed illicit, if its exclusive or primary aim is judged to be an attempt to circumvent a statutory prohibition on the founder or founders.

Domestic and foreign legal entities established under private or public law are suitable founders without restriction.

A GmbH must be managed and legally represented by at least one managing director (MD) who must be a natural person and cannot be a corporate entity. A sole shareholder can be the managing director.

The MD does not have to be a German citizen and is not obliged to have a residence in Germany. But where the MD is not a German resident, it is highly advisable that a lawyer or accountant in Germany empowered to represent the company is appointed to handle all necessary compliance and administration with the relevant German authorities.

There is no specific legal requirement for foreign companies other than the general legal, procedural and administrative requirements to be followed when incorporating and operating a GmbH in Germany. These are described below.

The appointment of a local German lawyer and tax accountant are essential to guide the foreign founders through these procedures and to ensure compliance with tax, employment and administrative regulations once the subsidiary is established.

Where the shareholder of the GmbH is a foreign company and not a natural person, the individuals who will sign the Articles of Association must provide an officially translated and apostilled power of attorney granting them the right to represent the founder and shareholder company.

All documentation establishing the subsidiary must be in German and, where necessary, officially translated into German by a sworn translator and notarised.

When establishing a GmbH there is a risk of liability which applies to all founders of a GmbH – foreign or German - before the GmbH achieves the status of a legal entity.

The risk applies in two phases:

• in Phase 1, before signing the Articles of Association before the notary (for details of this and other procedures see the next answer 5 below) the law assumes that a pre-founding company (“Vorgründungsgesellschaft”) exists. The liability in this phase is that of a private partnership (“Gesellschaft bürgerlichen Rechts”), meaning that the founders/shareholders are personally fully liable for all obligations incurred by the pre-founding company;
• in Phase 2 after conclusion (as defined above) of the Articles of Association and before the registration of the GmbH in the Company Register a preliminary company (“Vorgesellschaft”) exists. Any contractual and legal liabilities, entered into in the name of the pre-founding company (see Phase 1 above) in the time between the establishment and registration of the GmbH, remain as liabilities of the new GmbH subsidiary.

The Articles of Association / company statutes (Gesellschaftsvertrag / Satzung) of the subsidiary

These must reflect the wishes of the founders and specify:

• a company name,
• the seat of the company in Germany,
• the scope of the company,
• the amount of the share capital (minimum: Euro 25.000),
• the managing director(s) of the company,
• the amount and nominal value of the company shares,
• the (natural or legal person(s) who will be the shareholders.

Notarial and Administrative Procedures

• An appointment with a Notary Public is required at which the GmbH shareholders must be present where the notary reads the Articles of Association to the shareholders.
• The shareholders sign the Articles of Association and the notary certifies the contract.
• The notary also creates the list of shareholders, including details of their official identities and the value of their shares in the company.
• The shareholder list is submitted by the Notary to the Company Register for publication. This also ensures automatic submission to the German Transparency Register, the official register of the personal details of the shareholders (as beneficial owners).
• The notary also records the name of the managing director, whether or not their names are included in the Articles of Association.
• After signature of the Articles of Association the shareholder(s) need to open a bank account in the name of the company presenting the signed Articles bearing their notarial stamp to the bank in question.
• To announce the formation of the company to the Commercial Register, the notary requires proof of payment of the minimum share capital to the company's business bank account. If made in cash, the amount has to be on the bank account. If part has been contributed in kind, the founder(s) / shareholder(s) need to submit a report signed by the founding shareholders setting out the value of this contribution.
• Once the bank deposit has been made, the notary registers the establishment of the company with the Commercial Register at the local district court of the seat of the company.
• The competent district court usually needs some weeks and then sends a confirmation of the registration.
• Once registered with the Company Register, the GmbH becomes a legal entity.
• The GmbH must then be registered with the competent Chamber of Commerce (Industrie- und Handelskammer). The annual membership fees will be calculated according to the income of the company.
• Where the scope of business of the company requires specific licenses, these need to be identified and the respective licenses applied for.
• Finally, prior to the GmbH starting business, the local trade office (Gewerbeamt) must be notified of the business activity in question by the managing director or the lawyer handling the establishment of the company.
  

The biggest challenges for foreign companies are day to day issues of legal compliance, tax regulations and procedures, employment law (where the subsidiary employs staff) environmental and other local administration, and capability in the German language.

As stated above, the appointment of a reliable German lawyer and accountant empowered to represent the company for these purposes and able to communicate with the parent company in their own language are essential.

Appointment of an accountant with power of attorney to act as the authorised representative of the subsidiary before the tax authorities and to ensure that the deadlines of the authority are duly met is strongly advised.

If the GmbH employs personnel, provision needs to be made for essential compliance with German employment regulations, payroll, taxation, social security requirements, and immigration law (if any employees are non-German citizens or residents). Again, the appointment of a duly empowered German accountant and lawyer to advise on these obligations and ensure these services is highly recommended.

For management of the subsidiary’s day-to-day banking matters, an in-house capability in German is also highly desirable – e.g. most German banks’ online-banking and/or call centres are only partly available in English.

Also, a local representative or a trusted real estate agent is advisable to identify and secure suitable premises for the newly established GmbH.

Finally, there is a risk of liability which applies to all founders of a GmbH – foreign or German before the GmbH achieves the status of a legal entity. This risk is described in full above under Answer 4.