Setting up a business in Germany

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Updated 2021-12-02 14:23

The German government is very open to foreign investment. European citizens do not need special work permits or work visas to establish a business in Germany. However, different conditions may apply to non-European Union and EEA nationals according to their country of origin.  

Before starting a business in Germany, you must gather all the necessary information regarding the policies, the investment, and the profits in the city you plan to operate in. There are plenty of initiatives and networks, as well as Chambers of Commerce, which can advise you for legal, accounting, and tax issues. With the correct information, you can make intelligent decisions about your investment.

Why setting up a business in Germany

Germany has one of the strongest and most stable economies in Europe and the world, meaning that the country has the capacity to accommodate innovative and forward-looking business projects in a variety of sectors. According to the Federal Government, in 2020, Germany had 62,105 patent applications.

Besides the German population's strong spending power (23,766 euros), which is proof of the country's economic health, the transport infrastructure (e.g. roads, railways, airports) and telecommunications network are strong factors to take into consideration when starting a business with products that you want to have a wide reach.

If you are a woman, you would like to know that Germany is very considerate of the needs of women entrepreneurs and aims at increasing the number of businesses founded by women. In order to meet this goal, three German federal ministries have joined forces: the Ministry for Education and Research, the Ministry for Family, Senior Citizens, Women and Youth, and the Ministry of Economy and Technology.

Good to know:

Since January 2021, Germany has a new competition law. Even though it may be difficult to understand its implications if you aren't a legal expert, in general, the law accelerates administrative proceedings and makes it harder for competitors to access each other's data.

Useful link:

National Agency for Women Start-ups Activities and Services

Setting up a business as an EU-EEA citizen

Depending on the EU member-state you want to set up or expand your business, you will have to cross different bridges. Hence, setting up a business in Germany will be a slightly different process than setting up a business in The Netherlands, for example. However, in principle, the EU strives to maintain common standards and operational practices across all member-states. Namely, setting up your business shouldn't take more than three working days and cost more than EUR 100. In addition, online access and completion of administrative processes are highly encouraged, including the registration of a company. Lastly, the EU has funds for startups and resources for entrepreneurs who wish to develop their business projects further.

Useful links:

Point of Single Contact: A European support network coordinated in Germany by the Federal Ministry for Economic Affairs and Energy. Whether you need in-person help or online guidance, the Point of Single Contact services will advise you regarding business formalities and will be your link between different agencies and chambers during the establishment of your business projects. Note that each federal state has a different Point of Single Contact.

Startup Europe Club: A European Commission source where you can find information about partnerships, investment, and funding.

InvestEU Portal: Add your business project's profile in the portal and help potential investors find you.

We Gate: A European Commission platform for women entrepreneurs.

Erasmus for Young Entrepreneurs: A European Union exchange programme, giving new or aspiring entrepreneurs from one participating European country the opportunity to learn from the founders of successful small businesses in other participating countries.

Setting up a business in Germany from a third country

Suppose you are a citizen of a non-EU-EEA country, and you wish to set up a business in Germany. In that case, you need to meet certain criteria before starting to work towards turning your idea into a business. For example, if you want to open a private practice as a dentist, then, first and foremost, you must look into obtaining professional recognition in Germany for practicing a regulated profession. Then, you should consider the legal status you will need to have in order to be allowed to live and work in Germany. Lastly, you should start familiarising yourself with the bookkeeping practices and tax obligations you will have in Germany as a business owner.

Financing your business

High equity (aka sufficient personal assets and ownership of the equipment for the operation of your business) is pivotal for the financing of your business, as well as securing a bank loan. In other words, the more funds you have already, the more chances you have to have your bank loan application approved. Experience has shown that at least 20% of the overall capital should come from equity for a bank to feel that the risk it's taking is not tremendous. However, the bank's decision and applicable interest depend not only on the amount of money you want to borrow, but also on how long you want to borrow it.

Tip:

Arrive at the interview with the bank well-prepared and with a thorough business plan.

Useful links:

Gründer: Financing and funding solutions for your business in partnership with the Federal Ministry for Economic Affairs and Energy.

Startup funding opportunities (German)

Requirements for setting up a business in Germany

To set up a business in Germany, you must be at least 18 years of age and have never been banned from practicing the profession you intend to start your business in. Citizens from outside the EU-EEA will also need a residence permit for self-employment to start a business. In order to qualify for the self-employment residence permit, you must be able to show that the product or service your business focuses on is in demand in the region you want to set up your business. Also, your business plan must indicate that your company will affect the broader economy positively.

Now, if you have EUR 500,000 to invest in your business idea, and you can create at least five new jobs, then you will be issued a residence permit relatively quickly. However, since this is not the most common case for entrepreneurs, German authorities will still closely consider the application taking into account local economic interests, the level of capital use, the effects on the labour and training market, as well as the sustainability of the business concept. For this purpose, the Federal Foreign Office will consult with the Chamber of Commerce and Industry (IHK), trade authorities, and other professional representatives.

Important:

Different conditions apply for the self-employment residence permit depending on whether it is for business or freelance purposes.

Good to know:

The self-employment residence permit is issued for three years. However, if your company is active, you can apply for a settlement permit after three years.

Useful links:

Federal Ministry for Economic Affairs and Energy: Advice resources on financing, legal issues, taxes, etc. for your business project

Chamber of Industry and Commerce

Gründer: Find the respective office when setting up your business

How to establish your business in Germany

Once you have established that you are ready to dedicate yourself to your business idea, you can contact the Chamber of Industry and Commerce (Industrie- und Handelskammer, IHK) to determine which preconditions apply to your business idea. Then, you should be ready to proceed with registering your business with the local Trade Office (Gewerbeamt). The registration requires certain documents, including a valid ID, a residence permit for self-employment (or a registration certificate for EU and EEA citizens), and a registration fee payment.

Once you have registered your business, you should ensure that your bookkeeping and responsibilities towards the tax office are well-taken care of. Similarly, if you hire employees, you should make sure that you meet your tax and insurance obligations towards them. It's worth mentioning that there are different types of workers: Free agents (mitarbeiters), who take care of their taxes and insurance, and full or part-time employees (angestellter) whose taxes and insurance are deducted from their pay and require a certain amount of vacation per year. They also need that half of their insurance program be covered by the company.

It is highly recommended to seek help from an accountant or a tax lawyer when establishing your company. Before going ahead with your project, check that your activity is not subject to special regulations in Germany.

Good to know:

Remember that it is your responsibility to conduct marketing research or feasibility studies, define the structure of your company, and register any trademark.

Useful links:

Gründer: Find your local Trade Office

Legal business structures in Germany

You may like to ask your lawyer for advice before deciding what kind of investment and partnership is right for you. The German company law distinguishes between:

Private limited liability companies (Gesellschaft mit beschränkter Haftung - GmbH). This is the most common form of a company, which has shareholders that are not personally responsible for the company's debts. To open a GmbH, only one person is sufficient, and the capital share must be at least EUR 25,000. The shareholders need to set a notarised agreement, and the company starts to exist once it has entered into the Handelregister (Commercial Register). Shares from a GmbH cannot be quoted on stock exchanges but can be transferred to others. These companies have to set one or more managing directors, which are often the shareholders.

German stock corporations (Aktiengesellschaft - AG) are intended for a large number of shareholders. They are founded when authenticated articles of association are provided, and the company enters the Commercial register. The minimum share capital for these companies is EUR 50,000. The shares may (but not necessarily) be listed on the stock exchanges. A company like this works through a managing board (Vorstand), which brings a mutual decision.

A general partnership (Offene Handelsgesellschaft - OHG) is an association with unlimited liability. The company obliges every partner to participate in operating the business legally. This type of association can sue or be sued in a court of law. The main body is the commercial code, which provides agreements and decisions between the partners obtained with the majority of votes.

Limited Partnerships (Kommanditgesellschaft - KG)) can have two types of partners: a general partner with unlimited liability, and a limited liability partner.

Limited partnership with a limited liability company as a general partner (GmbH & Co. KG) is a combination between a limited liability company and a limited partnership, where the first one is the general partner of the second.

Subsidiaries (Tochtergesellschaft) is a company that is separated from the parent company and has a certain autonomy, but remains non-independent. These companies have their own management.

Branch (Zweigniederlassung) is a dependent company, which is occupied by the central administration. Subsidiaries and Branches are different, and they must be differently noted in the Commercial Register.

We do our best to provide accurate and up to date information. However, if you have noticed any inaccuracies in this article, please let us know in the comments section below.