What to consider from a legal perspective when opening a company in Germany
Anyone who wants to open a company in Germany, or in fact any jurisdiction, has a lot to plan and organize in advance. In addition to a business plan with the business idea and an investment plan, discussions with a professional service provider, can also be useful. In any case, there are also numerous legal aspects to be considered.
The following legal steps are a good starting point for establishing your future subsidiary.
Legal form
First, consideration should be given to how the business is to be conducted from a legal perspective. A business can be opened in Germany with many diverse legal forms, each with their own advantages. The most common legal forms are: Sole proprietorship or sole trader or partnership under civil law (GbR) with multiple persons, GmbH or UG (Limited Liability Company).
a) Sole proprietorship/ sole traders
A sole proprietorship is formed and operated by a single natural person. The advantage is that the owner can make all the decisions alone and is entitled to all of the profits. The formation is inexpensive and – except for a possibly required business registration – an relatively informal process. No minimum share capital is required. A disadvantage is that the owner is jointly and severally liable for any debts of the business, including the entirety of their personal assets.
A registered merchant (Einzelkaufmann, e.K.) is a sole trader who conducts commercial trade with the company being entered in the commercial register. Nevertheless, the costs and formalities involved in setting up this form of company are relatively low, again with no minimum capital being necessary. A sole trader has the sole power of decision. Here too, however, the disadvantage is that sole traders are jointly and severally liable with both their business and private assets. Sole traders are obliged to keep account and accounting records.
b) partnership under civil law (GbR)
At least two natural persons are required to found a partnership under civil law (GbR). A specific form is not prescribed for the foundation and an entry in the commercial register does not take place with no minimum capital being required. However, since all partners are jointly and severally liable for the business obligations, care should be taken to ensure that a trusting cooperation can take place. Due to the liability with private assets, it also seems reasonable that all parties involved have sufficient knowledge about the financial circumstances of the others. It often makes sense to set down individual regulations (rights and obligations) in writing in a partnership agreement.
c) GmbH
A limited liability company (GmbH) can have one or more shareholders (natural or legal persons). The prerequisite for the formation of a GmbH is the conclusion of a shareholders’ agreement and the appointment of at least one managing director. The foundation documents are notarised and the GmbH is then registered with the commercial register. The minimum share capital is EUR 25,000.00, whereby only EUR 12,500.00 must initially be paid in at the time of foundation. The advantage of a GmbH is that the liability of the shareholders is limited to the share capital. The partners are therefore not liable with their private assets. Capital increases and the sale or acquisition of shares in the company are relatively easy. The formation of a GmbH can also make sense in terms of tax law. There are statutory annual accounting and disclosure obligations, which are relatively easy to deal with.
d) Mini-GmbH or entrepreneurial company with limited liability (Unternehmergesellschaft (haftungsbeschränkt))
Only EUR 1.00 share capital is required to form a “Unternehmergesellschaft (haftungsbeschränkt)” (short: UG (haftungsbeschränkt)), also known as a Mini-GmbH. The share capital must be paid up in full. Apart from this, the formation process is relatively similar between a UG (haftungsbeschränkt) and a GmbH. The UG (haftungsbeschränkt) has a smaller share capital and some legal deviations. One principal advantage of a UG is that the formation costs are lower than a GmbH, as a model protocol specified by the legislator can be used for its incorporation. The UG (haftungsbeschränkt) can have one or more shareholders. The liability is limited to the available share capital, so that the partners are not liable with their private assets. Annually, 25% reserves must be formed at the UG (haftungsbeschränkt) until the share capital is 25,000.00 EUR and the UG (haftungsbeschränkt) can be converted into a GmbH. In addition, legal accounting and publication obligations must also be observed for the UG (haftungsbeschränkt).
As an alternative to a company foundation it would also be possible to take over an existing shelf company. In this case, however, legal advice should be obtained with regard to the debt assumption that may take place.
Company name/ brand
The name of the business and of the company is often decisive for success. In this context, it is important to consider the specifics of company law. It is always advisable to clarify company law concerns in advance.
A distinction must be made between these and special features of trademark law. It is recommended to check to see whether there are any potentially conflicting trademarks, brands and domains. We will be happy to advise you in this context and carry out a corresponding trademark search for you.
Registration
Depending on the nature of the business and the legal form, the following registrations with different authorities are possible
a) Commercial Register
The registration is mandatory for a registered merchant, a UG (haftungsbeschränkt) and a GmbH
b) Trade office
If a business is operated, you must register it with the trade office. If it was previously necessary to register at the commercial register, you must enclose an appropriate extract from the commercial register.
c) Chamber of Industry and Commerce
Membership in the Chamber of Industry and Commerce is mandatory.
d) Further chambers
In addition to the Chamber of Industry and Commerce, membership of other professional chambers (e.g. the Chamber of Crafts) may be required. The decisive factor is the business activity.
e) professional and inter-branch organisations, trade associations
In addition, memberships in professional and industry associations and insurances at a trade association may be mandatory or useful.
f) Financial authority
In the case of corporations, the tax office automatically requests the company for tax registration. Sole proprietorships and sole traders must also register with the tax office. You will receive a questionnaire for the tax registration of the business enterprise.
g) Employment Agency
If employees are hired, the new business requires a company number from the employment agency. In addition, the employees must be registered with the respective health insurance company and social security contributions must be paid.
Special permit
In some industries, an additional permit or concession is required, for example, for taxi drivers, restaurant operators or brokers.
Contractual and legal particularities
Anyone who opens a retail shop or store should also consider contractual things, like:
a) Non-competition, secondary employment
Is there possibly a ban on competition or secondary employment? In the case of an existing employment relationship or a participation in an already existing company, this would have to be examined more closely. Please contact us for assistance.
b) Drafting of contracts
Anyone who runs a business will likely conclude contracts with business partners, suppliers, employees and customers. The contracts in question are mainly contracts for work, service agreements, employment contracts and rental agreements, supply contracts and general terms and conditions of business for the services offered by the company.
Attention should be given to legal effectiveness and economic sense. Please contact us to assist you.
Insurance
An important point is the issue of insurance. There are numerous possibilities to cover eventual insurable risks. The principal insurances that should be considered are:
- Liability insurance
- Business interruption insurance
- Insurance against burglary and theft, damage to electronics, fire, water/flood and product liability
- Environmental liability insurance (e.g. for industrial and transport companies)
- Health insurance, accident insurance for work and leisure, disability and nursing care insurance
- Commercial legal expenses insurance
Taxes
It is recommended to consult a tax advisor in advance in order to clarify which tax obligations exist and what has to be considered.
A partnership (especially a GbR or sole trader) is not itself subject to taxation, but only its partners. The partners are personally liable to the tax generated in the partnership. In contrast, a corporation (esp. GmbH or UG (haftungsbeschränkt)) is itself subject to taxation with its profits, as a separate and distinct legal entity.
The following taxes, among others, should be considered:
- Corporate tax (15 percent of the profit)
- Capital gains tax on profit distributions (25 percent (plus 5.5 percent solidarity surcharge))
- Trade tax (depending on the location of the shop)
- Solidarity surcharge (5.5 percent of corporation tax, capital gains tax and wage tax)
- Value added tax (19 percent or 7 percent of the net invoice amount)
Special feature internet presence
If you are planning an internet presence, you will have to deal with the topic of data protection. In addition, there are numerous information and instruction obligations which must be observed in the context of an online shop/platform or an online order. We will also be happy to help you at this point.
Further important regulations
From a legal point of view, there are other laws and regulations that you may have to observe. We have listed the most important ones in the following:
- Legal opening hours (depending on the federal state there are different regulations to be observed)
- Price indication in the sense of the Price Indication Regulation
- Parking space commitments
- Food and hygiene legislation
- Obligation to provide sanitary facilities
Please contact us if you need more detailed information on one or the other position or if we can provide you with legal support in general when opening a Company in Germany.