Incorporating a Limited in Germany for Bootstrappers
With all the craziness in the world going on at the moment, founders and start-up enthusiasts are looking which place is worth moving to. Some people are suggesting to consider Berlin. Sadly, Berlin is located in Germany, which means that bureaucracy is a thing you need to familiarize with. Papers need to be filled, deadlines need to be met and all of that in the lovely language of “Beamtendeutsch”, which means “German for public officers”.
I don’t want to ridicule the German way of dealing with things, because it definitely has its upsides, namely that there is almost no corruption and there is a well-defined path of managing things.
For founders there are clear guidelines and requirements for incorporation and running a business. Especially for private limited companies, those rules are rather strict and will be enforced. Luckily, with the booming start-up culture, some small things have been improved: Before 2008 it was necessary to have at least 25000 Euros of minimal founding capital for incorporating a GmbH (“Gesellschaft mit beschränkter Haftung”). After the introduction of the “Unternehmergesellschaft (haftungsbeschränkt)” – what a wonderful name – this has been reduced to just one Euro.
Why incorporating as limited?
The question if you should incorporate as a limited is of course an complicated but vital aspect and you should deeply think about this and discuss this with people, who are much more experienced than me, but there are some perks: limited personal liability (only up to the founding capital), the possibility to give out shares, official shareholder agreement, registered name.
Note that most actions as incorporating, defining or changing a contract about the company itself need the supervision of a notary. Those have fixed fees for standard actions, but can adjust the pricing in a specific span if you need some customizations.
Of course if you have rich friends, investors or you just want to spend some money in exchange for convenience, you can hire some one to handle this process, but especially if you are bootstrapping, this article might help you.
You will receive a lot of paperwork that will be exclusively in German. Forms will be in German, sorry. People in public offices might be able to speak English. Don’t rely on that, get some friends or partners that will help you out, if you’re not fluent.
No matter if you are starting out with an UG (at least 1 Euro capital) or GmbH (at least 25000 Euros capital), you will need a “Gesellschaftervertrag”, which is a contract that defines the name of the company, the purpose, the managing directory, the initial shareholders and other useful stuff.
For UGs there is a minimum contract that covers the bare necessities (“Musterprotokoll”), which is provided by the state. This can be applied if you are founding alone or in a group up to three people. This contract is free to use, because the notary doesn’t need to create it for you. But beware, it is really the smallest possible contract. There are no special agreements: It does not say, what happens if a founder wants to leave, stops working, starts at a different company or dies. There is no non-compete clause either, which is not regulated by law as well. All in all, the minimal contract relies on trust. If something goes wrong, prepare to go to court.
A notary can set up a specialized contract for you: If you want that, look out for notaries that list “Unternehmensrecht” (company law) as their core expertise. Such a contract will cost at least a few hundred Euros.
After you agreed on a contract, all founders need to show up at the notary, they will read out the contract and you will sign the thing. Bring your government-issued ID!
The notary will collect all the paperwork and the managing director will be responsible for collecting the founding capital and to put it into a company bank account. The pitfall here: You don’t have a company at the moment, because it’s only officially incorporated after the notary hands in the paperwork in to the “Handelsregister” (commercial register). Banks always need a copy of the registration from the commercial register, which you don’t have at the moment. In order to get a bank account you need to tell it that you are incorporating and you will hand in the registration later. Banks can be very annoying about this. In that regard I had good experiences with Fidor Bank, which has a free basic account. Fidor has other issues, though.
After you have filled the bank account with some start money, pay the notary’s bill (this will be around 200 Euros at least), give the notary a proof of transaction (for founding capital and the bill) and they will pass the entry to the commercial register. You will receive a bunch of documents.
The First Contact
You are required to put the company’s name onto your mailbox, so the paperwork can reach you. There will be quite a lot of it: your bank, the Finanzamt (tax authority/collection service), your notary with original documents and some copies.
Note that there are some fraudsters which monitor newly incorporated companies and send out letters with fake invoices asking you to pay a specific amount or your entry will be discarded. Ignore those. If you are not sure, if a document is legit, check if the agency really exists.
Your bank might want to get a copy of your founding contract. Send them a copy, but ask them to send it back when they’re done. Official copies can exclusively be done by a notary.
The tax authority will ask you a bunch of stuff: Basic data about the company and its shareholders, but also some projections about your potential earnings. Especially if you are bootstrapping you might have no or only very little cash flow. In that case if you specify that your earnings are under 17500 Euros/year, your company will be exempt from collecting/paying VAT.
Soon after that the tax authority will send you a letter with your “Steuernummer” (tax ID number). This is used when communicating with the tax authorities.
Chamber of Commerce
You will also receive some lovely letters from your local “IHK” (Industrie- und Handelskammer), which is a chamber of commerce which is supposed to fight for the rights of corporations. The trouble is, companies are generally obligated to be a member and pay membership fees. This is a widely discussed topic in Germany, but this “Pflichtmitgliedschaft” (membership obligation) is not very popular amongst entrepreneurs.
The IHK will ask you to fill in a form about your projected earnings and will send you an invoice afterwards, asking you to pay a membership fee. Nevertheless first time founders are exempt for two years or if you make less than 25000 Euros/year even for the first four years. Tell them this if they try to make you pay from the start.
If you have incorporated an UG, the law requires you to put 25 percent of your profit back as a security, which counts as your founding capital and the maximum liability. If your capital passes 25000 Euro in total you can convert the company into a GmbH.
There is a general rule in Germany that customers or business partners need to know who they are dealing with. So if you operate a web site, you have to put your company’s full address, the names of the managing directors, the company’s registration number (Handelsregisternummer). The same applies for any email or written communication, you need to put this information there, too.
If you don’t, your competitors might be able to sue you.
By the way, you can also look up your entry in the commercial register (one of the few official sites which is translated into other languages). You can also do this for other companies, too. Basic information is free of charge, for others you might be asked to pay.
Taxes! Tax Reports!
Taxes are not really the big problem. If you start small, you will pay little taxes: As mentioned before, you can get exemptions if you are below certain thresholds. And if you are burning cash, taxes will be the smallest problem. If your company makes loss, you might be able to not pay any taxes.
The bigger problem here is tax reporting: There are specific rules when to report. Especially in the beginning the tax authority might be nice to you and remind you about this. But don’t ignore their letters, large fines might apply if you fail to hand in the necessary paperwork. If you can’t do it in time, let them know. Talk to them, they can squeeze out a few days/weeks for you.
There are also transparency guidelines: Smaller companies need to transfer their balance sheets to the commercial register (in addition to the tax office), bigger companies need to publish them, too. If you fail to do so, you might get a letter from court putting a fine on you and tell you to deliver it in a few weeks time.
Generally you can do almost everything online. Tax statements are transferred via Elster, balance sheets can be generated and transferred on eBilanz online. Publication can be done on the Publikationsplattform. They are all only available in German, but don’t worry most Germans don’t understand it either, because it contains a million juristic and fiscal terms.
My advice: Get an accountant (“Steuerberater” or “Buchhalter”) as soon as possible. It won’t be cheap, but it’s almost impossible to do it alone. I tried to do everything on my own – it wasn’t nice. Heck, it was one of the scariest things ever. The structure favors a system of accountants and tax experts and is not really made for doing things on your own. Weirdly if you have an official accountant, the deadlines are extended — normally over half a year.
Beware of the Cost
The trouble here is: If you incorporate early, because you feel the need for it, but you still don’t sell any product or service, so you don’t have any cashflow, you still need to spend a few hundred Euros every year just for meeting the official requirements.
My advice: Incorporate only as soon as its inevitable. If you have to do product work, “finish” a product first. You don’t need a corporation for sitting with some people at home or in a co-working space. You don’t need a corporation for printing business cards. You don’t need a corporation for setting up an NDA (you probably don’t need an NDA, either). You can have an official, written agreement without starting a company.
Running Your Business
You have to care about running your business on your own, sorry.
Put your notary on speed dial, you will need them if you want to make any changes to the company. Changing the address, the managing director, the purpose of the company — all of those need a entry into the commercial register, which can only be executed by a notary.
If you don’t need the company anymore, you will need to agree with your shareholders about this, go to the notary and hand in an “Auflösungbeschluss”, which is a statement about closing down the company. This will cost you around 250 Euros of notary fees and a few hundred for the commercial registry.
The company isn’t shut down immediately, though. There is a grace period of a year, in which the liquidator is responsible for shutting down the business (ending all contracts with customers, closing balance sheet and so on).
If you still think that you want to bootstrap your business in Germany, congratulations and good luck! But remember: You have been warned.
Disclaimer: I am not a lawyer or tax expert or any expert at all. If unsure, ask someone with a fancy job title. In case you found something that is ridiculously wrong, please let me know.