Incorporating a limited company in Germany
thomas.skowron.biz
thomas.skowron.biz
- I don't recommend starting an UG with less than 2k capital. If you do the minimum (1 euro), you won't have anything to pay your startup bills and it costs extra money (and a trip to the notary) to change your company's investment capital.
- While a GmbH requires 25k capital, only half has to be paid into the company. The rest is marked as a liability on the shareholders.
- A GmbH is generally looked upon as "more serious" than an UG. Some companies won't interact with you if you're an UG, but this is changing over time.
- For what it's worth, I used to hate the bureaucracy, and it can be streamlined further but over the years (and multiple attempts) I've come appreciate how it reduces the risk that you are dealing with shady companies.
- Thanks for the tip about Fidor bank! Setting up a company bank account is a pain in the ass in Germany.
What may make this a bit complicated (and make the advice given above sound) is that one of the condition triggering bankruptcy is having more liabilities than assets. If you start the company with 1 Euro, and then go for coffee with the notary spending 10 Euros with the intent to claim it as a business expense, you're 9 Euros underwater. Not sure if this is something you have to monitor throughout the year or if it only becomes relevant when you actually do the bookkeeping at the end of the year.
Contrary to popular opinion (and the article) this stuff is quite easy to sort out as long as it doesn't involve real money, so I wouldn't worry about it. I know some people start companies with a bit of money for this reason, or even use something physical (i. e. their notebook) as an initial deposit into the company.
And just in case people are wondering "but why": these rules are supposed to protect vendors. Limited liability companies shield the founders from financial responsibility, so the rules are written in such a way that founders/owners are on the hook for at least 25,000 Euro (GmbH), or – nowadays – that the risk is clearly communicated to vendors. You can start a personal company much easier (basically a form with an address field and three questions) if you don't need limited liability.
You have to deal with it as soon as you can not meet a obligation. ("Zahlungunfähigkeit") If you give your own company a loan, then you can meet your obligation and you're fine on this side.
You also have to keep an eye on your debt level but that's more complicated, especially for owner-loans.
> I know some people start companies with a bit of money for this reason, or even use something physical (i. e. their notebook) as an initial deposit into the company.
Funding with physical good ("Sacheinlage") is however only allowed with a proper GmbH. This rule makes it sometimes a little bit interesting to convert an existing, fully liable, business into a limited liability corporation if if all the goods and money don't add up to 25,000 Euro.
Most jurisdictions have similar laws, and as long as you put money in through loans when you need it, you're fine, since you will be able to service your liabilities.
I want to emphasize on the "less than 2000 Euro" part. There is a good amount of people who literally start with 1 euro, pay the notary and have to file bankruptcy because the 1 euro can't cover the notary fee.
Bank accounts are tricky as well. Only some banks allow accounts for companies and they usually cost a lot more than normal ones. Internet banks recently changed that so definitely go with something like Fidor. (Again, careful that the bank account fee doesn't get your company bankrupt)
Then papers papers and papers. Don't attempt to file the entire stuff by yourself unless you are 100% sure you know what you're doing. Even tax exemptions for smaller businesses you have to explicitly pick on the first documents otherwise you will be treated as a normal company. I forgot to file some and almost got fined thousands of euros.
Then be aware of scammers. The register is public so a lot of companies just send mass scary letters to everyone that look like they come from the government. Once you sign one (which naive me did) you have to get a lawyer. You will almost always win against them but still need to pay the lawyer.
Lastly if you completely screw up, you can apply for "deletion" of your company if you have no money debt to any entity and your company is officially without money (a balance around 0 euro, but not under since this means you have to file for bankruptcy). This skips the long and tedious liquidation process and gets rid of the company immediately once the court confirms it.
If you are in the initial investment phase and you have more bills than earnings, you'll get 19% of the bills back from Finanzamt. You'll pay 19% of your invoices, too, but if thats less, you're saving.
If you're starting to earn, the Finanzamt will remove the exemption anyways.
Don't know if that makes sense for an outsider, but just read it up and thank me later.
For a lot of big businesses simply looking at a company address where the country has no to bad rep is already a red flag. So you will have to do a lot of convincing work to do if you want to get funding.
Even a UK limited is the running gag in upper management since it needs next to no effort to create one and they are by default a risky to work with. In the past it was a common thing for dubious companies to create limiteds in the UK and this history is what drives the stereotypes of today.
That said I am confident that Germany is not the cheapest option tax wise and there is a lot of paperwork to do to get your company running. On the flip side you will inherently gain more trust with potential customers and investors.
eg: http://www.transparency.org/news/feature/corruption_percepti...
Estonia is big on e-government and have apparently made the process of registering an llc really easy. That attracts all sorts of people for whom it makes a difference if the process costs $100 or $110. And that is – as a group – self-selecting for people you can't necessarily trust as much as others. The same mechanism is at work with British LLCs. Those became somewhat famous (being first in this market) because they were often used by people who couldn't start a company in their native country – most often because of messy bankruptcies that can get barred from trying again for certain periods.
At the end of the day, it costs basically the same if you are in UK or in Germany because your cost will be your salary and if you read the advices here you are anyway to small to run some special tax optimization programs.
For Germany because the costs are in my head:
- Notary costs for the contract: 450€
- Registration of the company (chamber of commerce): 150€
- Registration at the city level: 20€
Opening a bank account is free but it will cost you about 100€ to "run" it.
The real added costs are the accounting costs. About 80€/month to take care of the books and the paper work for the salary (inclusive transmission of the salary tax information to the Finanzamt and VAT) + 1500 to 2500€/year for the "end of the year" accounting and taking care of the related taxes.
So, the "company structure" costs are about €2000/year if you go through the services of an accountant (you really must do it in fact).
The real cost will anyway be your salary.
In UK, the taxes on the profit of the company is lower than in Germany, it is here where I would have been pleased to have in Germany at least a small "less than XXX€ no taxes" or a relatively easy way to schedule charges in the future to transfer money from one year to another. If you are a single person, saving for a future project is a bit hard in the current structure. Let say you want to accumulate 100k€ before hiring somebody, you end up with the need to make 150k€ extra on top of your salary to have the 100 on your bank account "free" from tax liability.
I'm asking because the article seems to buy into the narrative that these rules and regulation create an actual obstacle to ventures such as google ever being founded in Germany, and having gone through the process a few times, I can neither find any step of the process that I would consider completely unreasonable (except the chamber of commerce), nor could I imagine it being more than an irrelevant nuisance to any dedicated team.
I also think the 2000 Euro/year you're citing is true only for a company actually doing a fair amount of business and having employees. I'm sure it's less than half that if you're just maintaining the legal structure, or are a single founder before launch – VAT reporting, for example, has threshold below which reporting happens only quarterly or yearly.
BTW: If you plan Google big and want to take on multiple investors pouring in 100k's or millions, you wouldn't usually found a 'GmbH' or UG but an 'AG' (Aktiengesellschaft, a share based construct). This involves more reporting/regulations but also makes it easier to deal with the ownership of the company.
Wrt your 'Google ever being founded in Germany'. The process of founding a company is not an obstacle, that part is easy enough. Other obstacles are manyfold: you don't have nearly as much VC money available, there are strong data protection laws, employing people is a significant liability in Germany (vs California where you can quit them any day), side-costs of employment are very high (state required insurances for medical, unemployment, disability, pension, ...) etc etc.
Summary: If you plan a small software/IT business it probably makes sense to just start with an UG and see where it goes.
For the general question about rules etc. At my level, it is a non problem because everything is taken into account by my accountant. It means, it is very easy. Also, the GmbH structure is the same for everybody, it means, everybody must follow these strict rules and as a customer told me: "You have a GmbH, we can trust you that you do the things the right way".
So, for me, these relatively small requirements at the start are a way to keep the non serious people out of business. This is good for the trust when running your business on the long run. I like it this way.
Why does it cost so much? In Sweden it's like two entries in the book that take 5 minutes to do and generating two reports from your program.
The end of the year book stuff is a fee based on your turnover, it is regulated by the german accountant association.
This might be attractive if for example you made some extra money this year which would raise your tax rate. If you know that you will make less money next year you can shift the extra money into the next year, reducing the total tax burden. Whether this is legal if you do not really plan to invest, IANAL. How would they prove it?
My best advice: get a tax-guy. They do all this crap and more and while they come with a price (German tax laws are no laughing matters) it's money well spent and also acts as security because said tax-guy shoulders a lot of accountability (pun intended).
Which are?
Clarification: Setting up a SARL in France is comparable to Germany, but the red tape to run it is hell.
It didn't seem too hard to me when I did it, and sites like https://www.legalstart.fr/fiches-pratiques/creer-sa-societe/ mention that you need 5 admin procedure and 7 days to start one, where the average of the G20 countries is 7.6 admin procedures and 22 days on average.
So I really wanted to know more about when and how you incorporated etc, out of curiosity.
EDIT: more data, here is a report from 2013 with the data I mentioned above (table at page 8) http://www.ey.com/Publication/vwLUAssets/EY-G20-country-repo...
That's because they have the contacts to get it all done (bank account, notary visit, required reports, etc) in a day or two, instead of 1-2 months.
You can find some more info at https://bkpk.me/estonia-eresidency-digital-nomads
If you want to move to Europe (which I think was part of the idea of the article), it may indeed make sense to consider where to move. Germany (and one of its startup hubs, like Berlin or Hamburg) is probably not the worst place to be for various reasons, but I've also heard good things about e.g. Estonia.
I don't have backup readily available but I think your statement about the taxes is just plain wrong. Generally I think income is taxed where it is produced and Europe has (no)double-taxation treaties with pretty much any country. Personally I'd still avoid the extra complexity for a startup :-)
And the USA isn't all that much better.
And as they get the information from Estonia, I don't think German authorities will have an issue that the company is abroad. They're used to deal with a lot of UK companies (especially when the UG didn't exist yet), it's not new topic.
Why would you need to explain my business choices to any german authorities? It's none of their business. On top, Estonia is a member of the EU, not some off-shore tax-evasion island.
The 20% Estonian corporate tax does not apply to salaries for non-residents, but for things like dividends.
P.S. Leapin is a company that specializes in accounting for online businesses looking to establish a presence in Estonia. You can find some more info on this stuff on their website:
https://www.leapin.eu/faq/receiving-funds#what-taxes-do-i-ne...
As far as Estonia is concerned you will not pay any taxes with them until you take out dividends or similar.
The goal here is not tax evasion but reducing some of the bureaucracy of founding and running the company.
Assuming the company isn't operating at a loss it is producing company income. Companies have to pay taxes on their profits too! AFAIK that income (excluding loopholes) needs to be taxed where it is generated. So if that company made 100k Euro using software you developed in Berlin, you'll pay the company taxes for 100k revenue in Germany. Not 100% sure, but that is my understanding of the situation.
Also note: You need to be quite careful, tax law is complicated in Germany. E.g. if you work for the company but you are not paying yourself a salary, but just profits, this can in itself be considered tax evasion! (since in Germany the corporate tax can be lower than your personal income tax)
But again, ask a tax lawyer or call your tax authority if you want dependable information on this.
P.S.: I don't believe bureaucracy is an issue here, you quite likely increase it by setting up a multinational.
What you can gain by filing your company in Estonia is less bureaucracy. The talk is that Estonia is a lot in e-government, so I suppose that means you can do a lot of filing stuff very conveniently on the Internet. Or if you employ people in Estonia, the employment laws may be less strict than in a country like Germany.
If you plan to operate out of Germany, I don't think you'll gain much by registering a company in Estonia. If you want to move to and operate in Estonia, it may be well worth a consideration.
As mentioned, in the past people filed companies in the UK to avoid the 25000 Euro investment required for a GmbH. But that's gone with the UG.
However, the company itself very likely has to pay German company taxes and need German business permits if you operate from Germany / generate the income in Germany.
But if you have 10 Estonian developers in your Estonian company doing programming for you in Estonia and you are only the founder/investor living in Germany, you probably wouldn't have to pay anything in Germany if you don't pay out profits.
To get a dependable answer you really have to discuss that with a tax lawyer. And finding one which can deal with multinational businesses is going to be really tough and presumably expensive. Which is another reason why this whole thing is more headache than gain, IMO.
https://www.gov.uk/limited-company-formation/register-your-c...
Probably after brexit this will be still a competitive advantage of the UK against other markets.
Note that a Limited doesn't free you from having to deal with the local authorities (Gewerbeamt in Germany, tax office, etc).
Now you can start a UG with a 1,- Euro investment (more like 500 Euro min because it still has to cover setup fees). Which I think has made the UK thing superfluous, just complicates things even more.
I advise against.
currently running two small swiss it companies (3 and 6 employees), and ran several more in the past. none had a "full-time administrator".
founding costs (notary, fees etc) were always around €2000 for GmbH and €5000 for AG. our yearly expense for an external accounting expert to do our end-of-year accounting and taxes is around 1k to 2k per company (i.e. 1 to 2 man-day).
That's a reason not to go that route, IMHO.
Second, if you play by the book (and a lot of people who use these entities don't), you can't control said entity directly from an EU jurisdiction. You need to fly there (or somewhere else with no corporate tax) and do board meetings there.
There are cases where it's worth it, but it almost always has to do with shaving off percentage points of corporate tax from your profits, and not with reducing administrative burden. If anything, if you want to use a company like this (or any foreign company), you need to be careful and understand what you can and cannot do under the laws of your resident country.
The internet does offer some additional opportunities, because it's not location linked and it's often hard to figure out how to tax internet generated revenue. It's easier to do tax arbitrage, but doing it right also requires a great deal of additional paperwork (+ extra overhead expenses).
You should read up on tax law -- the cost of getting it wrong can be high.
> Some EU countries have tax laws that look through said structures, attributing earned income to the shareholders. That's one reason.
Even if the company is not tax resident of said countries ? Mind pointing me to the laws/countries.
> doing it right also requires a great deal of additional paperwork (+ extra overhead expenses)
Any estimate ?
This is very informative. Thank You.
One UK example: http://bit.ly/2kAqV7r
> Even if the company is not tax resident of said countries ? Mind pointing me to the laws/countries.
Yes. Broadly this falls under CFC ("Controlled foreign corporation") related laws. Taxation of the foreign entity could exist at either the corporate level (i.e. some domestic entity owns a low tax subsidiary in some tax haven), or the shareholder level (i.e. you own shares of a company in some tax haven).
> Any estimate?
Depends on the business. Some things you can't run through a low tax entity, others you can. If you sell an app on the app store, that would be relatively easy, for example. But you'd have to fly to the jurisdiction to sign the contract + probably have a local director.
The problem with these structures is not the set up cost. It's the cost of defending it in court if the tax authority of your residence country comes after you. And they do.
If you can't afford to defend yourself, you might as well not set it up.
The next problem is getting a bank account, if you get a bank account in the offshore tax haven, it is hard for people to go business with you (paypal, payment processors). You could try and get a merchant account with your tax haven bank but this can be complicated and payments you put through may be rejected by the customers bank.
Thus you can try and get a bank in a better jurisdiction , however still paypal / payment processors won't touch you as want to know why your business / bank and you are all in different countries.
There are ways around this, but you need serious money to make it worthwhile.
As well, if you are from the US, things get even more complicated due to the IRS taxing US citizens in any way they can find out how to :)
Is something wrong in this situation?
1. doesn't matter. It sounds like this is your day job unrelated to the hypothetical company.
2. this is OK, you can do that.
3. this is where it becomes a little more difficult. since you are presumably working from Germany, the value is created in Germany and therefore is going to be taxed there. sounds like the obvious (and fair) thing to do to me.
4. income is taxed where it is created, not where you originate from. Consider it like this: If I'm a German and live more than 6 months in the US, my primary taxation point is the US. My origin doesn't matter, it is where I live (and in essence whose state services (what taxes pay for) I use). The same goes for companies. If the company is registered in Estonia, fine, you can do that. But if the company is actually _operating_ in Germany, well, you have to pay taxes over there _just for the business you do over there, NOT for business you do from Estonia_.
5. yes, this is personal income. You'll pay taxes in Estonia which you can match up to your taxes in Germany. In no circumstance you pay twice. Again sounds very correct to me.
To be honest I'm not entirely sure this is the actual situation, but nothing about it seems wrong :-)
There are, of course, specific conditions and regulatory work for the crowdfunding agency which mean no existing one (that anyone here has ever heard of) meets the bar and will essentially require a local operation to be set up. One of the biggest local banks (who probably pushed for the legislation?) meets the bar, though.
What do you mean, your potential backers want to use existing platforms they know? I'm sorry but can you ask those Kickstarter guys to file paperwork in our country (which they have never heard of either)?
If that's not an option, there' also the possibility to issue bonds. Bondholders won't have to pay the 30% tax on the bond's dividend if you start paying them out.
Lastly, it should be noted that all of the above benefits are forfeit if the crowdfunding campaign sends any backers' rewards.
I wish I'd make this up, but it was signed into law 3 days ago.
I can't find anything. I did incorporate too early and now have nothing but a few payments to declare. Don't want to spend 500€+ on the accountant :-/
I guess this applies to any human language ;-)
My top 10 list of why not to incorporate in Germany:
1. Yearly accountant costs of a limited (UG/GmbH) is around €2,000; you need this accountant, he is kind of an API to the German tax system which is super complicated and even native Germans wouldn't be able to handle its requirements or to file in all the paperwork themselves; AND it's not so easy to find good accountants/tax consultants, once you found one you are locked-in and they happily charge you for every extra things; the pricing is regulated but still they find ways to get all your money
2. 'Protection money', you have to pay to IHK which should help business owners (but they nothing) and to ARD/ZDF which are Germany's public TV stations; the costs depend on your headcount and are not that high but once ARD/ZDF have your name they never ever again let you out, so it's impossible to cancel this 'subscription' and you might pay additional fees for you 'personal self'; it's a mafia which creates additional mental clutter and mail
1. + 2. Just the operating costs of a limited which doesn't make any money is €2,500 to €3,000
3. Germany has probably the most friendly labor law; at the end of the day employees have in Germany super powers; e.g. if you have more the ten headcount it's impossible to lay off people (there are many, many more, I could give you 20 more examples); 30% of your time is spend on how to work around German labor law with German lawyers at €300/h
4. They try to get everybody to pay into their social system, once you are under 49% shares you must join them leaving most of your personal salary to the state; the only benefits is an ok health system and an ok unemployement insurance
4.a) Having freelancers is risky because the state always suspect you to circumvent their social system; one mistake and the freelancer can blackmail you
5. Super strong consumer protection but which is applicable to all European countries; consumers get it all (money-back guarantee, ...)
6. Setup of the limited is unnecessary slow and bureaucratic, takes 6 to 8 weeks and all the momentum out of the founding team
7. You need at least €12,500 share captial for the GmbH, forget about the UG, doesn't have any reputation and to migrate to a GmbH later is a PITA
8. Taxes are cluttered, you have VAT, corporate tax and 'Gewerbesteuer'
9. German labor is ok but not as good as e.g. US labor; non-tech labor is in general too expensive and education is limited, especially English skills are not on par with other Northern European countries, still better than southern European countries; tech labor is good but expensive compared to rest of Europe, but cheap again compared to the US; still it's very hard to find affordable native German devs so people look for foreign tech talent which are good and easy to attract in bigger cities (Berlin)
10. Political situation is ok and stable compared to US and UK but could tip with elections in summer, right wing is strong but not as strong as in other countries
Some more:
11. Shutting down your limited takes one year
12. Insolvency is covered in its own law and is super complicated, don't apply to early, don't apply to late
13. In general all German laws are very cryptic written and even for native German hard to understand without experts; even simple tax stuff is hard to grok and other countries have much more accessible laws (just look at gov.uk as an example); calling your tax guy helps here and there but costs money; researching stuff yourself takes days
14. You have to save documents and even mail which led to business for 10 (!!!) years; after few years you need to rent a space just for all the folders
Who knows about better options in Europe? Happy to hear alternatives, also from a relocation perspective, so which country is founder-friendly AND nice to live?
If you have your "real seat" in Germany, in my view, it makes sense to go for GmbH, instead of registering in UK/Estonia, because the corporate law differences are not that big.
The question if you should decide to build a company in Germany is another discussion.
The company however would have to pay company taxes in Germany.
> and to migrate to a GmbH later is a PITA
I've never done it myself but what I know it should just be a short trip to the notary, they take care of the rest. Did you have a different experience?
In fact the whole UG thing is setup towards this exact goal, conversion to a full GmbH (you even have to sideline profits to accomplish that).
There are indeed some valid things in that comment, others seem just wrong.
> others seem just wrong.
Are you so kind and tell us which you think are wrong?
Though I suppose it is much harder if you don't speak German, or have a friend which does.
I recommend finding a good tax consultant first. Unlike stated in the text they actually are cheap as long as your company doesn't make a lot of money (the fees are usually bound to the earnings). You pay ~70 euros a month, plus ~1000 for the year-end stuff, and they do everything required for you, all the filings, talk to the tax authorities when required, etc. Since they see you as a potential future business (when you make actual money), they will usually help you with all the other things (notary, bank). Some are even registered 'startup helpers'.
Note that you don't have to have a GmbH, you can also just register a 'Gewerbe' (a business) under your own person. That is even easier and much cheaper, but you have full personal liability.
Important: This is specifically for IT companies, which are easy. If you setup other companies, like in the building sector (but almost any other field is affected by this, even a hair cutter!), it can be way harder and usually requires an approved education (you need to be a 'meister' in your field).
The text suggests that you should delay founding the company as long as possible. Be careful with that. If you say produced a significant amount of software before, you technically have to 'sell' that to the company for the fair value (and pay taxes on that etc). It can make things easier if everything is 'owned' by the company from the start. If you talk to investors or want to sell the company, they will want to know about such stuff.
Summary: IMO it is very easy to setup a GmbH/UG - at least if you speak German or have a friend who can translate. Yes, it does cost some money to start and operate (I'd say, calculate ~2500/y), but you'll get limited liability.
P.S.: This again makes the process kinda harder than easier, but most German states actively support startups. There is sponsored consulting for setting up business plans (usually as part of a competition), if you plan to employ people you can get that co-financed, most states even have state-VC's! There are many programs and a lot of public money is put into supporting startups in Germany, but well, you have to deal with authorities :-)