Types of Companies in Germany: Guidance for Investors
Types of Companies in GermanyUpdated on Thursday 18th January 2024
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Germany offers a broad range of business entity types from which investors can choose when setting up a business. Once they have chosen the preferred form they have to register with local Trade Office (Gewerbeamt) and also with the Commercial Register. Freelancers, individual trade persons, and private partnerships don’t have to register with the Commercial Register. It is also required to register with the local tax office in the first month of the start-up and the company will be given a tax identification number. Banks, insurance companies, and hospitals need to obtain special licenses to carry out their activities. Our law firm in Germany can offer assistance in obtaining such licenses and permits.
The most common businesses types in Germany are:
- the limited liability company (GmbH): the most widely used business form, it is suited to small and medium-sized businesses.
- the joint stock company (AG): similar to the GmbH in terms of shareholder liability only that it can trade its shares and it is thus most suited to large corporations.
- the limited partnership (KG): a collaboration between two partners where at least one of them is subject to unlimited liability.
- the general partnership (OHG): the partners are liable for the debts and obligations of this business form and will share the profits.
- the civil law partnership (GBR): functions following the same principles as for the limited partnership where the two partners have unlimited liability but do not have to pursue a commercial purpose.
- the sole trader: the simplest business form where one individual sets up the business and has unlimited liability for the debts and obligations that arise.
- the German branch office: an extension of the parent company abroad, it is used by foreign corporations that wish to enter the market.
The German Limited Liability Company (Gesellschaft mit beschränkter Haftung)
The limited liability company is the most widely-used type of business. Only one founder is required for its formation and he can also be a shareholder. A particularity of the German limited liability company is that its name has to refer to the nature of the business or the name of the shareholder followed by GmbH.
The share capital of a limited liability company must be at least 25,000 euros from which 12,500 have to be deposited in a corporate bank account during the registration procedure. The shares of a GmbH cannot be traded on the stock exchange and they are not certificated either. Our lawyers can help open a bank account in Germany and deposit the share capital.
The incorporation procedure is rather simple, as the shareholders of the company have to sign the deed of formation and the articles of association. The procedure is performed with the assistance of a public notary in Germany.
A subtype of the limited liability company is the mini limited liability company, which was enabled in 2008 for individuals or groups of persons and features a specific characteristic: it only requires a start-up capital of 1 euro. It has to be identified as such and the shareholders are required to put aside at least a quarter of its annual turnover until it reaches a share value of 25,000 euros, and therefore become a GmbH.
The incorporation procedure is simpler than in the case of a GmbH, as the local legislation provides standardized articles of association, which are notarized by a public notary. It is advisable to receive assistance during the incorporation procedure from a lawyer in Germany, who can verify if all the provisions respect the applicable legislation.
The German Joint Stock Company (Aktiengesellschaft)
In order to start a German joint stock company one needs a capital of 50,000 euros and must be registered in the Register of Companies. A joint stock company requires one shareholder, and there are no restrictions on the number of shareholders that can be appointed. Also, there are no restrictions or requirements on the nationality of the shareholders. The board of directors will have the right to decide on the operational aspects of the company, as well as on its management.
Its shares can be listed on the stock exchange. In order to incorporate a German joint stock company, the investor will need to sign the articles of association and the company will become active only after the registration is completed at the Register of Companies.
A company in Germany that will be involved in trade activities is required to apply for an EORI number in Germany.
The Limited Partnership (Kommanditgesellschaft) in Germany
To start a German limited partnership you need a capital of 50,000 euros. This capital has to be split into shares. The business has to be registered with the Trade Register and the articles of associations have to be notarized. This type of company has a general partner who is the main representative and wholly liable for the company while the limited partners are only liable up to the value of the shares owned in the company. This type of legal entity is more suitable for small and medium sized enterprises (SMEs).
The limited partnership with a limited liability company as general partner (GMBH & CO KG) is a subtype of the limited partnership where the general partner is a limited liability company instead of one person. This sub-type is also suitable for SMEs, as well as for family companies.
The registration procedure is different than in the case of the above mentioned legal entities, as the investors will have to sign a partnership agreement, but it has to be registered at the Commercial Register and the Trade Register.
Our German lawyers can offer more detailed information on this structure, as well as personalized consultancy regarding each type of business forms available in Germany. They can help you start a business in Germany no matter the type of company you choose for incorporation. They can also help you if you want to register a trademark in Germany.
The General Partnership (Offene Handelsgesellschaft) in Germany
In order to start a general partnership in Germany there is no need for capital, as each partner has unlimited liability. A general partnership has to be registered with the Trade Register and has to bear the OHG abbreviation at the end of the name for clarification or liability. The structure of a general partnership has to be a board of directors and a supervisory body. An important aspect when forming a general partnership in Germany is that accounting procedures are different (and simpler) than in the case of other types of legal entities. Also, it is necessary to have at least two associated partners in order to start a general partnership.
Civil Law Partnership in Germany
To start a civil law partnership it takes two partners with unlimited liability. The German civil law partnership has to be registered with the trade office if it is a small trade business. If the annual profit exceeds 25,000 euros it will become a commercial business, therefore it will be considered a general commercial partnership (oHG) and it will have to be registered with Commercial Register. The partners should sign a partnership agreement. The regulation is not compulsory, but it is recommended.
Foreign companies can open subsidiaries or branches. The main difference between these two business forms lies in the liability of the parent company abroad. For the branch, the foreign company bears full liability while the subsidiary is incorporated as a GmbH, for example, and will be treated as a locally registered German company.
The sole trader is the simplest business form that can be incorporated in the country and it is formed by a single individual who wishes to open his business. It is managed by the founder who is also fully liable for the debts and obligations of the business. it has no demanding accounting or reporting requirements and can be used for small businesses such as those in consulting.
Sole proprietorship (Einzelunternehmen) in Germany
A sole proprietorship is a common type of business structure in Germany. It is a form of business where an individual operates a business on their own without forming a distinct legal entity. Our law firm in Germany also handles sole proprietorship registrations.
The sole proprietor is the sole owner and operator of the business. There are no partners or shareholders involved. Unlike some other business forms in Germany, there is no minimum capital requirement for establishing a sole proprietorship. However, the owner is responsible for financing the business and its operations. If the business incurs debts or faces legal claims, the owner's personal assets, including their home and savings, can be used to cover these obligations.
Sole proprietors are subject to income tax, solidarity surcharge, and trade tax (except for freelancers). VAT registration in Germany might apply to some sole proprietors. The income tax is progressive and varies on the annual income.
It is also important to know that German law distinguishes between small business enterprises and commercial enterprises. Small businesses may not need to be entered into the commercial register, while commercial enterprises must be registered and may have the suffix "eK" (eingetragener Kaufmann - registered sole trader).
Also in the case of this type of business structure in Germany, small businesses register with the trade office, which notifies the tax office. Freelancers must register directly with the tax office. Commercial enterprises must be entered into the commercial register via a notary before registering with the trade office.
If you are a sole proprietor and need assistance with registration and other issues, our lawyers in Germany can help you.
Branch offices in Germany
A branch office is a suitable type of business in Germany for foreign companies that want to establish a presence in the country. It serves the purpose of initiating business activities and maintaining contacts with business partners. Our German lawyers can also assist with branch registrations.
There are two types of branches in Germany:
- Autonomous branch office: This type of branch office operates with a higher degree of independence from the foreign head office company;
- Dependent branch office: A dependent branch office has a closer relationship with the foreign head office and operates with less independence.
Note that this type of German company does not have an independent or separate legal personality. Instead, it is considered part of the foreign head office's business. The branch office follows the same regulations as the main company, and any debts or responsibilities of the branch office are the liability of the foreign company.
The taxation of a branch office in Germany depends on whether it is considered a permanent establishment according to the applicable double taxation agreement (DTA). Generally, autonomous branch offices are regarded as permanent establishments and are subject to German taxation rules for corporations, including corporate income tax. A dependent branch office is only considered a permanent establishment under specific conditions outlined in the DTA.
Our team of attorneys in Germany can give you more details about branches if you are interested.
General company formation steps in Germany
Starting a business in Germany is not a complicated procedure and as many investors choose to open a GmbH, the steps required to open this business form can be easily summarized and followed through. However, the language barrier may present issues for some investors and this is why our company formation lawyers in Germany are ready to provide the needed help when drafting documents in German and making submissions with the authorities.
Below, we present the main steps to open a limited liability company, the GmbH. Complete information about the procedure to open other business forms is available upon request.
- Choose the company name: this is a pre-registration step as this is an important condition: a chosen name must be available for registration; a check can be easily performed.
- Draft the documents: the Articles of Association are the company’s constitutive documents and they contain information about its name, scope, number of founders, shareholders and number of shares and other details.
- Notarize the documents: once drafted, the company documents are taken in front of a notary public in Germany and the Deed of Incorporation is executed in the presence of the notary and the company founders;
- Submit the capital: as previously stated, a mandatory minimum share capital applies for the GmbH; proof of minimum payment is provided for registration purposes; a bank account is opened and the amount is deposited therein; a bank statement is presented when registering the business.
- Register the GmbH: the company is registered with the Company Register; our lawyers can assist during this step.
Company formation in Germany is not conditioned by nationality. All foreign investors are welcome, irrespective of their nationality and/or place of residence. Moreover, the fact that the GmbH is a flexible business structure is an important advantage for those who decide to open a company here.
Please keep in mind that the steps described above apply in most cases, for opening a corporation, as opposed to those that are required to open a sole trader or a partnership. In general, simpler business forms are easier to incorporate, however, professional advice and assistance are recommended.
All corporations in Germany observe the accounting principles (in most cases, the IFRS), and need to submit annual financial statements. Investors can choose to work with our German accountants to ensure that these annual documents and properly drawn up and submitted. They can also reach out to our team for bookkeeping services, payroll processing, and tax payments.
We invite you to watch a video on the main types of companies in Germany:
Taxation and reporting compliance for the types of companies in Germany
Companies in Germany are subject to corporate income tax as well as the value added tax and other taxes for corporations. The value of the corporate income tax is 15.825% when also including the solidarity surcharge and companies need to pay the municipal trade tax, with a value between 7 and 17%. When all of these surcharges are combined, the effective corporate income tax in Germany has a value between 30 and 33%. The taxable income of a company in Germany is calculated according to the annual accounts submitted by the corporation. German VAT registration is also required in some cases.
Companies in Germany may choose a 12-month period as they see fit for their accounting period, however, it may not exceed this duration (it can be shorter in some cases). Tax returns are filed electronically by the end of July the year following the one for which the submission is made; when a tax advisor is involved an extension of the filing deadline can be granted. Company owners are expected to make quarterly advance corporate tax payments in March, June, September, and December. The trade tax also has four periods for advance payments in February, May, August, and November.
Tax penalties can apply for those who do not observe the filing periods (late filing) and these can have a minimum value of 25 EUR per each month of delay and a maximum value of EUR 25,000. Late payment is also subject to penalties, at 1% on the outstanding rounded-down tax amount per month. Inconsistencies in the tax audits are not subject to penalties in most cases, however, those taxes that have been assessed as a result of an audit are subject to interest of 6% per year. Company owners who need assistance with these calculations can reach out to our tax lawyers in Germany.
Company statistics in Germany
According to the Federal Statistical Office, in 2021 there were 3.4 million legal entities registered with the German Business Register. Out of these, the following numbers of companies were found in each of the main analyzed business sectors:
- 568,926 companies were in the wholesale and retail trade sector and the repair of motor vehicles and motorcycles industry combined;
- 509,923 companies were in the professional, scientific and technical industries;
- 387,853 companies were in the construction sector;
- The mining and quarrying sector had the least number of businesses, approximately 1,945 in total.
Investors who wish to know more about these business fields, as well as those who need complete assistance from one of our lawyers in Germany can reach out if they wish to start a business. We can help entrepreneurs incorporate irrespective of the chosen business field or the chosen type of company.
Entrepreneurs who wish to know more about company formation, the different business forms and the specific requirements for each one can contact our German law firm.