Setting up a company in Germany

How to start a business or trade representation in Germany?

I. Introduction

German law provides for a broad variety of corporate legal forms for pursuing business activities. There are different forms of capital-based companies on the one hand and different forms of partnerships on the other hand. For a first step on the German market a foreign company might want to set up a merely representative liaison office or a trading branch office. Another or later step could be the establishment of a limited liability company or a joint venture with a German company.

The following overview starts with the establishment of a non-trading liaison office as this form of entrepreneurial activity demands the least administrative effort. However there are certain requirements to fulfil.

A liaison or branch office may later be converted into a genuine company under German law. Among capital-based companies, a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) is the most common legal form due to the flexibility it offers. For this reason the summary will later focus on the setting-up of a limited liability company.

In both cases the foreign company interested in setting up a company in Germany is advised to develop a written business plan in advance. This plan is not compulsory in respect of legal matters but very useful in finding the appropriate legal form, applying for subsidies and in drafting the corresponding documents.

II. Setting up of a Liaison Office

1. Introduction

The basic feature of a liaison office is the distinct location of the principal establishment. It has no own legal personality and is dependant in every respect of the foreign parent company, which therefore assumes liability.

No permission is necessary for its establishment. The only requirement is a notification to the Trades Office (Gewerbeamt) responsible for the relevant place of business. Trade offices are official municipal or local authority bodies. The task of a Trades Office is to collect data on the conduct of trades and businesses. To comply with its duties the Trades Office forwards data of the registration to other authorities, e.g. the Tax Office or the Chamber of Industry and Commerce.

In addition to the notification of trade, any change in the business must be notified to the Trades Office.

2. Steps prior to Notification

A number of documents must be submitted to the Trades Office. In order to have these documents present, certain steps have to be made prior to the notification, e.g. the foreign company has to choose a premise from which it will operate its business in Germany. The first step therefore, is the conclusion of a rental agreement for office site.

3. Documents to be submitted to the Trades Office

The Trades office will request evidence, that the parent company constitutes a legal entity under the laws of the country of its registered main office. The requested documents thus are:

-           Duly certified copies of documents stating the registration of the parent company in a foreign Commercial Register. A certified translation into German language is required.

-           Shareholders Agreement and Articles of Association of the Parent Company. A certified translation is required.

-           Power of attorney in the name of a proxy with residence in Germany.

III.        Setting up a limited liability company (GmbH)

1. Introduction

A limited liability company (Gesellschaft mit beschränkter Haftung - GmbH) is a commercial trading company organised on corporate lines with its own legal personality. Minimum capital is 25.000 EURO. Its share capital is determined in its Articles and corresponds with the sum total of shareholders’ capital contributions. In comparison to the GbR (Gesellschaft bürgerlichen Rechts) for which is established a joint and several liability of the shareholders, in the GmbH only the company is liable to creditors for debts incurred by the company. The limited liability company avoids that the shareholders are liable with their private assets.

The foundation of a limited liability company creates a new legal entity, which can create rights in its own name as well as possess assets or real estate. The entity has its own rights and duties under German law and must bear its own name. The GmbH is the legal form most chosen by foreign companies, due to the flexibility it offers in conducting business.

Compared with a public limited company (AG), a limited liability company (GmbH) is subject to less severe regulations in some ways. Formation is less formal and is therefore simpler and cheaper. A one-person limited liability company is admissible, too. Articles can basically be drafted at will and the law on limited liability companies offers greater flexibility than the law governing public limited companies. There is no requirement for a minimum or maximum number of proprietors. It is even possible to form a one-person limited liability company. The founders of a limited liability company can be individuals and legal entities. A limited liability company can pursue practically any legally admissible aims.

The establishment of a GmbH requires three main steps: First, the drafting of the relevant documents and corresponding preliminary actions; second, the certification by a public notary; and third, the commercial registration and its respective publication.

2. Name of the company

Prior to the drafting of the founding documents the name of the company has to be agreed upon. It has to clearly distinguish the GmbH from other businesses in the same location and may not be misleading. The appendix “GmbH” – as reference to the limited liability of the company – is a necessary element. The company’s name is a mandatory element of the Articles of Association. Hence, conducting a name clearance is advised before the drafting of the following contracts.

3. Company seat

The company seat also has to be specified in the Articles of Association. A rental agreement should be taken care of in advance. Since the laws governing the GmbH are federal laws, the location of the registered office does not affect the rules governing the company.

4. Articles of Association (Gesellschaftsvertrag)

The company may only be founded on the basis of a written contract by all shareholders specifying the following mandatory points:

-           Name of the company

-           Purpose of the company

-           Company’s seat

-           Amount of share capital (Original contribution, Stammeinlage)

-           The sum to be paid by each shareholder towards the share capital

The remaining optional points of agreement can be customized to the needs of the company. The contract usually contains provisions defining the rights and obligations of the general meeting of the shareholders (Gesellschafterversammlung) as executive body of the company in addition to statutory rights and obligations. A supervisory board can be appointed but is not necessary. The only time a supervisory board is mandatory by law is when a limited liability company is subject to co-determination with its workforce (mandatory supervisory board), and also when capital investment companies or non-profit flat construction companies are operated in the form of a limited liability company.

A list of all shareholders has to be compiled, containing the names, dates of birth, residence, contribution to the share capital and signatures of each shareholder.

5. Managing Directors

The shareholders of the company have to appoint at least one managing director to represent the company in and out of court. The appointment can already be provided for in the Articles of Association. He or she has to be an individual, but not necessarily a German citizen. If the shareholders appoint a Non-EU citizen as managing director, the respective residence and work permits have to be obtained. The management authority can only be restricted internally. Vis-à-vis third parties the managing director’s power of representation can not be restricted. Managing directors are to submit a written statement that no circumstances (e.g. bankruptcy offences) prevail which could impair their appointment.

6. Capital – payment

The minimum amount of share capital (Stammkapital) of a GmbH is EUR 25.000. Shareholders are not liable beyond their initial share contribution from the moment of commercial registration. The initial contribution subscribed to by each shareholder must amount to a minimum of EUR 100 and be divisible by 50.

If contributed in cash, only one quarter of the share capital or a minimum amount of EUR 12.500 must be paid in by the date of the application for registration in the commercial register. For the payment, a bank account has to be opened in the name of the company to its complete disposal. The Court of registration will accept a bank statement as proof of inpayment.

The capital can also be rendered in kind (Sacheinlagen), e.g. by means of tangible or intangible assets, licenses or assets in enterprises. Contributions in kind must be made for the total value. In order to ensure that the share capital is paid up and maintained, evidence of the value of such payments in kind must be furnished in a report (Sachgründungsbericht) which must also be filed together with the application for registration. The local court will consequently request the opinion of a certified public accountant. The foundation of a GmbH by subscribing the minimum share capital in cash is thus often easier to do.

7. Certification by notary and announcement to the commercial register

The following documents have to be certified by a notary before handing them in to the Local Court:

-           The Articles of Association

-           The appointment of the managing director(s) if not already provided for in the Articles of Association.

            -           The signatures of the shareholders on the application itself

The founders of the company can delegate their powers to authorized representatives and thus do not need to appear in person before the German notary.

The application form, together with all other documents mentioned above, can be forwarded to the Court of Registration by the notary. From this moment the registration process usually takes a period of 4-6 weeks.

8. Registration in the Commercial register

Only upon registration in the Commercial Register the GmbH acquires full legal capacity. The Company may already conduct entrepreneurial activities prior to the registration. From the moment of the notarial certification of the Articles of Association, the Company is considered a “pre-GmbH” (Vor-GmbH) by law. There is a substantial financial risk for the shareholders as in this state the founding shareholders may be held personally liable for any losses of the pre-GmbH.

The registration has to be subsequently published in the Federal Gazette (Bundesanzeiger).

9. Unternehmergesellschaft (UG)

Since 2008, there is another possibility in Germany to set up a company. The so called Unternehmergesellschaft (UG), also named Mini-GmbH, was introduced as an alternative to the usual limited liability company (GmbH). It can be more attractive for founders of their own business due to the fact that only a minimum amount of 1 EUR share capital is necessary. Another difference to the GmbH is that the capital can not be rendered in kind. However, a UG clearly does not have the same standing and reputation as a GmbH.