Gründung

Legal questions and taxes

This article will tell you more about what name you should choose for your company and what key criteria apply when naming a company in Germany.
Of course, the legal form you choose has an impact on the taxes you have to file and pay. To find the appropriate legal form for your company’s situation, we recommend that you consult a tax advisor who can analyse your individual needs and advise you on the correct legal form.

What legal form should I choose?

This is a decision you simply cannot avoid: Even by simply registering your business, you have automatically chosen a legal form! If you start your business on your own, it will be a sole proprietorship from then on. And if your enterprise requires a commercially organised business operation, a partnership constituted under civil law (GbR) or a general commercial partnership (OHG) is set up as a team effort. Since the applicable legislation for your business depends on its legal form, it stands to reason that the choice of legal form is a crucial decision.

Entry in the Commercial Register

Commercial enterprises must be entered in the Commercial Register, and small-scale businesses can be entered.
The following legal forms must also be entered:
  • e.K. (registered commercial trader)
  • OHG (general commercial partnership)
  • KG (limited commercial partnership)
  • GmbH (limited liability company)
  • UG (limited liability entrepreneurial company) and AG (joint stock company).
Special formalities must be observed when entering them in the Commercial Register.
Businessmen who have an entry in the Commercial Register have a company name that describes the commercial enterprise. Businessmen may choose a personal, descriptive or imaginative name for their company. By being entered in the Commercial Register, a one-man business becomes a sole proprietorship whose name must be completed with a designation such as e.K., e.Kffr. or e.Kfm. Examples: Bruckers Buchhandel e.K., Hotel Himmelbett e.Kffr., or Putzblitz e.Kfm.
The advantages of registration might be, for instance, that the businessman can grant power of attorney to his employees, and has the right to operate under his company name (rather than his own name), perhaps enabling the company to appear more reputable or to improve its image. In addition, only companies listed in the Commercial Register can be sold, bequeathed or leased, and open independent branches. Some banks, businesses and trade associations will only enter into a business relationship with companies listed in the Commercial Register.
On the other hand, one disadvantage of registration is the obligation to use double-entry bookkeeping and prepare a balance sheet in compliance with the German Commercial Code, which is more time-consuming than a simple profit and loss calculation. Commercial traders are also subject to the stricter legal requirements of the German Commercial Code and must, for instance, notify their suppliers immediately if they receive faulty goods, so as to retain their right to make warranty claims.

A selection of legal forms and their special features

Sole proprietorships

This is by far the most common legal form in Germany, and is very easy to set up. A sole proprietorship exists from the time you start work, if you have not chosen another legal form, and if you are starting up alone. The sole proprietorship is managed solely and independently by its owner, but of course staff can still be recruited.

Profile of a sole proprietorship

  • Suitable for an entrepreneur working alone
  • No minimum capital required
  • No listing in the Commercial Register required
  • Unlimited liability of the owner (i.e. including personal assets) vis-à-vis the company’s creditors
  • No company name in the legal sense (the first name and surname of the owner must be given in the company designation)
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, a licence must be obtained

Partnerships constituted under civil law (GbR)

A GbR is the simplest form of start-up where a team of people is involved. It forms automatically when individuals collaborate to pursue the same commercial goal, for instance by preparing a business plan in order to go into business together. Although a written partnership agreement isn’t essential, it is a good idea for you and your partners to draw one up.
As far as management of the GbR is concerned, the BGB states that all of the partners should make decisions together and should also represent the company jointly vis-à-vis third parties. This means that all of the partners must act as one to conclude each and every legal transaction. Since this can prove inconvenient in practice, the partners are able to make alternative internal arrangements in their partnership agreement (for example, they may appoint a single partner to manage or represent the company).
If your GbR grows to such an extent that it becomes a commercial enterprise, its legal form becomes that of an OHG by law. In this case, you are obliged to have the OHG entered in the Commercial Register.

Profile of a GbR

  • Suitable for at least two business partners
  • No minimum capital required
  • since 2024 Possibility of registration: Civil law partnerships with legal capacity will be entitled to register in the newly established public civil law partnership register. This register is similar to the commercial register and the entries enjoy a similar protection of good faith. Registered civil law partnerships carry the corresponding addition to their name (also shortened as ‘eGBR’, where ‘e’ means registered – ‘eingetragen’).
  • Unlimited liability of all partners (i.e. including personal assets) vis-à-vis the company’s creditors (joint and several liability)
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, licences must be obtained by all partners

General commercial partnerships (OHG)

At least two businessmen are required to set up an OHG. Each is entitled to manage and represent the company individually; in other words, each partner can act on his own initiative in the ‘normal’ course of business, with the other partners merely being entitled to object to his actions subsequently. Legal transactions can be effected by the partners individually. Alternative arrangements can be made in the partnership agreement.

Profile of an OHG

  • Suitable for at least two business partners
  • No minimum capital required
  • Listing in the Commercial Register required
  • Unlimited liability of all partners (i.e. including personal assets) vis-à-vis the company’s creditors
  • A company name in the legal sense can be used
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, licences must be obtained by all partners

Limited commercial partnerships (KG)

The main difference between this and the OHG is that liability is limited to a specified amount for one or more of the partners. These partners are known as limited partners (Kommanditisten). A partner with unlimited liability is called a general partner (Komplementär). With this legal form, it is very simple to strengthen the equity base by taking on new limited partners who are not, however, given decision-making powers with respect to the day-to-day running of the company. In this case too, a written agreement is not essential but is strongly recommended.

Profile of a KG

  • Suitable for at least one entrepreneur and one further partner
  • No minimum capital required
  • Listing in the Commercial Register required
  • Unlimited liability (i.e. including personal assets) vis-à-vis the company’s creditors of at least one (wholly liable) general partner
  • Liability of at least one limited partner up to the level of his investment
  • Management by the general partner
  • A company name in the legal sense can be used
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, licences must be obtained by all general partners

Limited liability companies (GmbH)

It is no accident that the GmbH is the most popular legal form in Germany after the sole proprietorship. This is because liability is restricted to the level of company assets. In the case of insolvency, creditors cannot generally access the personal assets of the partners, but only the total assets of the business, in other words the share capital at the very least. The minimum share capital is 25,000 Euro, at least half of which has to be deposited when the company is started up. This can be made up of material assets instead of cash.

Profile of a GmbH

  • Suitable for one or more business partners
  • Minimum capital of 25,000 Euro required
  • Listing in the Commercial Register required
  • The company has a legal personality (is a legal entity)
  • No personal liability on the part of the partners (in normal circumstances)
  • May be managed by an employee
  • A company name in the legal sense can be used
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, a licence must be obtained by managing director of the GmbH

Entrepreneurial companies (UG with limited liability)

This legal form is a specific type of GmbH. Essentially, the same strict rules apply as for a GmbH, but the minimum capital required when setting it up is just 1 Euro, and ‘specimen documentation’ can be used to facilitate its formation. If there is more than one partner, however, one should think carefully before using the specimen documentation, as it does not – for instance – contain any regulations about dealing with disputes.
According to the German Companies Act, a legal reserve must be created in the balance sheet to which one quarter of annual net profit must be transferred after first deducting any loss carried forward from the previous year. This reserve must be built up until the sum of €25,000 is reached and a GmbH is registered.

Profile of a UG with limited liability

  • Suitable for one or more business partners
  • Minimum capital of €1 required
  • Listing in the Commercial Register required
  • The company has a legal personality (is a legal entity)
  • No personal liability on the part of the partners (in normal circumstances)
  • May be managed by an employee
  • A company name in the legal sense can be used
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, a licence must be obtained by managing director of the UG (with limited liability)
More information about legal forms (in German)

What taxes do I have to pay?

Do not be alarmed; you only need to have at least a basic understanding of just four or five types of tax. This requirement even applies if you have had the help of a tax advisor from day one, as without a basic knowledge of the tax system, it will be difficult for you to evaluate your performance and organise your business processes.

VAT

VAT (turnover tax) is payable in the case of nearly every purchase or sale of products or services. The only exceptions relate to the typical turnovers of specific professional groups (such as doctors, physiotherapists and insurance brokers) and small business operators, who are exempt. As a businessman, you must charge your customers VAT and submit a preliminary VAT return to the tax office. When you make purchases for your company, the VAT you have paid becomes what’s known as input tax. This input tax can then be set off against the VAT you have collected.
If you start up a company, you are obliged to file a VAT return every month during the first year and the following calendar year by the 10th day of the month following the reporting period.
Generally speaking, debit taxation is used for VAT: you must pay the VAT as soon as you have invoiced your customer, and not wait until the invoice has been paid. Freelancers and small businessmen can apply to delay their reporting and payment of VAT until they have received payment from their customers (actual taxation). This exemption is also applicable to businesses obliged to maintain accounting records (commercial traders) if their total turnover in the previous calendar year did not exceed €500,000. If you wish to shift from debit taxation to actual taxation, you must submit an application to this effect to your tax office.

Income tax

Sole traders and members of business partnerships (GbR, OHG and KG) pay income tax. This is calculated based on income from business activities: generally speaking, the company profits. Income tax is calculated over a calendar year. Personal allowances are taken into account, while insurance contributions for old age, illness and accidents are deductible as provident expenditure. The tax system allows losses to be offset against profits from other income categories or from other years. If taxable income is less than the basic tax-free allowance, no income tax will be payable.
N.B.: Every year, the tax office calculates a specific sum that you must pay quarterly in advance. If your income in one year is higher than initially anticipated, you can expect to pay a balancing payment in the following year. The balancing payment plus the new, higher payment on account have caused many a young entrepreneur to get into serious financial difficulty. You should therefore set aside the funds in good time to settle any potential balancing payment.

Wages tax

Wages tax is a special form of income tax. Although it is the employee who owes the tax, you as the employer must undertake to withhold it by deducting it at source, and to pay it to the tax office. Payments of wages tax must be pre-registered with the tax office electronically. As well as wages tax, the solidarity surcharge and, if applicable, church tax must be withheld and paid to the tax office.

Trade tax

Every businessman in Germany is subject to this tax. It is the most important source of income used by local authorities to fund their public services. Taxation is based on trade earnings, i.e. the business’s profits adjusted in accordance with special guidelines. Payment of this tax must be made quarterly in advance. Here, too, it is important to set aside an adequate reserve if one’s profits are rising. Individuals and partnerships are entitled to a tax-free allowance of €24,500 per annum. A lump sum for trade tax can also be offset against personal income tax. Corporations may not offset the tax, nor do they have any tax-free allowance. However, in both cases it is important to note that trade tax cannot be defined as an operating expense.

Corporation tax

All corporations (such as the AG, GmbH and UG) are liable to pay corporation tax. It must be paid to the tax office every quarter in advance. Once again, it is the company’s profits that are taxed. Retained and distributed profits are subject to a standard corporation tax rate of 15 per cent. A further 5.5 per cent of this amount is payable as a solidarity surcharge under the German reunification regulations.