Business Structures in Germany

Business Structures in Germany - Taxation, Creation and More

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Last updated: 13 May 2020 / by Sam Williams

When you move to Germany you may already have a job lined up, but if that isn’t the case, you could consider working for yourself. Self-employment is an increasingly popular choice, with more than 4 million people setting up business in Germany.

Since 1994, the self-employed market has ballooned in Germany. If you want to follow the same path, you will find plenty of guidelines to help you succeed. However, you will need to make some fundamental decisions yourself, such as the basic structure of your business.

Choosing your business structure is far more than an administrative decision, it can affect how much tax you pay and your legal liability. Our guide will walk you through the different options available and explain what each one means.

Sole Traders (Einzelunternehmen)

Also known as sole proprietorship or individual entrepreneurs, these types of businesses are owned by a single person.

One of the simplest ways to set up a business. If you are a sole proprietor, you get to keep all the profit you earn.

There is no dividing line between the company and the individual with a sole trader structure. All money generated after expenditure is yours, but you also carry full liability. This means that if your business goes bust, you are personally liable for any debts and cannot just walk away.

You must register the business in your name with the tax authority, but it is not always entered into the Trade Register (Handelsregister).

Types of Sole Traders

Small Trader (Kleingewerbetreibende or Kleinunternehmer)

If your business either produces or makes items, you will probably be classed as a trader (gewerbe).

When your revenue from this type of commercial business is below €17500 in the first year, and €50,000 in subsequent years, German law will class you as a small trader (kleingewerbetreibende). This distinction is important as different rules apply to small traders compared to larger businesses. The laws that apply to small traders are known as Kleinunternehmerregelung.

You will not need to register for VAT, nor have your business listed in the German Trade Register (Handelsregister), but you can choose to do so if you think there will be an advantage.

Listing your business in the Trade Register will place certain obligations on your business, even though the listing is voluntary. If you are considering this, you should first check with an accountant.

You will still need to register with the local Trades Office (Gewerbeamt) to obtain a trade permit (Gewerbeschein). This means paying an annual membership subscription to the Chamber of Commerce (Industrie-und Handelskammer – IHK).

In most cases you will be liable for trade tax (Gewerbesteuer). There is an exemption for small businesses which generate less than €24500 profit per year.

Gewerbetreibende

If you do not meet the criteria for a small trader but are still manufacturing, selling or working commercially as a sole trader, German law classifies you as a Gewerbetreibende (trader).

Similarly to a small trader, you must register to obtain a trade permit, and you will need to pay your subscription to join the Chamber of Commerce.

You will be liable for trade tax but unlike a small trader, you will also have to pay VAT (Mehrwertsteuer or ‘MwSt). Compared to some other countries, the threshold for VAT registration is relatively low in Germany.

You will also have to list your business in the Trade Register (Handelsregister) and you must use a more complex type of record-keeping, known as double-entry bookkeeping. Other types of sole trader can also use this method if they prefer, but for a gewerbetreibende, it is compulsory.

Freelancer (Freiberufler)

In Germany, there is a very strict definition of what types of roles qualify as freelance. This type of sole trading is recognized as a distinct entity, and has its own set of rules.

 The jobs typically have an academic component, or they are creative. Any type of which is artistic, or requires a degree is normally accepted as freelance. Some of the typical types of jobs which meet the freelancer criteria include:

  • Interpreter, translator, journalist, teacher, writer
  • Engineer, architect
  • Lawyer, tax consultant, accountant
  • Vet, doctor, therapist, dentist, psychologist
  • Photographer, actor, dancer, artist, musician, designer

All you need to do to get set up as a freelancer is apply for your tax number (Steuernummer) from your local tax office (finanzamt). They will confirm whether you meet the freelancer criteria. You do not need to list your business in the Trade Register (Handelsregister). 

Check our Guide: How to Become a freelancer in Germany

Partnerships

If you are setting up a business with another person, you will be in a partnership. There are many different types of partnerships, but they can be broadly grouped into general partnerships and limited partnerships.

The main difference between eh types of partnerships is the liability. You retain personal liability for the business in general partnerships. In limited partnerships, as the name suggests, there is only limited personal liability.

It may seem like an obvious choice to limit your liability, but there are extra responsibilities that come along with this type of structure.

All partnerships will be liable for trade tax and must be VAT-registered.

Types of General Partnerships

Civil law Partnership – Gesellschaft des bürgerlichen Rechts (GbR)

This is the simplest type of partnership and either freelancers or other types of self-employed workers can use it. Although it is referred to as a partnership, there can be more than two people in the agreement. There is no minimum capital requirement.

No formalities are required to create this type of partnership; you can create a civil law partnership with just a handshake, should you choose! (This is not recommended, however. You should always create a written agreement for the protection of all parties, even though it is not legally required.)

Civil law (Bürgerliche Gesetzbuch or BGB) applies to these types of partnerships.

Every partner is an equal member and has equal responsibility for the business. This includes being personally liable for the whole of the business’ debts. Although in a civil law partnership, you act collectively as a business, you must all individually obtain the necessary permissions or paperwork. For example, for a group of traders, each must obtain a trade permit. Likewise, for freelancers, each one must apply for their steuernummer.

Freelance Partnership (Partnerschaftsgesellschaft – PartG)

You can only use the PartG partnership if you are a freelancer. It’s a common structure for similar freelancers who want to join together, such as doctors or lawyers. Unlike a GbR, it has a formal contractual basis which, once drawn up, is known as the Partnerschaftsvertrag. You must enter this business into the partnership register (Partnerschaftsregister).

As a member of the partnership, you share unlimited liability with all other members. This can be specified more clearly in the partnership contract as the law allows for certain restrictions to be made. For example, the liability may be confined to the doctors who treated a patient, rather than all the partners in the business.

If you are liable for any transaction or service, you have full personal liability and your private assets could be seized.

Commercial Enterprise Partnership (Offene Handelsgesellschaft – OHG)

An OHG is fairly like a GbR other than the fact that it is limited to traders. If you are a freelancer, you cannot form an OHG partnership agreement.

The other primary difference between a GbR and an OHG is the size of the business. You must list an OHG in the Trade Register. You can also list your GbR in the Trade Register, but unlike an OHG, it is not compulsory.

Once a business reaches a certain size, it will automatically convert to an OHG, from a GbR. There is no single defined point where this happens. The authorities will decide when a business is large enough to become an OHG. They will take several factors into account, such as turnover, number of staff, loans, number of transactions and size of business premises. As a rough rule of thumb, authorities will classify your business as an OHG once you have more than five members of staff, or your turnover is more than €250,000.

Every partner in the business can represent the firm or make decisions on its behalf.

Types of Limited Partnerships

Limited Partnership (Kommanditgesellschaft – KG)

This business structure operates as a partnership while removing some of the liability issues for some of the partners, but not all. One (minimum) partner is the general partner, the Komplementär, who has unlimited liability which includes their personal assets. The other partner/s are limited partners, Kommanditist, and their liability is restricted to their company holdings.

Limited Partnership Using a Limited Liability Company as the General Partner (Gesellschaft mit beschränkter Haftung und Kommanditgesellschaft – GmbH & Co. KG)

A more complex type of limited partnership, in this structure, the role of Komplementär, is taken up by a limited liability company, the GmbH. The Kommanditist are individual partners and have the same type of limited liability as with a KG.

The GmbH has the liability for the business, and the managing directors of the GmbH, the Geschäftsführer, represent and manage the GmbH & Co.KG.

The difference between this structure and the basic KG is that the Komplementär has liability which is limited to its assets. The personal assets of the Geschäftsführer are not at risk as it is the company, which is the partner, not the directors in their personal capacity.

This is one way to limit liability in a business, but banks may not be willing to issue loans on this basis. To get credit, the Geschäftsführer may have to agree to sign a liability agreement with the bank.

Limited Partnership Using a Limited Liability Company as the General Partner with Nominal Capital (Unternehmergesellschaft mit beschränkter Haftung und Kommanditgesellschaft – UG & Co. KG)

This structure is almost identical to the GmbH & Co. KG, where the UG assumes the role of Komplementär and the individual partners are the Kommanditist. The only difference is that nominal capital is required, starting at one euro for the UG.

See below for more about a UG.

freelancer Partnership with Limited Liability (Partnerschaftsgesellschaft mit beschränkter Berufshaftung – PartG mbB)

If you like the idea of a freelancer partnership but want more protection over potential liability, a PartG mbB might provide the solution. This structure is the same as the basic PartG in many ways, apart from allowing the partners to have limited liability. You achieve this by using a type of liability insurance, Haftpflichtversicherung.

You can only set up a PartG mbB if your liability insurance is regulated by law. The professional liability insurance sets the limit of the liability of the business. The private assets of all the partners are all protected as liability is limited to the insurance in force.

All the other rules which apply to a PartG partnership also apply to a PartG mbB.

Corporate Enterprises

Entrepreneurial Business with Limited Liability (Unternehmergesellschaft mit beschränkter Haftung – UG)

A UG is a simple way to set up a new business, making it easier for would-be entrepreneurs. You may also hear a UG called a “1-Euro GmbH” or a “mini-GmbH“. You can start a UG with €1 as nominal capital, increasing the share capital annually until you reach €25,000. You must deposit 25% of the profits every year to reach this value.

This structure is designed to act as a start-up model and is helpful if you’re keen to minimize risk in the early days of your business. Just like a GmbH, your liability is limited to your holding in the company. Personal assets are not liable in this structure.

The incorporation process for a UG is simplified compared to a GmbH, and the notary can use a standard proforma. This is unlike a GmbH where specifics are necessary. Taxation is the same for a UG as a GmbH.

The disadvantage of a UG is that you must clearly show that the business is a UG, and this may raise concerns over financial stability with potential creditors.

Limited Liability Company (Gesellschaft mit beschränkter Haftung – GmbH)

This is the “full” version of a limited liability company, roughly equivalent to Ltd or LLC companies that exist in the UK and USA.

You need at least one managing director (Geschäftsführer) at a GmbH. The managing director/s can also be shareholders. If there are more than 500 employees at the GmbH, a supervisory board (Aufsichtsrat) must also be present. The managing director/s are the only persons who can represent the company.

If the company fails, the liability of the company is limited to its assets. The shareholders will not be liable for any more than their share capital. This is one of the benefits of a limited liability company; personal assets are not liable or at risk.

The company legally exists once it is formally listed in the Trade Register (Handelsregister).

Joint Stock Company (Aktiengesellschaft – AG)

An AG is a type of legal structure that allows you to offer shares to the public and to trade on the stock market. There are many formalities, including articles of association which must be authenticated by a notary or a court, and a minimum of five members.

Initial share capital must be at least €50,000 and its legal existence begins once it is listed in the Trade Register (Handelsregister).

The managing board (Vorstand) is responsible for operational decisions. They report to the supervisory board (Aufsichtsrat) who appoints the managing board initially. There must be a regular schedule of general meetings (Hauptversammlungen), during which shareholders can contribute to company policy.

Small Joint Stock Company (Kleine Aktiengesellschaft – AG)

This is a miniature version of the full AG, which has lower levels of regulation. Conversely, it has higher levels of complexity in the registration process. You can set up a kleine AG as a sole shareholder, but you must still have a share capital of at least €50,000 and an advisory board (Aufsichtsrat) of at least 3 people.

Getting Professional Advice

Just like any other country, there are many types of legal structures in Germany.

Each type has its advantages and disadvantages, some of which may not always be apparent. You should, therefore, seek professional advice before setting up your business to check which type of structure would be the best for you.

Business Structures in Germany - Taxation, Creation and More

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