German GMBH, UG AG and Limited Formations

You the entrepreneur

Try to find out exactly why you want to be self-employed and whether you really have what it takes to be an entrepreneur. Take the time to discuss matters, for instance, with chamber consultants, with friends who are self-employed and with family members.

Language barriers

A good command of German is still important in many areas for anyone starting up in business here in Germany. How else can you use all of the information that is so important when preparing to go into business? How can you get to know your market if you are not able to understand information provided in German? How can you explain your concept to the bank? Check whether your command of German is sufficient and, if not, attend a German course (German for foreigners) [Deutsch für Ausländer], e.g. at an adult education centre www.vhs.de.

Personal qualifications

Are you able to work independently, to make your own decisions, to assume responsibility? Can you lead and manage employees? Will your family support you in your endeavour? Not every entrepreneur will be able to meet all of these requirements.

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Professional background

The key to the success of your going into business is mostly your skills and what you have learnt, i.e. your professional qualifications and ability. Check whether your qualifications are recognised in Germany. To find out more, go to: Recognition in Germany

Commercial skills

Being an expert who has a good idea or new product will not automatically make you a good entrepreneur. That’s why you should make use of the courses and training programmes for people starting out in business which are on offer, for instance, from the Chambers of Industry and Commerce [Industrie- und Handelskammern (IHK)] and the Chambers of Skilled Crafts[Handwerkskammern (HWK)].

Types of new business

Self-employed people are either business people [Gewerbetreibende] or members of the liberal professions [Freie Berufe]. Different rules apply to these two categories.

Business people

A business [Gewerbe] is (almost) every kind of self-employed activity that allows you to earn money. For instance, traders, caterers, craftspeople or producers of goods are business people. On the other hand, people who work on a self-employed basis in one of the liberal professions, agriculture or forestry are not classed as business people.

You should also make note of the following:

  • Contact the Chamber of Industry and Commerce [Industrie- und Handelskammer] or the Chamber of Skilled Crafts [Handwerkskammer] to find out whether you need a permit or licence or if you need to sit an exam in your specialist skill.
  • If you are planning an activity in the skilled crafts or a related sector, you will need to be registered in the Trades Register or in the register of activities similar to skilled crafts at the Chamber of Skilled Crafts.
  • Once you have all the required documents, register your company with the Trade Office in the city where you want to start your business. The Trade Office will inform all the other relevant authorities (e.g. Tax Office, accident insurance fund, local court).
  • Membership in the Chamber of Industry and Commerce or the Chamber of Skilled Crafts is mandatory.

Liberal professions

It is not always easy to know which profession really belongs to the liberal professions [Freie Berufe]. The liberal professions include, for instance:

  • Healthcare professions: doctors, dentists, vets, non-medical practitioners, physiotherapists
  • Legal, tax and business advisory professions: attorneys, patent attorneys, notaries, accountants, tax consultants or business consultants
  • Scientific/technical professions: surveyors, engineers, architects
  • Linguistic and information-transmitting professions: journalists, image-based reporters, interpreters, translators

If you are not certain whether your activity is one of the liberal professions [Freie Berufe], we advise that you contact the Institute on Liberal Professions [Institut für Freie Berufe] or the Tax Office.

You should also make note of the following:

  • The activity is what counts, not the qualification. An architect running a construction company or a lawyer heading up a temping agency will not normally be considered to be a member of the liberal professions.
  • Ultimately, the Tax Office decides whether your activity is classed as a liberal profession or a commercial activity.
  • Freelancers do not register with the Trade Office, just with the Tax Office which provides them with their tax number.
  • Members of the liberal professions do not pay trade tax.
  • Some liberal professions require membership in their respective chambers. Also, a number of liberal professions have to observe special rules of their profession. To find out if the qualifications which you acquired in your home country meet with these requirements, please go to: Recognition in Germany.

Requirements under residency law

The preconditions that apply when starting up a business in Germany also depend on your nationality.

Nationals from an EU member state (or from an EEA country or Switzerland)

Labour mobility and freedom of trade apply within the EU member states as well as the EEA countries and Switzerland. EU citizens who wish to move to a member country do not require a residence permit and may set up a business in any of the member states. However, there are some exceptions. More detailed information regarding this can be found on the website of the Federal Office for Migration and Refugees.

Nationals from a non-EU country

Nationals from a non-EU country wishing to enter Germany in order to engage in a self-employed activity are required to apply to the respective foreign mission of the Federal Republic of Germany for a residence permit for the purpose of self-employed commercial activity.
Under certain circumstances, foreigners who are already resident in Germany and who have received a residence permit for a purpose other than self-employment can engage in self-employed activity. More information about this can be found on the website of the Federal Office for Migration and Refugees.

IQ Fachstelle Migrantenökonomie has also published a guide for people from non-EU countries starting a company.

Advice and Information

Before setting up your company, you should get as much advice and information as possible. Find out about the support that is provided, sometimes free of charge, by public and private institutions to people starting out in business.

You should first answer the following questions:

  • Do you have a promising business idea?
  • Do you have the personal and professional skills needed?
  • Is your assessment of the market correct?
  • Are your financial calculations realistic?

Advisory services

Chambers of Industry and Commerce [Industrie- und Handelskammern(IHK)]

General advice on all matters related to starting up in business (free).
The address of your nearest Chamber of Industry and Commerce can be found on the website of the German Association of Chambers of Industry and Commerce (DIHK).

Chambers of Skilled Crafts [Handwerkskammern (HWK)]

General advice on all matters related to starting up in business (free).
The address of your nearest Chamber of Skilled Crafts can be found on the website of the German Confederation of Skilled Crafts (ZDH).

Professional associations

A number of professional associations, e.g. the German Association of Consulting Engineers, German Association of Journalists, etc. offer various forms of support, such as start-up advice, publications and profession-related information.

KfW

Through the federal government’s financial support programmes, KfW supports people starting up in business and especially small and medium-sized enterprises. Go to the KfW website for more information about these business support programmes.

Tax advice

Tax consultants provide assistance on issues relating to tax law, business management, and in choosing the correct legal structure. The addresses of tax consultants can be found on the websites of the German Federal Chamber of Tax Consultants or the German Association of Tax Advisors.

Legal advice

Lawyers and notaries provide assistance, for example, in matters related to legal structure and contract issues (legal structure, purchase contract, etc.). The addresses of lawyers and notaries can be found here:

Business advice

Business consultants can offer in-depth advice on business management matters (concept, marketing, organisation, controlling, etc.). Addresses can be found on the following websites:

Federal Employment Agency [Agentur für Arbeit]

If you receive unemployment benefit I or II and wish to become self-employed, you may be eligible for a start-up or integration grant from the Federal Employment Agency. To find out more, contact the person in charge at your local employment agency.

Financial assistance may be available for professional business advice services:

Before starting up

Many federal states offer financial support to cover consultancy service costs or provide free consultancy services. To avail of this support, you should not have already established your company and you should avail of the consultancy service during the preparation phase. Information about offers and their terms and conditions is available from the points of contact in the federal states.

After starting up

The “Promoting Entrepreneurial Know-how” [“Förderung des unternehmerischenKnow-hows] programme supports consultancy services for young entrepreneurs in the start-up and consolidation phase.

Planning your start-up

How can you transform your business idea into reality? This is the question you need to answer in your business plan.

More importantly, you will also explain what’s new and special about your endeavour. You should also emphasize how your products or services benefit customers. You should explain in detail the costs of your product or service and the price at which you intend to offer them.

Make it clear how your product or service is different from that of competitors. State who you think will buy what you have to offer, explain your choice of location and how your product (your service) is to be marketed.

Your business plan: Layout and other information

Just how extensive your business plan has to be depends on what you are planning to do. The following overview offers a rough guide for your business plan and will steer you to the right background information (in German).

1. You the entrepreneur(s)

  • What qualifications/professional background and licences, if any, do you have?
  • What do you know about the sector?
  • What commercial skills do you have?
  • What are the strengths?
  • What are the weaknesses? How can they be offset?

Useful information:

2. Business idea: Product/service

  • What is the purpose of your project?
  • What’s special about your business idea?
  • What are your short-term and long-term business goals?
  • What product/service do you want to produce or sell?
  • When will production/service start?
  • Development status of your product/service?
  • What preconditions have yet to be fulfilled before you start?
  • When can the product be marketed?
  • Which legal formalities (e.g. licences, approvals) have yet to be completed?

For projects involving extensive development:

  • Which development steps have yet to be carried out for your product?
  • When can a pilot series start?
  • Who will conduct testing?
  • When will a patent procedure, if any, be complete?
  • Which technical licenses are needed?
  • Which patent or utility model rights do you have or have you applied for?
  • In an ideal scenario, how would the technological possibilities develop?

Useful information:

3. Market and competition

Customers

  • Who are your customers?
  • Where are your customers?
  • How are the individual customer segments made up (e.g. age, gender, income, profession, shopping behaviour, private or business customers)?
  • Do you already have reference customers? If so, who are they?
  • Are you dependent on just a small number of key accounts?
  • What are your customers’ needs/problems?

Competitors

  • Are there other developments “similar” to yours?
  • Who are your competitors?
  • What are your competitors charging for your products?
  • What are your competitors’ greatest strengths and weaknesses?
  • What weaknesses does your company have compared to your major competitors?
  • How can you counteract these weaknesses?

Useful information:

Location

  • Where will you offer your product/service?
  • Why have you chosen this location?
  • What are the disadvantages of this location?
  • How can these disadvantages be offset?

Useful information:

  • Start-up information – Location (in German)
    Location

4. Marketing

Offer

  • How can your offer benefit potential customers?
  • How is your offer better than that of competitors?

Price

  • What kind of price strategy are you pursuing and why?
  • What price do you want to charge for your product/service?
  • What is the costing basis for this price?

Distribution

  • How high are your distribution costs?
  • What are your sales targets and over which period of time?
  • Which sales territory do you have in mind?
  • Which distribution partners will you use?

Advertising

  • How can your customers find out about your product/service?
  • What kind of advertising measures are you planning and when?

Useful information:

5. Organisation/employees

  • Present your future company (date of establishment, shareholders, managing directors, employees, place of business, business purpose, strategic alliances. If available, patents, rights, licenses, contracts).
  • What is your company’s present phase of development (development, establishment, market launch, growth)?
  • If available, include an organisational chart of your company along with details of the individual managers (age, company affiliation, qualifications, training).

Employees

  • How many employees do you want to hire, when and at what frequency?
  • What qualifications should your employees have?
  • What kind of training are you planning to provide for your employees?

Useful information:

6. Legal structure

  • Which legal structure have you chosen for your business? Why did you opt for this?
  • What kind of shareholder structure are you planning and how will you distribute shares in the business?
  • Does the legal structure take into account the interests of the shareholders?

Useful information:

7. Risks/opportunities

  • What are the three biggest opportunities that could have a positive impact on the further development of your company?
  • What are the three most important difficulties that could hinder the positive development of your company?
  • How do you wish to counteract risks/difficulties?

Tip:

8. Financial plan

  • How much money do you need to get your company up and running and for a liquidity reserve for the start-up phase (6 months after establishment; approx. 2 years in the case of innovative science companies)?
  • How much equity do you have?
  • How much capital do you need to borrow?
  • What kind of collateral can you put up for loans?
  • Which funding programmes could be useful for you?
  • Which equity investors could also be of interest to you?
  • Can you lease certain assets? If so, what are the terms and conditions?

Liquidity plan

  • How high do you think your monthly contributions will be (spread over three years)?
  • How high do you think the monthly costs will be (material, personnel, rent, etc.)?
  • How high do you think investment costs will be (spread over the first twelve months)?
  • How high do you think the monthly debt service will be (principal and interest)?
  • What kind of monthly liquidity reserve do you expect to have?

Revenue/profitability forecast

  • How high do you estimate that sales will be over the next three years?
  • How high do you estimate that costs will be over the next three years?
  • How high do you estimate that profits will be over the next three years?

Useful information:

9. Documents

  • Tabular CV
  • If available, articles of association (draft)
  • If available, longer term rent agreement (draft)
  • If available, lease agreement (draft)

Financing

How much money do you need for your start-up? Many people starting out in business calculate with too tight a budget and then run out of money halfway through either because business didn’t go as well as they had hoped for or due to some other unexpected event. You should always include a buffer in your financial planning.

Equity requirement?

How much money can you invest in your project? If you are setting up a small office or a small company, you may even be able to finance it by yourself. In most cases, however, you will need to borrow money. And this is usually not possible without equity. After all, nobody should rely entirely on third-party financing and you will not be able to find anyone who will lend you money if you yourself are not willing to invest a reasonable amount of your own money in your project. If you do not have enough money to get your business up and running, you should look for other sources of finance as soon as possible. As a rule, start-up financing is made up of a government assistance loan, a bank loan and the founder’s equity.

What about collateral?

Every investor will, of course, want security in case the borrower is not able to pay back the loan. In the case of bank loans, collateral is required. This can be cars, securities or real estate. Even public loans may also require that a certain percentage be secured by collateral. However, when it comes to collateral, there are some things you should remember. Using the home in which you live as collateral could be a problem. The same applies to life insurance policies for when you retire.

Support and subsidy programmes

The federal government, federal states and the European Union offer support programmes to assist people starting out in business. This support usually comes in the form of loans. Public loans typically come with low interest rates, long terms and often with a redemption-free period before you begin repaying the loan.

The most important federal government support programmes for people starting out in business:

You can use the public support loans My micro-loan [Mein Mikrokredit], ERP capital for start-ups [ERP-Kapital für Gründung] and ERP StartMoney [ERP-StartGeld] along with assistance under the Micro-mezzanine fund for Germany [Mikromezzaninfonds Deutschland] to finance plant, property, plant and equipment, inventories and/or working capital. Plant, property, plant and equipment are fixed assets. Financing is provided for operating and business equipment as well as the acquisition of real estate. Working capital [Betriebsmittel] refers to current assets, i.e. operating costs.

EXIST Business Start-up Grant supports students, graduates and scientists from universities and research institutes who want to turn their business idea into a business plan. The start-up projects should be innovative technology or knowledge based projects with significant unique features and good commercial prospects of success.

When should you submit your application?

Your application must be submitted before you launch your project or before you invest. You should hence not sign any purchase agreement, order goods or commission services before financing has been secured. Simply registering your business does not have any adverse impact on support.

Where should you submit your application?

Submit your application for My micro-loan [Mein Mikrokredit] to a micro-financing institute.
Submit your application for funds under the Micro-mezzanine fund for Germany [Mikromezzaninfonds Deutschland] to Mittelständische Beteiligungsgesellschaftin the federal state where you want to establish your business.
Applications for a start-up grant should be submitted to your employment agency [Agentur für Arbeit].

Applications for ERP loans should be submitted to your own bank, i.e. commercial bank, savings bank [Sparkasse] or [Volks- und Raiffeisenbank] where you have your current account or where you wish to open your business account.

Which documents should you bring with you?

  • Business and investment plan
  • Sales and profitability forecast for two years
  • List of assets and debts
  • Tabular CV
  • Investment plan
  • Overview of your collateral, including, for instance, real estate, vehicles, machines. Your bank will decide on the value of the collateral provided by you.
  • Monthly liquidity plan for one year.

You can also find useful information in our Tips for your bank meeting.

How much equity do you need?

As a rule, your equity should total at least 20% of the costs that are eligible for support.

What will happen to the documents?

Your bank will check your credit rating and decide whether to forward your application to KfW or to the funding institutions in the federal state where you want to set up your business.

How will you receive support?

Funding must be used for a specific purpose. You will have to present your bank with the invoice or the purchase order for the planned investment. The respective amount will then be transferred to your business account.

More information and advice can be found at:

BMWi support database

Federal Ministry of Economics and Energy

Financing hotline
Tel.: 03018 615-8000
Monday to Thursday from 9am to 4pm, Friday from 9am to 12 midday

KfW information centre

Tel.: 0800 539 9001 (toll free in Germany)
Monday to Friday from 8am to 6pm

Formalities and public authorities

Before you launch your new company, you will need to deal with a few formalities.

Trade Office [Gewerbeamt]

Before you start: Register your business:

People who want to set up a trade business are required to register their project with the Trade Office [Gewerbeamt] in the municipality in which the business is to be established.

To do this, you will need:

  • A valid ID document or passport
  • Depending on the activity (e.g. catering), a permit or approval
  • A crafts card if you are planning to set up a business in the skilled crafts sector
  • A trade card for activities similar to those in the skilled crafts sector
  • A residence permit that also allows you to pursue a self-employed commercial activity
  • Between ten and forty euros for the registration fee
  • A police clearance certificate or information from the Central Commercial Register may be required.

You should describe the commercial activity in as much detail as possible. There are also rules that apply to the description of your company. Business registrations usually take just a few days to be processed. Freelancers do not have to register with the Trade Office, but contact their Tax Office directly.

The Trade Office automatically notifies the following authorities where you must also be registered: Tax Office [Finanzamt], your trade association [Berufsgenossenschaft], the Chamber of Industry and Commerce [Industrie- und Handelskammer (IHK)] or the Chamber of Skilled Crafts [Handwerkskammer(HWK)], the local court (Commercial Register) [Amtsgericht (Handelsregister)], the trade supervisory office [Gewerbeaufsichtsamt] (responsible for the occupational health and safety of your employees and customers; checks, for instance, ovens, beverage dispensers, etc.).

What you need to know before you go to the Trade Office

  • What kind of business do I want to start?
    For instance, a café. Do you want to set up a café with our without seating, a coffee bar, coffee-to-go? This has implications for your facilities (WC installation, etc.). Before registering your business, contact the Chamber of Industry and Commerce [Industrie- und Handelskammer] to find out about the preconditions that apply to your project.
  • Do I need a permit (approval, license)?
    Contact the Chamber of Industry and Commerce [Industrie- und HandelskammerIHK] in advance in order to find out whether your business requires a permit and which preconditions you have to fulfil.
  • Where will I set up my business?
    In a purely residential area, for instance, only small shops are permitted. The chambers and the municipal and regional business development units can be of assistance here. By the way: Many municipalities offer commercial space to start-ups at attractive rates.
  • Which legal structure will my business have?
    If just one person is setting up a small business, then sole proprietorship is an option. If you are setting up your business as a team, a civil law partnership could be your best option. You should decide on the legal structure beforehand together with your start-up and tax consultant.

Tax Office [Finanzamt]

Before you start: Apply for a tax number:

As someone setting up a business, you will automatically receive the “Questionnaire for tax registration” from your Tax Office [Finanzamt] after you have registered your business. As a freelancer starting out in business, you will have to contact the Tax Office yourself. You will have to complete the questionnaire, providing details of your future sales and profits. Please be careful when completing this questionnaire and provide a realistic estimate of your expected sales and profits.

Chamber of Industry and Commerce [Industrie- und Handelskammer (IHK)]

All domestic companies in Germany (with the exception of the skilled crafts, the liberal professions and farmers) are members of a Chamber of Industry and Commerce [Industrie- und Handelskammer (IHK)]. They offer an extensive range of consultancy services and seminars for members and advise people starting out in business. For certain professions, the chambers also offer examinations in subjects and skills that are required in order to obtain a licence for a profession, e.g. in the taxi or car rental sector or for the hotel industry.

Membership with the Chamber of Industry and Commerce is required by law and a membership fee is charged. Businesses automatically become a member as soon they have been registered with the Trade Office (with the exception of the liberal professions, skilled crafts, agriculture). The founder then receives a letter from their local Chamber of Industry and Commerce containing all the necessary information regarding membership.

Chamber of Skilled Crafts [Handwerkskammer (HWK)]

If you wish to go into business with a skilled craft that requires a licence, you will need an exemption for your registration in the Trades Register [Handwerksrolle] at the Chamber of Skilled Crafts [Handwerkskammer]. You can find an overview of the skilled crafts that require a license in Appendix A to the Trade and Crafts Code (PDF, 40 KB). If you wish to work exclusively across the border in one of trades listed in Appendix A (i.e. while having your place of business in your home country), you will not have to be registered in the Trades Register, however, you will require an exception issued by the Chamber of Skilled Crafts. The chamber must confirm that you meet the relevant preconditions in order to perform the skilled craft in question in Germany. In order to receive such a certificate from the Chamber of Skilled Crafts, you will have to provide proof of the type and duration of the profession carried out by you in your home country.

You are not required to provide proof of work experience if you can provide a certificate of competence that meets with the European guidelines for the recognition of certificates of competence (e.g. a diploma or examination certificate). If you wish to pursue a skilled craft in the health sector, you will always need such a certificate of competence. Work experience alone is not sufficient.

You will not need proof of qualification for the skilled crafts that do not require a license (Appendix B1 to the Trade and Crafts Code (PDF, 40 KB)). You can also make use of the exception rules of the Trade and Crafts Code if you fulfil the applicable preconditions.

Health insurance [Krankenversicherung]

You should notify your health insurance company [Krankenversicherung] that you are about to become self-employed. They will first check whether this is a full-time activity and your contribution payments will be then calculated on this basis.

Pension insurance [Rentenversicherung]

Please note that for some self-employed activities membership in the statutory pension fund is mandatory. This applies, for instance, to skilled craftspeople, midwives, teachers, artists and publishers. To find out which other professions belong to this category, go to: Gesetze-im-Internet.

Commercial Register [Handelsregister]

The Commercial Register [Handelsregister] at the local court [Amtsgericht] provides the public with information regarding the circumstances of the commercial operations registered there. It provides information regarding who is permitted to represent a company and who is liable. Business people [Gewerbetreibende] and corporations [Kapitalgesellschaften] (e.g. a limited liability company “GmbH“) must be registered in the electronic Commercial Register. Normally, this will be carried out by a notary [Notar]. Members of the liberal professions [Freie Berufe] and small businesses [Kleingewerbetreibende] are not registered in the Commercial Register. Small businesses operate facilities with very simply structured, limited and transparent business relationships (information is available from the Chambers of Industry and Commerce).

Chambers of the liberal professionals

Some members of the liberal professions are required to be members of their respective chamber. These professions include, for instance, doctors, chemists, architects and consulting engineers.

Construction Office [Bauamt]

If you wish to use rooms that were previously used for other purposes as your future business facility, you will need to apply for a change in use from the relevant Construction Office. The planning of rebuilding work and new buildings for commercial purposes must also be co-ordinated in good time with the Construction Office.

Public Health Office [Gesundheitsamt]

Depending on which sector you wish to work in, you may need a permit or a clearance certificate from the Public Health Office [Gesundheitsamt/Fachdienst Gesundheit]. In the case of start-ups in catering, you must have attended an instruction course by the Public Health Office or a commissioned doctor. This certificate must be submitted when you register your business and should not be more than three months old.

In the case of start-ups in catering or childcare, the Public Health Office or the trade supervisory office (varies from region to region) will also examine the standards of hygiene at your facilities. You will also need a police clearance certificate and confirmation from the Chamber of Industry and Commerce that you have participated in a seminar on hygiene and the handling of food.

Occupational Accident Insurance Fund [Berufsgenossenschaft]

The Occupational Accident Insurance Fund (BG) is the statutory accident insurance fund. Anyone who starts up a company should contact the relevant occupational accident insurance fund [Berufsgenossenschaft] to find out if they need to take out insurance with this fund. Entrepreneurs who do not employ staff are not always required to contribute to this fund. Voluntary insurance with the occupational accident insurance fund can, however, make sense because this will protect you against the consequences of work accidents and occupational diseases. You can find a list of occupational accident insurance funds at: German Social Accident Insurance.

Employment agency [Agentur für Arbeit]

If you are receiving unemployment benefit I and wish to apply for a start-up grant, you will have to contact your employment agency [Agentur für Arbeit]. Recipients of unemployment benefit II can contact their local provider of basic benefits for job-seekers [Träger der Grundsicherung für Arbeitsuchende] (job centres) to receive the integration grant for becoming self-employed.

If you were previously employed in Germany and have paid into the social insurance scheme, you can apply to the job centre to continue to be insured in the unemployment insurance scheme [Arbeitslosenversicherung] within the first month of your self-employment.

If you employ people in regular jobs, in so-called 450-euro jobs or as trainees, you will need a company number. You can apply for this 8-digit number at the company number service at the Federal Employment Agency. This number is used to register and de-register employees and to settle contributions to the health, pension and unemployment insurance schemes.

Taxes

You should address the topic of taxes even before you start up your company. Before choosing a particular legal structure, you should consult a tax advisor [Steuerberater] in order to find out about the fiscal implications of your decision.

You should be familiar with these taxes:

VAT [Umsatzsteuer]

VAT [Umsatzsteuer] is payable when you sell goods or services. The standard rate is 19% and a reduced rate of 7% is applicable, for instance, to professions in the arts and the media. You are required to bill your customers VAT and to state this separately in your invoices. You should take note of the information that is required in your invoices. You are then required to pay the VAT which you receive from your customers to the Tax Office as part of your VAT return [Umsatzsteuer-Voranmeldung].

Input tax [Vorsteuer]

You pay input tax on (almost) all company-related purchases. You should ensure that this tax is stated separately on the invoices which you pay. (Note: Invoices do not use the term “input tax” [Vorsteuer], but “VAT” [Umsatzsteuer].) You can then deduct this input tax [Vorsteuer] from the VAT [Umsatzsteuer] which you pay to the Tax Office as part of your VAT return [Umsatzsteuer-Voranmeldung].

Income tax

Anyone who generates or receives income is required to pay income tax [Einkommensteuer].
The income tax rate depends on the personal profit that you generate with your company (less all of your operating expenses). In the first year of your self-employment, the Tax Office will estimate your profit on the basis of the information you provide. The Tax Office will then determine a certain sum which you will have to pay as quarterly advance payments. If your income is higher than initially expected, you will have to pay tax arrears the following year. If you have to pay both tax arrears and income tax pre-payments at the same time, you may find yourself in some financial difficulty. You should hence contact your tax advisor to find out whether you can expect tax arrears and how much this will be so that you can put aside money to cover this.

Trade tax

You will be required to pay trade tax every quarter to your municipality. Once a year, you or your tax advisor, respectively, will be required to issue a trade tax return and to send this to the Tax Office.

Corporation tax

Corporation tax [Körperschaftsteuer] is payable solely for the profit generated by corporations [Kapitalgesellschaften] (GmbHAG). You will be required to pay corporation tax every quarter in advance to the Tax Office [Finanzamt] responsible for your company.

Small entrepreneur regulation

There are a number of rules designed to make business easier for small entrepreneurs.

If you fulfil both of the following preconditions, you will not be required to pay VAT[Umsatzsteuer] to the Tax Office [Finanzamt]:

  • your turnover [Umsatz] including payable tax did not exceed €17,500 in the previous calendar year and
  • your turnover [Umsatz] plus payable tax is not expected to exceed €50,000 in the current year.

At the time you establish your business, you should realistically estimate the total turnover you expect to generate. In the year of establishment, the expected total turnover for the current calendar year, including VAT, may not exceed €17,500.
Note: Anyone who does not pay turnover tax is not entitled to claim input tax. If you as an entrepreneur have high expenditure on investments and/or deliveries, you should consider waiving the tax exemption for small entrepreneurs. You should discuss this matter with your tax advisor.

Insurance and personal health and security provisions

Company insurance

Before requesting offers for insurance, you need to know what your main risks are and where real damage can occur.

Examples of company insurance

  • Corporate liability insurance [Betriebs-Haftpflichtversicherung]:
    to cover claims for damages by third parties, e.g. by customers, suppliers, visitors and employees
  • Professional liability insurance [Berufs-Haftpflichtversicherung]:
    For services companies and freelancers. This type of insurance covers the financial consequences of a professional oversight, for instance, incorrect advice, appraisal.
  • Business interruption insurance [Betriebs-Unterbrechungsversicherung]:
    to cover running costs, such as wages, salaries, rent and interest, etc. at times when revenues cannot be generated.

Personal insurance

Health and disability care insurance

If you are planning on changing from the statutory health insurance scheme to private health insurance, you should first consider the advantages and disadvantages of such a move. If you opt for private health insurance, you will normally not be able to return to the statutory health insurance scheme. The consumer advice centres can advise you in this matter.

Daily sickness allowance

A self-employed person who is unable to work (for instance, due to illness) will usually cease earning. A daily sickness allowance [Krankentagegeld] can offset these losses in income. This type of insurance can be taken out under voluntary statutory health insurance or as private insurance. You should compare insurance companies! Rates can differ considerably. You can also contact the consumer advice centres for assistance.

Occupational disability insurance

Occupational disability insurance provides you with a monthly pension should you find yourself unable to pursue your occupation. When taking out this kind of insurance, please check to see if you should take out separate accident insurance. For more advice in this matter, you should contact the consumer advice centre.

Statutory disability scheme

Unlike private occupational disability insurance [Berufsunfähigkeitsrente], the statutory disability scheme [gesetzliche Erwerbsminderungsrente] of the statutory pension fund will only pay out when the person insured is unable to pursue any kind of work, irrespective of their qualifications or their last job.

Accident insurance

The employers’ liability insurance association, i.e. statutory accident insurance scheme, is an important addition to all other forms of insurance. Private accident insurance is another option. Both types of insurance pay out when an accident results in invalidity. Entrepreneurs or freelancers are not normally compulsorily insured, however, they can insure themselves voluntarily with their employers’ liability insurance association against the consequences of accidents at work or on the way to and from work. The industrial/commercial employers’ liability insurance associations are organised according to sectors.
As always, it is important to obtain advice here.

Life insurance

A risks-only life insurance policy is the best way to protect the financial future of your family. This type of insurance becomes payable when the insured party dies. The level and duration of cover can be agreed to individually.

Pension provision

If while working as an employee you already paid into the statutory pension fund you will continue to be entitled to your claims. Self-employed freelancers and business people can continue to pay into the German Pension Insurance scheme and/or can take out private pension insurance. Some self-employed people are obliged to be insured in the statutory pension insurance scheme. This applies, for instance, to skilled craftspeople, midwives, teachers, artists and publishers.

Contracts

As an entrepreneur, you will continually be concluding contracts, especially purchase agreements [Kaufverträge], service contracts [Werkverträge] and employment contracts [Arbeitsverträge].

You can, for instance, use template contracts or have them adapted to your specific needs by an attorney or notary. Template contracts are, for instance, available on the websites of the Chambers of Industry and Commerce. Have an attorney or a notary check important contracts with regard to your specific case.

Please observe the following points when drawing up contracts:

  • Binding effect
    Contracts must be adhered to. Special attention should therefore be given to contract negotiations. Each party to the contract is responsible for ensuring that they can meet the obligations undertaken.
  • Validity
    Contracts can in principle be concluded orally. This applies, for example, to everyday things like purchasing office supplies or foodstuffs, but also to work contracts and service agreements. Other contracts should be made in writing. This applies, for instance, to many types of contracts made between an entrepreneur and a consumer (e.g. hire purchase business or consumer loan agreements). Land transfers and property encumbrances must be additionally notarised. This also applies to company law contracts of a private limited company. Binding lists showing the form required for the various types of contracts can be obtained from an attorney.
    Important: Faxes are not recognised as a written form of contract; emails are only recognised if they bear a digital signature in accordance with the Digital Signature Act.

Please contact us on +49 511 802883 for legal contracts in German language.

 

Kind regards
Metropol International & Lexicom – affiliation of Metropol A/S
Senefelderweg 2
D-30159 Hannover
Phone: +49 511 802883
Fax: +49 511 802873

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