Establishing a company or legal entityINVEST IN GERMANY

Establishing a company or legal entity

During the foundation procedure (e.g. notarization, opening bank account…) you can be represented by any local person, e.g. the lawyer and a postal address (temporary, or permanent for virtual office) can be provided. So you do not need to be present in Germany until the business starts. You may also receive short term or long term German visa relating to your investment upon application.

You can choose one of several forms of business when setting up the business initiative. The options range from a representative office through to corporations. Before you select a legal form for your company, you should consider the following questions:

  • Is your focus initially on maintaining contacts and initiating business, or direct business activity in Germany?
  • Are residence permits needed for you or your staff?
  • How many people will establish the company?
  • Are only the company partners going to manage the company or others too?
  • How much equity capital can be raised?
  • Is personal liability to be restricted?
  • Should the company have a high credit standing?
  • Should there be as few formalities as possible?

Also issues of tax, diversification of risks and flexibility should be taken into account.

Representative office

  • Less formalities and running
  • Conducting business is prohibited
  • No stand in the European hall at trade fairs
Foundation period
  • 6~8 weeks for a residence permit

The representative office is suitable for initiating business, market research, advertising and contacts. Conducting your own business, e.g. signing trade contracts, is not allowed. Therefore no formalities, capital and less work for accounting or tax refunds are necessary which saves initial and running costs. Usually no local business registration is required at all. Your representative person(s) can be anyone, and most foreigners need a residence permit for employment. Since most immigration offices consider representative office as an initial temporary establishment, visa for such purpose can only be granted for limited period of around two years.

Doing business changes the legal character into a branch office.

Entrepreneurs who are determined to do business sooner or later should consider initially establishing a company or branch office for the following reasons:

  • Residence permits for directors or employees are slightly easier to get
  • It gives a better impression to customer
  • Exhibiting in European halls at trade fairs
  • Additional costs for accounting and tax declarations are negotiable and can be assessed by the size of the business
  • In worst case the company can be sold and initial expenses can be recovered

German limited liability company (GmbH)

Key facts
  • Separate legal personality
  • Liability limited to the assets
  • Registered capital: at least EUR 25.000
  • Free choice of business field and name
  • Additional charges: ca. EUR 500 (registration and notary fee)
  • Foundation period: 3~4 weeks

It may be your first step for your well structured long term establishment on the German market. The company can either be run with local management in Germany or from abroad (virtual office).

Legal background

The GmbH is suitable for small-sized to large companies. It is a separate legal personality, which means it can acquire rights and enter into obligations of its own. The shareholders are not personally liable to third parties, and the liability of the company is limited to its assets.

At least one shareholder, who can be a natural person or a legal entity, with residence in Germany or abroad, is needed. For holding a share, no residence permit is needed. The shareholder has property rights (esp. share in annual profits) and rights of participation. He is free to dispose of his share unless the articles of association stipulate otherwise.

The minimum registered capital is EUR 25,000, which can be contributed in cash or in kind. At least 50% payment of the registered capital is enough for getting the company registered.

The shareholders appoint one or more directors who do not need to be shareholders. The director is the legal representative of the company and Is responsible for all daily businesses of the company. Foreign directors can either run the business from abroad, or work in Germany, for which a residence permit can be applied (see below under “immigration”). The company registration and optional immigration proceedings can run in parallel or in sequence. The director is the legal representative of the company. Depending on the articles of association, directors can represent the company jointly or alone. The director’s service contract setting out his contractual duties to the company and his salary is usually finalised at the same time as his appointment. Regular salary payment is important for tax and company law purposes (see below).

The foundation process

  • The articles of association and appointment of the director(s) have to be certified by a notary. Holding a (business) visa, the designated shareholder(s) and director(s) can attend the notarization in Germany in person. If the shareholder is a legal person, a copy of its business license certified by local notary and German Embassy at country of origin is required
  • The shareholder opens the company’s bank account in Germany and the registered capital shall be transferred to the account.
  • Representation of shareholders, e.g. by a lawyer, during all steps of implementation is possible; for foundation documents which need to be signed by directors, representation is not possible, but their signatures can be certified by German Embassy to fulfil the form requirements, so also the directors do not need to attend the German notary
  • The company has to be registered on the commercial register. The registered office must generally be the place where the company has an address. During the process of foundation, and also for long term, the registered office can be the lawyer’s office.
  • Having received the mandatory business licence, the company is allowed to conduct its business; the tax numbers can be applied for. Duration of foundation: 3-4 weeks.
  • Shell companies can be purchased; advantages such as faster process, disadvantages like higher service charges and risks resulting from the company’s past should be considered.
  • For the immigration proceedings for directors, employees and family members, please see below under “immigration”.

Other practical information

There are no important restrictions on the name given to a GmbH. If you are considering having the name (or part of it) registered as a trademark in the future, it should initially conform to the trademark regulations and not already be protected in favour of a third party.

Commercial companies are obliged to keep accounts in which their transactions and asset position can be seen clearly. It is incumbent on the directors, but they may assign this task to a third party. An annual financial statement and a management report must be drawn up. On the basis of the statement, annual tax declarations have to be prepared.

The corporation and the managing director are two different legal entities, even if the managing director and the shareholder is the same person. The company’s assets and the shareholder’s private property should strongly be separated. In case of mixture or see-saw transfer of the capital, the shareholder is likely to be held to never have lodged the registered capital, and he is liable for this amount if the company becomes insolvent. The money should be taken out regularly with legal grounds, e.g. salary, rental fees or profit distributions.

In practice, the assets of the GmbH should be as low as possible in order to limit the insolvency’s estate. Valuable assets like real estate should be held in private or in a holding company (company split-up). There are various opportunities not only for reducing liability, but also for tax (on profits and VAT) purposes.

GmbH & Co. KG / Ltd. & Co. KG

Key facts
  • Combination of GmbH/Ltd.
    Company and partnership
  • Limitation of liability
  • Direct profit drawings
  • Tax savings
  • Flexible structure
Foundation process
  • Similar to GmbH/Ltd., plus:
  • Draft of partnership agreement
  • Registration & business licence
  • Duration: similar to GmbH/Ltd., 3~4 weeks

A GmbH & Co. KG is a special form of limited partnership (KG), in which a GmbH participates as personally liable partner, known as general partner. This can be the only purpose of the GmbH; it does not need to conduct any other business. The other partners are limited partners, only required to effect their initial contribution pursuant to the partnership’s agreement. But the general partner, the GmbH, is a limited partner by legal nature. A GmbH & Co. KG is thus a partnership in which no natural person is personally liable for the KG’s obligations. The GmbH & Co. KG has its own legal personality.

Instead of a GmbH, a British Company Limited by Shares (Ltd.) can be the general partner, too, known as Ltd. & Co. KG. The descriptions for GmbH & Co. KG noted here apply accordingly. Details of the Ltd. you can find below.

The combination of the corporate law and tax advantages of partnerships with the liability advantages of corporations gives the GmbH & Co. KG its special flexibility as a legal form, especially for small and medium sized business.

Structure and foundation

The typical structure is as follows: the shareholder(s) and director(s) of the general partner GmbH can be identical to the limited partner(s) of the KG. The KG itself can also be the sole shareholder of the general partner GmbH, which excludes the risk of diverging participating interests in the general partner GmbH and the KG. A great number of additional limited partners can also be admitted as capital providers.

The partnership agreement between the general partner GmbH and the limited partners does not need to be notarized. It can be drawn up according to the partners’ needs, they enjoy freedom of contract. The partnership has to be registered on the commercial register, however the agreement does not need to be filed and is thus not available for inspection by the public.

The management and representation power rests with the general partner GmbH, which through its directors acts for the GmbH directly and for the KG indirectly. The limited partners are excluded from managing and representing the company for the normal course of business, they have only information and control rights.

Practice and advantages

Both, the GmbH & Co. KG as well as the general partner GmbH, are obliged to keep accounts and to provide annual financial statements and management reporting. If the general partner GmbH does not conduct any other business, the additional work involved in adopting the statements is kept within reasonable limits.

The profits of the KG are distributed to the partners due to the partnership agreement. Usually, the GmbH receives a small share to cover the basic salary expenses for the director(s). The limited partners (who are usually directors as well) receive the major part which leads to considerable tax advantages (see below).

Apart from tax reasons, the biggest advantage is the capital flexibility compared to the GmbH, in terms of both how its capital is raised and the shareholders’ rights to draw the company’s profits. The GmbH & Co. KG is suitable for those who are not willing or able to strictly separate the partnership from their private property, who prefer direct drawings and participation of profits instead of regular salary payments.

An already existing GmbH can additionally expand or completely change its purpose to become the general partner of a (new) KG. Following the first alternative, the (existing) business can be conducted by the GmbH, and a (new) business can be conducted by the GmbH & Co. KG. This structure is recommended if you want to enter a new business area with a new business partner separated from your existing GmbH. The new partner can become a limited partner and provide some additional capital. He can also be appointed as a representative or director of the GmbH & Co. KG. This structure provides a separate legal entity and limitation of liability without establishing a new GmbH with your partner. It is therefore a cost and time saving alternative for opening a new market.

The GmbH & Co. KG, introduced in the ‘70s, is well accepted in business and enjoys the same credibility as the GmbH.

Other companies & legal entities

The following overview is kept short because the mentioned legal forms usually play a secondary role for foreign entrepreneurs. Nevertheless, we can provide you with detailed information on request.

Stock corporation (AG)

In a German stock corporation (AG), the shareholders participate in the company by holding shares in it. Shares in an AG are capable of being listed on a stock exchange. Very strict and mandatory principles apply to listed and unlisted AGs in order to protect public investors and the general public interest by capital market transparency. There is a very limited scope for tailoring an AG to individual needs of its shareholders in contrast to the greater freedom offered by the GmbH or KG. Stock corporations from emerging countries avoided this AG structure in Germany, but the number of AGs established by them is expected to increase in the future.

Branch office

A branch office is an establishment with a distinctive location separated from the principal establishment, and a certain degree of organisational and effective independence. It does not have its own legal personality and bears the firm name of the foreign establishment, plus the word “branch office”. An independent and self organised branch has to be registered on the company register and most changes to the branch office structure or the foreign company need to be notified. A dependent branch cannot be registered on the company register. Both, dependent and independent branch, are required to apply for local business license at the city of residence. A branch office is obliged to keep accounts, deliver annual statements and tax declarations.

Sole proprietorship and other partnerships (GbR, oHG, PartnG)

Sole proprietorship and other partnerships are suitable for small business and special business areas, such as massage, sports, intellectual work or arts. Additionally they play an important role for holding and split structures, e.g. leasing assets to a company. Depending on size and business scope, the entities need to be registered on the company register, are obliged to keep accounts and deliver annual statements and tax declarations. For some business areas they are preferable for tax reasons, but in others they may cause problems for the foreign partner to get a residence permit.

The Business Company with Limited Liability (Haftungsbeschr?nkte Unternehmergesellschaft "UG")

The UG is almost similar to the German Limited Liability Company (GmbH, please see above). The UG varies in the minimum capital stock which amounts to EUR 1,00, and in limitation of profit distribution to 75% of annual profit, until the retained 25% profits increased the company’s capital to EUR 25,000. If so, the company’s name can be changed from “UG” to “GmbH”.

The UG was introduced in 2008 to provide a German alternative to the popular British Ltd. Both legal forms combine limited liability and small capital investment. But German business partners are likely not accepting these legal forms, because such companies are regarded to have few assets. A marginal capital stock may easily lead to insolvency and the general manager may become personally liable if he does not file for bankruptcy in time. Due to low investment sum, the UG is usually not suitable for the general manager to apply for residence permit, since the amount of investment sum and therefore the capital stock play a major role for the approval by immigration office.

  • One week foundation period
  • No minimum registered capital
  • Good reputation in Anglo-American influenced countries
  • Higher running costs
  • Lack of reputation in Germany
  • Involvement of German and English law

British Company Limited by Shares (Ltd.)

The Ltd. can be established in England and the entire business can be conducted by a branch in Germany. In that case the company is taxable in Germany. On some points it is comparable with the German GmbH: liability limited to the registered capital; own legal entity and representation by directors.

The advantages of the Ltd. are the short foundation process which takes about one week and the lack of regulations concerning the minimum registered capital. It has a good reputation in countries influenced by Anglo-American law.

The disadvantages are the higher running costs, caused by the need for an office clerk in England, double accounting and taxation requirements and the additional need for consultation by specialized English lawyers, since usually English corporate and insolvency law is applicable in Germany. Up to now, German business partners and immigration offices are likely to place the Ltd. at a disadvantage relative to the GmbH, because they might suspect a lack of capital resources and fear the involvement of English law. Therefore a personal guarantee by the directors is likely to be required. In addition to that, the Ltd. company should be provided with the capital that is necessary for its business, because otherwise it might become bankrupt and the directors and/or shareholders might be personally liable due to the English regulations.

Several consultants offer services including registration, office clerk, accounting and taxes in England for a small lump sum for one or two years. Not only the possibility of increasing costs after that period, but also all other advantages and disadvantages should be taken into account before making a final decision between GmbH or Ltd.

European Public Limited Company (SE = Societas Europaea)

The SE, introduced in 2004, has the legal nature of a stock corporation. It provides corporate identity in every member state and supports European cross border transactions. The SE has to comply with the many different regulatory systems of each member state where offices are located. A lack of legal and tax certainty has led to only a small number of foundations, which amounted to 30 until summer 2006.

Companies in distress

Germany has a codified legislation on restructuring of companies in distress. Insolvency is defined as illiquidity, immanent illiquidity or debt overload. In that case the directors should apply to open the insolvency proceedings at company register in due course, i.e. within around three weeks after signs for insolvency appeared, in order to avoid personal liability. Therefore the directors should be well informed about the company’s actual accounting results. Also third parties, e.g. creditors, have the right to file insolvency application.

The company register opens insolvency procedure when the remaining company assets can cover the proceedings costs, and it appoints an insolvency administrator who can liquidate all or some of the company's assets, restructure the company or shut it down. Creditors are asked to specify their claims which will be settled on pro rata basis (usually not more than 5% of the nominal claim).

In order to avoid contracting with an (almost) insolvent company, credit status information can be collected, furthermore contract conditions can help to prevent from losses resulting from your business partner’s insolvency.

Merger & Acquisitions

A complex transaction may combine different legal fields, such as e.g. labour law, industrial property protection, real estate law, anti-trust law or tax law, including the following steps:

  • The Letter of Intent provides security in terms of confidentiality and prevents breakdown of negotiations without a reason.
  • The Due Diligence process should gather relevant information about the target including its structure, risks and deal breakers.
  • Then a proposal on the future structure can be prepared, price-relevant tax factors analysed and the sales negotiations conducted.

After signing the contracts, the implementation phase starts, and, if necessary, further structural adjustments can be made.

In case of transactions between foreign and German parties, specialised native advisors from both countries should attend the process.

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