Legal Requirements for Starting a Business in Germany

Anyone who wants to open a shop or restaurant has a lot to plan and organize in advance. In addition to a business plan with the business idea and an investment plan, it may also be useful to attend a start-up seminar and have a detailed consultation with a bank or financial advisor. However, there are also numerous legal aspects to consider.

The following section will explain which legal steps should and, in some cases, must be taken

1. Legal form

First of all, you should consider how the business is to be operated from a legal point of view. A business can be opened in Germany with a wide range of legal forms. The most common legal forms are: sole proprietorship or sole trader, or GbR (civil-law partnership) for several people, GmbH (limited liability company) or UG (limited liability company)

a) Sole proprietorship/sole trader

A sole proprietorship is operated by a single natural person. The advantage is that the owner can make decisions alone and is entitled to the full amount of profits. It is not possible to hold shares in a sole proprietorship. It is inexpensive to set up and can be done informally, except for a possible requirement to register the business. There is no minimum capital requirement. The disadvantage is that the owner is liable with all of his assets (including private assets).

A registered merchant (e.K.) is a sole trader who runs a commercial business (in particular a shop). The company must be entered in the commercial register. Nevertheless, the costs and formalities of setting up a business are relatively low. No minimum capital is required. The sole trader has sole decision-making authority and there is no possibility of shareholdings in the business, so profits do not have to be shared. However, here too, the disadvantage is that sole traders are liable with both their business and private assets. Sole traders are also obliged to keep accounts.

b) GbR

At least two natural persons are required to establish a partnership under civil law (GbR). No particular form is prescribed for the establishment of a partnership and it is not entered in the commercial register. No minimum capital is required either. However, since all partners are jointly and severally liable for the business liabilities, care should be taken to ensure that a trusting cooperation can take place. Due to the fact that the partners are liable with their private assets, it also makes sense for all parties to have sufficient knowledge of the financial circumstances of the others. It is often useful to set out individual rules (rights and obligations) in writing in a partnership agreement.

c) GmbH

A limited liability company (GmbH) can have one or more shareholders (natural or legal persons). The precondition for the formation of a GmbH is the conclusion of a company agreement and the appointment of at least one managing director. The formation documents must be notarized and the GmbH must be entered in the commercial register. The minimum share capital is EUR 25,000.00, although only EUR 12,500.00 need be paid in at the time of formation. The advantage of a GmbH is that the liability of the shareholders is limited to the share capital. The shareholders are not liable with their private assets. Capital increases and the sale or acquisition of shares in the company are relatively easy to achieve. From a tax perspective, too, it can make sense to set up a GmbH. The disadvantage is that the formalities involved in setting up a GmbH can be somewhat time-consuming. There are also legal accounting and disclosure requirements. You can find more information about setting up a GmbH in Germany on the following page: shop.liesegang-partner.de/gruendung-gmbh.html

d) UG (limited liability)

To establish a “Unternehmergesellschaft (haftungsbeschränkt)” (UG (haftungsbeschränkt)), also known as a “mini-GmbH”, only EUR 1.00 in share capital is required. The share capital must be paid in full. Otherwise, the establishment process is similar to that of a GmbH, and the UG (haftungsbeschränkt) is very similar to a GmbH. The UG (haftungsbeschränkt) has a lower share capital and some legal differences, for example the obligation to form reserves. However, the formation costs are much lower, as a standard protocol prescribed by the legislator can be used for the formation. The UG (haftungsbeschränkt) can have one or more shareholders. The liability is limited to the existing share capital, so that the shareholders are not liable with their private assets. The UG (haftungsbeschränkt) must set aside 25% of its annual profits until its share capital reaches EUR 25,000.00 and it can be converted into a GmbH. In addition, the UG (haftungsbeschränkt) is also subject to statutory accounting and disclosure requirements. You can find more information on setting up a UG (haftungsbeschränkt) here: shop.liesegang-partner.de/gruendung-einer-mini-gmbh-unternehmergesellschaft.html

Alternatively, it would also be possible to take over an existing business. However, legal advice should be sought in this case with regard to the assumption of debt that may occur.

2. Company name/brand

The name of the business and the company is often crucial to its success. In this context, it is important to observe the peculiarities of company law, which we have summarized on the following page: www.liesegang-partner.de/eshop/gesellschaftsgruendung/firmierung.html. It is always a good idea to clarify any concerns about company law with the relevant chamber of industry and commerce in advance.

This is to be distinguished from trademark law. It is recommended to check whether there are conflicting trademarks, company names and domains. We are happy to advise you in this regard and will conduct a trademark search for you: shop.liesegang-partner.de/marke/markenrecherche.html

3. Registrations

Depending on the type of business and legal form, the following registrations with different authorities are possible:

a) Commercial register

Registration is mandatory for a registered merchant, a UG (limited liability company) and a GmbH (limited liability company).

b) Trade office

If you are operating a business, you must register it with the trade office. If a commercial register entry was previously necessary, you must enclose a corresponding commercial register excerpt.

c) Chamber of Commerce

Membership of the Chamber of Industry and Commerce is mandatory.

d) Other chambers

In addition to the Chamber of Industry and Commerce, membership of other professional associations (e.g. the Chamber of Crafts) may be required. The object of the company is the deciding factor.

e) Professional and industry associations, professional associations

In addition, membership of professional and industry associations and insurance in a professional association may be mandatory or useful.

f) Tax office

In the case of corporations, the tax office automatically requests that the company be registered for tax purposes. Sole proprietorships and sole traders must also register with the tax office. They will receive a questionnaire for the tax registration of the business.

g) Employment agency

If you employ staff, the new business will need a company registration number from the employment agency. In addition, the employees must be registered with the respective health insurance company and social security contributions must be paid.

4. Special license

In some sectors, an additional license or concession is required, for example for taxi drivers, restaurant operators or brokers.

5. Contractual and legal particularities

Anyone opening a business or shop should also consider contractual matters, such as

a) Non-competition clause, prohibition of secondary employment

Is there a prohibition on competition or secondary employment? If you are already employed or have a stake in an existing company, this would need to be examined more closely. Please contact us if you require assistance.

b) Contractual arrangements

Anyone who runs a business is bound to enter into contracts with business partners, suppliers, employees and, above all, customers. The main types of contracts that come into consideration are contracts for work and services, employment contracts, rental contracts, supply contracts and general terms and conditions (GTC) for the services offered.

Attention should be paid to legal validity and economic sense. Please contact us if we can be of assistance

6. Insurance

Insurance is an important issue. There are numerous options for covering potential risks. The types of insurance that we consider are:

Liability insuranceBusiness interruption insuranceInsurance against burglary and theft, electronic, fire, water pipe and product liability damageEnvironmental liability insurance (e.g. for industrial and transportation companies)Health and accident insurance for work and leisure, occupational disability and nursing care insuranceCommercial legal protection insurance

7. Taxes

It is advisable to seek the help of a tax advisor in advance to clarify what tax obligations exist and what needs to be considered.

A partnership (especially a GbR or sole trader) is not subject to taxation itself, but only its partners. The partner is personally liable for tax. In contrast, a corporation (especially a GmbH or UG (haftungsbeschränkt)) is subject to taxation as a legal entity with its profits.

The following taxes are among those that may apply:

• Corporation tax (15% of profits)
• Capital gains tax on profit distributions (25% (plus 5.5% solidarity surcharge))
• Trade tax (depending on the location of the shop)
• Solidarity surcharge (5.5% of corporation, capital gains and wage tax)
• Value added tax (19% or 7% of the net invoice amount)

Further information on taxation of a UG or GmbH can be found here.

8. Special feature: website

If you are planning an internet presence, you will need to address the issues of data protection and the mandatory information to be provided in the imprint. In addition, there are numerous information and instruction obligations that must be observed in the context of an online shop/platform or online order. We will be happy to help you with this as well.

9. Other important regulations

From a legal point of view, there are other laws and regulations that you may have to comply with. We have listed the most important ones from our point of view below:

legal opening hours (depending on the federal state, there are different regulations to be observed)pricing in accordance with the price indication regulationparking space obligationsfood regulationsobligation to provide sanitary facilities

Please contact us if you require more detailed information on any of these points or if we can provide you with general legal support when opening a business.