Unlocking Germany: The Incorporation Process for Foreign Start-ups

The Largest Economy in Europe

Germany is not only the largest economy in Europe but also offers an attractive market for foreign start-ups looking to expand their business activities. With its central location in Europe, and as a member of the European Single Market, Germany is a strategically important destination for companies looking to expand their reach. With a population of over 80 million, Germany offers a large and diverse consumer base with significant purchasing power. Following Brexit, more and more non-EU companies choose to incorporate their European headquarters in Germany. Cities like Berlin and Munich have vibrant start-up ecosystems and regularly attract foreign businesses.

While Germany is known for its robust legal system, it is also known for its high level of bureaucracy. Choosing the right legal form is, therefore, a crucial step for the success of the expansion and certain steps must be adhered to procure a seamless incorporation process.

Considerations for Setting Up in Germany

When deciding whether to set up a legal entity in Germany, consider your business goals. Determine whether you aim for long-term establishment or a temporary presence and assess your financial resources and willingness to meet capital requirements. Consider the level of liability protection you need, evaluate your capacity to meet regulatory and reporting obligations, and think about how your chosen entity will be perceived by customers, partners, and investors.

Incorporating a German subsidiary can be beneficial for establishing long-term business partnerships and customer relations in Germany. A subsidiary is a legally independent company in which the parent company holds the majority of shares. A domestic subsidiary, therefore, has its own legal personality independent of the parent company abroad and as such is subject to German law. Establishing a subsidiary, hence, provides clarity on legal issues. It also offers greater independence with regard to operations, adding a customised strategy for the German market. Contracts can be signed in the subsidiary’s name, and its own management can be appointed. Additionally, having a subsidiary enhances local market visibility.

Alternatively, foreign companies can open branch offices (Zweigniederlassungen) in Germany. The branch office is a part of the overall company that is organizationally, but not legally, independent from the main company. It is generally subject to the law which applies to the foreign main company. This option is simpler and cheaper to establish, requiring, in particular, no share capital. Accounting obligations and operational costs are lower, as administration and logistics are typically integrated into the main company. A branch office therefore suits temporary or smaller-scale activities but is not ideal for growth-focused start-ups.

The German Limited

German law distinguishes between partnerships and limited liability companies, with limited liability companies being more suitable for foreign start-ups, as they offer limited liability to the company's assets and are beneficial for multi-level structures (foreign parent company - German subsidiary). Partnerships, on the other hand, have unlimited liability, restricted management, non-transferable shares, and income taxed at the shareholder level, making them less attractive for growth-oriented start-ups seeking investor appeal.

The most popular legal entity for start-ups in Germany is the GmbH (Gesellschaft mit beschränkter Haftung), which is a German limited liability company. Its concept is similar to the British Limited and U.S. Limited Liability Company (LLC).

A GmbH may be formed by one or more individuals or legal entities, with no restrictions on nationality or residence. The GmbH is typically managed by one or more managing directors, who are responsible for the day-to-day operations. It has a minimum share capital of EUR 25,000.00; at formation, it is sufficient to pay in half of the share capital. The other half may be paid in at a later point in time. However, in order to compete with foreign legal entities, Germany introduced in 2008 a new legal entity called “UG” (Unternehmergesellschaft), which is basically a GmbH with a lower minimum share capital. A UG can be formed with a minimum share capital of only EUR 1.00. It is often referred to as the “small sister” of the GmbH given that there are no relevant differences from the GmbH. The only significant difference is that 25 % of the profits of the UG must be retained in the capital reserves of the company. If the share capital of the UG is increased to at least EUR 25,000.00 at any point in time, it automatically becomes a GmbH. Given the GmbH's higher reputation and prevalence in the German market compared to the UG, it may be more advisable to directly choose a GmbH as the legal form for your start-up.

A managing director of a GmbH can be any person of legal age who has not been convicted for fraud or other white-collar crimes. The managing director does not have to hold German nationality nor be a German resident. However, a managing director must be able to enter Germany (i.e., hold a European passport or a visa). Moreover, the GmbH must have a business address in Germany. This does not require an actual office but does require at least a mailbox for communication with German authorities. In many cases, foreign start-ups do not need physical offices in Germany. Hence, they use service providers that provide them with a mailbox, or they set up a mailbox at a co-working space.

Incorporation Process

The incorporation process in Germany is rather burdensome compared to other countries. The incorporation must take place in person at a German notary. At the notary, the articles of association are read aloud. In the case of a 100 % subsidiary, the articles of association are rather standard and can be prepared by the notary. If you require special corporate governance or other individual rules, the articles should preferably be drawn up by a local lawyer.

The shareholder (i.e., the parent company) must be present or duly represented. In case the shareholder is a foreign entity, the shareholder must provide proof that such entity exists under foreign law and that the person appearing is authorized to represent such entity under foreign law. Such proof may be provided by submitting a legal opinion from a foreign legal counsel or commercial register excerpts from the foreign commercial register, which must be notarized and apostilled in the country of origin. It is also possible to incorporate the GmbH online; however, you must hold an EU passport to be able to use the notary’s online services.

After incorporation at the notary, you must open a bank account in Germany and pay in the share capital. After the share capital has been paid in, the notary will apply for registration of the GmbH to the commercial register. The limited liability of the GmbH only takes effect once it is registered in the commercial register. Hence, entering into legal obligations should be avoided prior to registration. The process from incorporation to registration may take up to two weeks. If time is of the essence, start-ups should consider buying a shelf-company instead of founding a new company. Shelf-companies are “empty” companies which are incorporated by service providers who later sell the shares in such shelf-companies. Even though the sale of shares must be notarized as well in Germany, the process is less formalistic, and the registration of a new shareholder is faster than the registration of a new company. With the acquisition of the shelf-company, you can change the name of the shelf-company and amend the articles of association to adapt to your needs.

Navigating German Bureaucracy for Successful Expansion

In conclusion, Germany's strategic location and vibrant start-up ecosystems make it an attractive destination for foreign start-ups. When expanding to Germany, it is crucial to choose the right legal form, whether it be incorporating a subsidiary like a GmbH or establishing a branch office. The incorporation process, though bureaucratic, ensures legal clarity and operational independence. When working with service providers such as notaries, banks, and lawyers, it is crucial to choose international players who regularly work with foreign businesses. Consider travelling personally to Germany to attend notary and bank meetings, as this can end up being cheaper than issuing powers of attorney and other documents which need to be notarized and apostilled. By carefully adhering to the necessary procedures, start-ups can successfully establish and grow their presence in the German and European market.