I. Foundation of companies
The first question to be answered when founding a company is: Which type of company best suits the objectives of the founder(s)?
In most cases a privately limited company (Ltd in UK or GmbH in Germany), i.e. a company with limited liability for its owner(s), is chosen. The foundation of an Ltd/GmbH requires the conclusion of a shareholder's agreement, which needs to be recorded by a notary public. The minimum share capital of an Ltd/GmbH is EUR 25.000,00.
In recent years more and more publicly limited companies (plc. in UK or AG in Germany) are being founded. The shareholder's agreement needs to be recorded by a notary public, the minimum share capital is EUR 50.000,00, and there are several other formalities which have to be observed.
The foundation of a Plc is advisable if the company plans to launch on the stock market. In some cases it may be financially lucrative to go in this direction, but this has to be determined case by case.
II. Foundation of a Partnership
In business life two types of partnerships are of importance: the open commercial company and the limited partnership company. An open commercial company consists of several individuals or legal persons, whose liability is unlimited. A limited partnership consists of at least one partner, whose liability is unlimited (the so-called liable partner) and at least one more partners whose liability is limited to the amount unpaid on the shares held by them (the co-called limited partner).
III. Opening of a dependent branch
It is also possible to open a branch of an existing company without your own separate legal person. This alternative can be considered if the foreign business wants to analyze the market situation. German company law does not contain any specific requirements for such branches. In this case the law of the country where the main company is based applies. In other words: the law of the homeland must allow the opening of such a branch.
1. Single entrepreneurs
No specific foundation act is required if an individual wants to establish a business in Germany. But there are certain formalities which must be observed, these duties are described in the following section.
2. Duties towards the public authorities
Anyone who wants to set up a business in Germany has to fulfil certain obligations to the public authorities.
In Germany the concept of the free trade prevails. Specific permission is only needed in certain cases which are noted in the law of the land, e.g. if the business may cause harm to the public such as waste disposal or the production of weapons.
If this is not the case, the starting of the business needs only to be reported to the relevant local authority. The relevant local authority - the city in whose area the business enterprise is seated - will then grant a trading licence. A licence can only be refused in certain situations, such as the suspicion that the company will pursue illegal activities.
The commencement of business activities must also be reported to the relevant tax office at the seat of the business and to the social security offices.
IV. Timescale
It is always advisable to take your time when setting up a new business and allow time for unforeseen problems. Experience shows that most problems do not arise from legal obstacles - like the ones mentioned above - but from practical aspects. Such things as the search for suitable offices and employees should be prepared well in advance. A time period of six months is realistic.
The fulfilment of the legal prerequisites, in particular the drafting of the shareholder's agreement may take a few weeks. In practice delays may take place, especially if several people are involved and they have different opinions on the necessary contents of the shareholder's agreement. Therefore, you should allow about one month for the drafting of a shareholder's agreement. The legal formalities involved can be settled relatively quickly. You can get an appointment with a notary public within a few days, besides that, a company whose foundation has been recorded by a notary public can already take up its business before it is registered in the companies' register.
V. Costs
Intensive legal and fiscal counselling is to be recommended when setting up a business, good advice in the early stages means many risks can be minimised or even eliminated. We recommend legal and financial advice at all stages of the set up; this includes during registrations and notifications at the local authorities and the finance offices.
According to our experience the following time plan can be reckoned with:
GmbH: approx. 40 hrs.
AG: approx. 60 hrs.
Partnership: approx. 35 hrs.
Opening of a branch for a domestic company: approx. 20 hrs.
Opening of a branch for a foreign company: approx. 40 - 50 hrs.
The time differences can be explained by the necessity of authentication by a notary public; the formation of a branch of foreign companies may at times turn out to be very time-consuming, since the legal situation of the foreign mother company have to be explained to the German authorities and therefore explanations regarding the foreign law may be necessary.