Cost of Starting a Business in Germany: How Much Do You Need?
Starting a business is exciting, especially in an economically prosperous country like Germany. However, the prozess isn’t simple and indeed not free. Before even considering launching a new business, you must consider all costs involved and whether you can afford it.
Starting a business in Germany will cost you 1,011 EUR for LLC (GmbH), 2,500 EUR for the joint-stock company (AG), 2,000 EUR for GmbH & Co. KG, and 50 EUR for a sole proprietorship.
This post will help you understand how to organize your finances when starting a business in Germany and which options to incorporate are available to you.
The cost breakdown of starting a business in Germany
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The cost for forming a company in Germany depends on which type of incorporation you choose. Maybe you even decide to become a sole proprietor, which is the most inexpensive option. See the cost breakdown for all forms of corporations and self-employment in Germany.
If you need money to finance your business in Germany, you can apply for one of the easy-to-get loans, such as Auxmoney.
Self-employed/Sole trader/Sole proprietor
Sole Trader is the most inexpensive and easy option to become self-employed in Germany. However, you will be liable with all your assets, so there is no protection from liability in case your business is facing bankruptcy.
So you get what you pay for.
As a sole proprietor, you only need to register a business or trade-in Gewerbeamt (trade office) of your city, which costs between 15 and 65 EUR. If you start as a sole trader, which is very common in Germany, you only will have trade register costs to get your business running.
Overall you can expect less than 50 EUR for the founding of a sole proprietorship.
GmbH – private limited liability company
GmbH- Private Limited Liability Company is Germany’s most common incorporation form. Founders and members aren’t liable with their private assets but only with what the company owns.
Share capital is a must if you want to set up a GmbH. You must have at least 25,000 EUR to start an LLC in Germany.
When setting up a limited liability company, you must hire a notary to help you with registration. You will need a wide range of their services which in total comes to 850 EUR. Plus VAT – taxes on received services 19% – a total of 1,011 EUR.
As well as go through some authorities in Germany: German Trade Register, Trade Office, Tax Office, IHK (German Chamber of Commerce), or HWK.
Exactly cost breakdown for setting up an LLC in Germany – the most common way to incorporate!
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These costs are net, so you have to add the VAT.
As you can see, most of the steps are obligated and also require you to hire a notary. Without a notary, you can’t incorporate a company in Germany.
AG – joint stock company
This company type is suited to large businesses because of the possibility of increasing the initial capital through registering the shares to the stock market.
The German AG or joint-stock company requires a minimum of 50,000 EUR share capital. The members are only liable up to the amount they have contributed to the capital, just like in the case of the LLC.
The founding process is also very similar to LLC (GmbH). Owners will need to proceed with registration in various places: German Trade Register, Trade Office, Tax Office, IHK (German Chamber of Commerce), or HWK. You can see all procedures in the table above.
The most significant difference to the LLC is that you must invest 50.000 EUR as a shared capital when incorporating an AG in Germany. However, only 12,500 EUR must be available at the time of the formation.
The total costs of founding a joint-stock company start from approx. 2,500 EUR depending on the share capital.
GmbH & Co. KG – a form of German limited partnership
The “Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft” is a special form of KG (limited partnership) combined with a GmbH (LLC). Therefore, German GmbH & Co. KG is a hybrid form between a partnership and a corporation.
When setting up a GmbH & Co. KG owner will need to register in various places in Germany: German Trade Register, Trade Office, Tax Office, IHK (German Chamber of Commerce), or HWK and do it for both companies and therefore pay for both.
While founding one company, you practically will set up two companies in one: GmbH and KG. So that’s why costs are divided, and you will pay double the price.
Firstly the capital of 25,000 EUR is required (because of GmbH).
Followed by notary costs: for the GmbH, the notarization costs amount to 207 EUR to 678 EUR; for the KG, the expenses of notarial certification are 124 EUR to 276 EUR. In the table above, you can see the price list and all necessary procedures for the GmbH.
Here are the most important of them:
- Costs of business registration: 60 EUR for each
- Registration in companies register: 150 EUR for each
- And finally, to proceed with a business registration that costs between 10 EUR and 60 EUR for each.
Therefore, owners will pay the price twice when founding a GmbH & Co. KG. You need to decide whether it’s worth it.
Additional costs when running the business will be double-entry bookkeeping, accounting, and inventory, which are required for both companies.
Running costs
Now you know how much it will cost to start a business in Germany, but what about other costs? While running and managing your business, you will encounter many of them. Let’s look at all the essential categories of expenses you should expect.
While having a business in Germany, you will have to pay different contributions and taxes to the government. Many of them are part of the social contribution and payroll taxes that were paid by the employer when you were an employee. But now it’s time when you will need to take care of them on your own.
Health insurance
In Germany, everyone is required to have health insurance, which can be private or public. With private health insurance, rates depend on the provider and the coverage, but the public will always charge at least 14,9% of your gross income. (check out all insurance options in Germany here.)
To avoid paying too much for your coverage, read this article about the cheapest health insurance in Germany.
Why self-employed in Germany should consider private health insurance?
Private insurance will be a wiser decision since it doesn’t charge a percentage of your profits but the pre-agreed fixed rate.
Most freelancers, self-employed, and ex-pats can opt for Ottonova and Feather in Germany. The price ranges between 261 EUR and 480 EUR per month. And if you’re a younger, healthier business owner, private insurance will be even cheaper for you.
Besides that, you can sign for public insurance, which costs a minimum of around 300 EUR a month.
As your earnings grow, public health insurance contributions will grow as well. That’s why we recommend private coverage – it doesn’t depend on your income.
Hence, taking out the private plan from the beginning is a better idea.
Sole proprietor
Health insurance falls into one of the most significant expenses for a business owner. Now your employer isn’t responsible for submitting premiums; you need to organize it yourself.
Statutory or public health insurance costs a fixed monthly rate – 14,6% of your income, not the revenue but actual profit.
But private insurance isn’t tightened to your income; instead, you pay a fixed rate. Therefore, the private provider can be a better choice for a business owner; it won’t depend on your profit.
Corporations
As an owner of the corporation (GmbH, AG, GmbH & Co. KG), you, of course, need to pay social contributions for all your employees, including one for health care insurance.
This will be 14,6% of their gross monthly salary, 7,3% of this pays your company, and 7,3 will be deducted from the employee’s salary.
If you are the CEO of the company and, therefore, an employee, the same rules apply to health insurance for you. However, if your annual salary is higher than 59,400 EUR gross, you should opt for a private health insurance provider which rate doesn’t depend on your income.
Pension insurance
Sole proprietor
Self-employed in Germany have to pay monthly contributions to the statutory pension insurance. This costs at least 79,60 EUR and can be variable up to a maximum of 1,054 EUR per month.
The amount depends on your yearly profits; for now, it’s 18,6% of it. The more you earn, the more you pay to the government in Germany.
Ottonova and Feather are two best health insurance for self-employed in Germany.
Corporations
As a business owner, you will again pay social contributions for your employees. Pension insurance is one of them and should be paid monthly.
The rate is 18,6% of the gross monthly salary, half paid by you and half by your employee.
Unemployment insurance
Sole proprietor
This insurance is voluntary but very recommended to have. The voluntary unemployment insurance currently charges 2,5% of your monthly profits and covers the self-employed if they leave the company.
Therefore, as an unemployed and not a business owner anymore, you will receive some benefits and support from the government.
To use unemployment insurance, your business must be deregistered.
Corporation
For a business owner, this insurance isn’t voluntary; you need to pay it for your employees, so they are secure. However, costs are pretty low – only 2,5% of the gross monthly salary, half paid by you and half by the employee.
Taxes
Generally, self-employed have to pay only income tax on their profits and VAT.
For GmbH & Co. KG: corporate income tax applies at Komplementär-GmbH, and income tax applies to limited partners, each with a solidarity surcharge. In the GmbH & Co. KG: trade tax, VAT, if applicable. Payroll taxes.
Income taxes
Sole proprietor
Every self-employed person must pay income tax on the income. The first 9,408 EUR is free from taxation; the after-tax rate is growing proportionally with the income.
However, the annual income tax return must be submitted even if the income is lower. As a sole proprietor, you can manage all your taxes online by using this tool.
Corporation
As the company’s CEO, you also will need to pay income tax to the government. You can see the rates below.
| Bracket | Taxable income | The marginal rate |
|---|---|---|
| 1 | up to EUR 9,408 | 0% |
| 2 | EUR 9,408 – EUR 57,051 | 14% rising progressively to 42,00% |
| 3 | EUR 57,051 – EUR 270,500 | 42% |
| 4 | from EUR 270,500 | 45% |
Corporate taxes
Self-employed/sole proprietors don’t have to pay corporate taxes. They don’t have to register at the Commercial Registry and, therefore, don’t have to become a member of or contribute to the Chamber of Commerce.
In Germany, companies pay corporate tax based on their net income over one business year. The rate is 15%. Only profits are subject to taxation.
In addition, self-employed/sole proprietors don’t need to prepare annual financial statements for taxation purposes or pay a trade tax. They should do a simple profit-and-loss assessment instead. It’s another benefit of choosing this type of legal structure.
VAT
Sole proprietor
In addition to income tax, self-employed persons must also pay sales tax unless they fall under the small business regulation, in which a total turnover of no more than 17,500 EUR is generated.
VAT is paid on sold services and products, and returns can be received when buying other services and products. The standard rate is 19%, whereas the reduced rate is 7%.
Corporation
Corporations pay VAT in the same way as a sole proprietor does.
Taxes on dividends
These taxes apply only to corporations. Any time shareholders receive payment from the company; they will be taxed at 25%.
Business tax (Gewerbesteuer)
Business tax is paid on the yearly profits of the company. The rate varies between 5% and 17% depending on your business location because each state in Germany has its own rate.
Sole proprietor
Self-employed pay business taxes only if they have a trade business, but freelancers (Freiberufler) like layers, doctors, architects, and others are fundamentally exempt from this taxation.
However, they pay only when the annual profit exceeds 24,500 EUR. As a sole proprietor, you can manage all your taxes online by using this tool.
Corporation
Corporations are always subject to business tax.
Summary
As a sole proprietor, you will pay income tax and business tax between 5% and 17% if the annual profit exceeds 24,500 EUR. The income tax rate depends on the annual income. Furthermore, with a turnover above 17,500 EUR per year, you fall into the VAT category with a tax rate of 19%.
As a corporation, you pay income taxes if you are CEO, corporate tax of 15%, VAT of 19%, tax on divides to your shareholders 25%, and business tax between 5% and 17%, depending on your location.
As you can see, cooperation pays more taxes than sole proprietors in Germany. And it’s quite a tax-heavy country.
Steps to take when starting a business in Germany
It’s important to mention that you can’t set up a company in Germany without visiting Germany. The company founders need to sign the application for registration in front of the notary.
Generally, company formation consists of preparing required documents and registration with several German authorities.
Below you can see the essential steps for company formation in Germany:
- Choose a form of business or company type: this ranges from a sole proprietorship, limited liability company, joint-stock company, or limited partnership.
- Choose a company name: the name of the new legal entity needs to be unique and can be checked for availability.
- Execute the formation with a notary: take the steps we listed above in the pricelist.
- Deposit the share capital.
Don’t forget about additional procedures necessary to run your business, such as finding and registering an office, opening a bank account, and hiring a local accountant for the company. Check out the best business bank accounts in Germany.
You probably won’t manage to do the bookkeeping yourself unless you speak fluent Germany and have some decent knowledge in this area.
Do you probably think how long it takes to set up a company in Germany? It takes about two weeks for the company registration procedure to be completed.
For all those procedures, you will need a business bank account, get an easy online setup with one of these German banks.
What About Other Business Costs?
There is definitely much more to costs you will need to consider when setting up a proper (not online) business in Germany.
If you are a typical business and not the online one, you can expect other costs when setting up and running your small business:
| STARTUP EXPENSE | ESTIMATED COST |
|---|---|
| Equipment | 10,000-125,000 EUR |
| Incorporation Fees | Under 1.000 EUR |
| Office Space | 100-1,000 EUR per employee per month |
| Inventory | 17-25% of the total budget |
| Marketing | 0-10% of the total budget |
| Website | About 40 EUR per month |
| Office Furniture and Supplies | 10% of the total budget |
| Utilities | About 2 EUR per square foot of total office space |
| Payroll | 25-50% of the total budget |
| Professional Consultants | 1,000-5,000 EUR per year |
| Insurance | An average of 1,200 EUR per year |
| Taxes | Variable, but 15% corporate tax rate |
| Travel | Variable |
| Shipping | Variable |
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