Have you been racking your brain to develop a business idea lately? And now that it has struck you, you can’t wait any longer to reify it into a business? Setting up a business indeed is an exciting endeavor. One has to keep floating and facing the challenges and waves that come your way and survive them.
As you have landed here, we know that Germany is what you are thinking of locating your venture, right? You are plumb at the right place if you want to know how to start a business in Germany. Well, that’s a great idea! Germany has the largest national economy in Europe, while it is counted as one of the strongest economies in the world.
Furthermore, in recent years, the country’s government has simplified the process and liberalized employment laws, while certain foundations have come forth to fund the ventures. The country has been ranked 24 in the Ease of Doing Business index 2019. So, you can deem it a good time and the right place to establish your long-cherished dream of starting a business.
Before you book the tickets and fly to Germany to launch your business, there are certain things you need to know and consider. For instance, you should acquaint yourself with the place’s somewhat disciplined and austere business culture, its taxes, business registration requirements, working hours, and other legal rules and regulations specific to the business you are targeting.
Furthermore, to ensure smooth operations of your venture, you must know your duties as an employer, residency permit, visa application, health insurance, the laws and contracts that affect you, and of course, if you are a foreign national, what additional formalities you need to regard are crucial. For non-natives, language may pose a barrier, so you will have to rely on credible English-speaking agencies for these things.
Let’s get this first. Why start a business in Germany? Germany welcomes people of every nationality who aspire to erect a strong business that can add value to their economy. However, one needs to have a German work permit, residency permit, business visa, health insurance, open a business bank account, procure a trade license, get a tax advisor, register the venture, etc. Moreover, Germany has a strict business culture, where people like to go by rules, appreciate formality, clear communication, respect general etiquette, high punctuality, and stick to deadlines and schedules.
You will need to learn German as it will benefit you immensely every time a German word is used in official meetings and documents. Moreover, it will impress people you will meet, making them open to collaborating with you. Rote and grok key vocabulary to grasp German work cultures such as Finanzamt (tax office), Gewerbeschein (trade license), Gewerbesteuer (local business tax), and Handelsregister (commercial register), and more. With serious adherence to legal obligations, you can definitely take your venture off the ground here!
Process of setting up a business in Germany
Being ranked 24 in the Ease of Doing Business, Germany is a secure and remarkable choice to start a business. Furthermore, it is the largest European economy and is among the world’s top three exporters. Before you proceed to grasp starting a business in the country, you need to get familiar with certain general requirements.
For instance, to start a venture in Germany, you need to be at least 18 years old and should have never been prohibited by the law to practice the profession you aim to launch your business. And now, you are all set to understand what the process of starting a business in Germany looks like. Let’s get in!
- Have a business idea: This is a no-brainer, indeed. To set up a business, you first need to come up with a marketable business idea, for it will determine how much competition you will face outside and how much ground you would be able to secure for your business. Remember, a business idea becomes the drive for one to invest, which is directly associated with the sales and revenue of the company. The better and unique the idea, the higher you will go!
- Prepare a business plan: A business plan includes products and services offered by the company, its budget, executive summary, objective, etc. It is a critical strategic tool that facilitates entrepreneurs in accomplishing short-term and long-term goals. Furthermore, new investors and people who want to join you also demand a comprehensive business plan for deciding to work with you. Thus, be prepared with a business plan.
- Register your Business: You need to fulfill certain formalities before starting a business in Germany. Now, what procedures and criteria you need to meet depends on what you have chosen as your business basis, Gewerbe (trade) or Freiberufler (freelancer). The former must register with Finanzamt while the latter must contact the local trade office first.
To complete the business registration process, you will need a German tax ID number, operative bank account, residence permit, a current passport, and a valid visa. Once done with this part, apply and secure a tax number and a VAT number. You would have to deal with several authorities, which may incite hassles. However, remember, sweet is the fruit of patience!
- Inform your health insurance company: As you opt for becoming self-employed, you can choose to get private health insurance (PKV) or statuary health insurance (GKV). Informing the health insurance provider of a business is necessary to indicate their self-employment standard, which will influence the payment structure. On top of this, a comprehensive policy will help protect your business against dangers like theft or other property damages.
- Open a business bank account: To get your business registered, you must have a bank account which would also be needed for tax payments. It is important to get a separate business account for two reasons. First, several banks in Germany exclude business use in personal accounts, and secondly, it would facilitate keeping the business records immaculate. It would help you have a clear synopsis of your expenses and income, which is again important.
- Procure trade license: To get your trade license, entrepreneurs in Germany need to visit Finanzamt in the city where they want to locate their business. There, they must register as a businessperson, and it’s done. A trade license is needed to specify the domain of your business and comes at a fee.
- Register the business with tax authorities: Registration with tax authorities, aka Finanzamt in Germany, is a tedious but critical part of setting up a business. Here, they will ask you to fill out an intricate 7-page form. You may even take the help of services that specialize in the field and aim to streamline the questionnaire filling process.
Owing to sophisticated tax regulations and requirements, your business would require a seasoned tax advisor, which might be expensive but worth it. All your accounting would be made smoother while abiding by the laws concurrently.
- Choose the legal structure: Now that you have heeded the steps mentioned above, you must pick a legal form for your venture. The type of structure you choose is determined by several factors such as equity you own, the number of people starting the venture, the business leader, etc. It is crucial to choose the appropriate structure of a business as it will impact your debt liability and business taxes down the road.
- Enlist your Business in Handelsregister: After choosing the legal structure of your business, you have to get your business entered in the commercial register of Germany (Handelsregister). It is required to secure a business license and register the company at a local trade office.
GmbHs (Gesellschaft mit beschrankter haftung), UGs (Unternehmergesellschaft), OHGs, (Ofene Handelsgelleschaft), KGs (Kommanditgeselleschaft), and AGs (Aktiengesellschaft) can accomplish the said process through online mode.
- Register the address in Germany: As you move to Germany, you will need to get your address registered, known as Anmeldung. In the process, you will receive a Tax ID and a registration certificate required for opening a bank account and business registration. Bear in mind that the address is updated every time you change it.
Hiring Employees in Germany
To get the business going, you need a strong workforce. Make sure, as a new venture, you consider the necessary number of people instead of hoarding the world into your team. Having an experienced HR consultant like Zimyo is exactly what you need to do to make the entire process a hassle-free experience. Here are certain things you need to know concerning the process and attributes of the employee hiring process in Germany.
- Trial Period/Probation Period: The probationary period/ trial period in Germany can last up to 6 months and no more. During this period, the company and the employee are entitled to terminate the services by giving a two-week notice if the employment contract doesn’t specify a longer notice period. For the first 6 months of employment, the Dismissal Protection Act is not applicable, irrespective of whether the parties concur upon a trial period.
- Leave and Holidays: Germany strictly prohibits working on Sundays and public holidays. A German employee is authorized to enjoy 20-days’ leave annually from work. This is for 5 workdays-week pursuant as indicated by the Federal Vacation Act. Furthermore, the length of annual leave may also depend upon the sector you are working in, which can be 25 to 30 days.
- Maternity Leave: Under the Mutterschutzgesetz- MuschG (Maternity Protection Act), pregnant employees are entitled to leave during pregnancy and 4 months post-childbirth. On top of this, women who experience miscarriage after the twelfth pregnancy week are immune by law from termination for up to 4 months.
All the female employees have the right to get paid maternity leave 6 weeks before childbirth and 8 weeks after that. In the case of multiple births, premature births, and disabled kids, the leave may be extended to 8 weeks. The employee receives the payment from the insurance provider and part from the employer.
- Termination of Services: Termination of services in Germany can be carried out with the notice handed over by any of the two parties. Dismissal Protection Act (DPA) works to restrict the authority of the employer to dismiss the employee in the following cases:
- A business establishment involves 10+ employees.
- The employee has worked in the company/ business for 6 months continuously.
In the 2nd case, employee termination has to be socially justified, i.e., it will be based on conduct-related grounds (like constant infringement of employment terms even after warnings), operational grounds (like business shut down), or person-related reasons (like long-term illness).
An ordinary dismissal of an employee ends after the dismissal notice period completion. In contrast, dismissal can be given with instant effect on the grounds of a severe breach of the employment contract.
- Pension: Pension is one of the elements of Germany’s national social security system. The German Pension system is constituted of three pillars- Gesetzliche Rentenversicherung-GRV (public retirement insurance system), private individual retirement investments, and Betriebliche Altersvorsorge-bAV (company pension plans). The retirement age in Germany earlier was 65, and it has been increased to age 67.
- Work Hour Norms: Germany’s working hour norms have clarified the accepted work hour limits per day, which is 8 hours except Sundays and statutory holidays. At the same time, the working hour limit is 48 hours per week. However, collective agreements have succeeded in bringing it to 38.5 and 35 hours a week. You would be surprised to know that German employees enjoy the shortest working hours among other countries in Europe. Furthermore, those who work for 6-9 hours a day must be given a 30-minute break which can be split into two 15-minutes breaks. Those working for more than 9 hours should receive a 45-minute break after 6 hours.
How easy is it to conduct business in Germany?
The Doing Business project has taken several factors into account to estimate the ease of starting a business in Germany. For instance, it considers factors like safeguarding minority investors, getting credit, property registration, starting a business, taxation, across-the-border trading, insolvency resolution, etc. The rank on these individual subindices determines the overall Ease of Doing Business (EODB) rank, where Germany falls at 24th position according to the Doing Business. Here, we shall peruse the percentile of critical elements that contribute to the EODB ranks in Germany, so you may have an idea of how grappling or smooth is starting a business in the country.
- Starting a Business: This indicator is determined by the time, costs, minimum paid-in capital, and procedures involved to kick off a business. Germany comes at the 125th position when it comes to starting a business. A person has to go through different procedures where no two procedures can start on the same day. Setting up a business has been made easier, efficient, and less costly.
- Managing Permits: Managing permits is another indicator that ranks a country in the EODB index. It investigates the cost, procedures, and time required to go through and complete all the formalities required to procure licenses and permits for the company’s operations. The permits a company needs depend on the location and legal structure of the venture. Germany has been ranked 30 in the subindex of permit management. EFTA/non-EU nationals must get a German residence permit while trade permits (if needed, you are starting a gambling business, property agent business, or an insurance broker company).
- Getting Electricity: Germany secured 5th position in the getting Electricity subindex, which implies that you won’t be hassling much in getting your business connected to the electrical grid. There are fewer formalities that do not take much of your worthy time. The electricity factor also considers the reliability and cost of electricity supply and tariff transparency.
- Getting Credit: This indicator assesses the strength and efficacy of credit reporting setups and bankruptcy rules in supporting lending. Germany ranked 48 for the Getting Credit topic, which evaluates the rights of lenders and borrowers via collateral laws, accessibility and scope of credit information provided by credit registries and credit bureaus, etc.
- Managing Payroll: As a company grows, its payroll and employee management operations become complicated with each passing day. Not only do you have to take care of carrying out this overwhelming task, but you also need to be compliant with the country’s legal obligations. Therefore, you need special payroll management services that will help you thrive.
- Paying Taxes: Of several other factors mentioned before, paying taxes is another one considered by the Doing Business to measure the Ease of Doing business in a particular economy. Of 189 countries put under the lens to rank them based on the ease a country provides in setting up a business, Germany ranked 46 for Paying Taxes indicator.
The rank is conferred after perusing the time, costs, and procedures that a small or medium-sized business must go through for making tax payments. Despite the country’s multiple tax incentives, its tax laws are fairly complicated. Thus, you will have to invest a lot of time and resources to fulfill the tax requirements in Germany.
- Enforcing Contracts: Germany was ranked 13 in the Enforcing Contracts subindex, where the Doing Business report looked at the efficacy, quality, time, and costs required to settle a dispute in a court. It also analyzes a country’s practices to render the judiciary more efficient in resolving disputes. The country further streamlined the factor by introducing digital filing of complaints and by delivering other related services online.
- Resolving Insolvency: Germany enhanced insolvency by introducing a law to facilitate increased participation of creditors and restructuring distressed businesses and firms in court. The country bagged 4th position, which is indeed prominent in the Resolving Insolvency subindex. To measure this factor, the Doing Business looks at the proceedings’ time, recovery, cost, and outcome.
And there you are! Now you know what opportunities await entrepreneurs in Germany. So far, we walked you through the answers to common queries related to starting a small business in Germany, and you also found the answer to is it easy to start a business in Germany.
If you are thinking, “can a foreigner start a business in Germany or a student start a business in Germany, you should be given this news. Germany is open to all business endeavors that add value to its economy; however, it sets the age a minimum of 18 years old for a person to start a business. Nonetheless, opportunities are galore, given that you subscribe to their business culture while working there!
Zimyo has emerged as a leading HR solutions provider in Germany, offering businesses a one-stop solution for all the HR requirements, acquiring and training new employees, or managing advances against payroll. With multiple years of experience, the team at Zimyo is equipped to take on every challenge that you may encounter.