This guide will teach you how to start a business in Germany. It is not an easy task, but it is not impossible either. The German government is not only seeking skilled workers but also entrepreneurs from abroad to help grow the German economy. One thing that makes starting a company in Germany somewhat difficult is the language barrier; however, there are plenty of resources available in English to help with that!
This guide will only focus on how to start a small business in Germany as a foreigner and will not cover founding a company in Germany from abroad.
Can Foreigners Start a Business in Germany?
If you are an EU citizen or from Norway or Switzerland, you can become self-employed or start your own business in Germany at any time, as long as you register as a resident.
If you are from outside the EU, you need to have a visa and residence permit allowing you self-employed work in Germany. Please refer to our other guide on how to obtain a freelance and self-employed visa in Germany.
Self-Employed vs. Freelancing in Germany
Suppose you are planning to start a business by yourself and join the trend of solopreneurs. In that case, you need to distinguish whether you will operate as a freelancer (Freiberufler) or self-employed trade person (Gewerbetreibender). Since you need to fulfill different requirements for both categories, you must identify the category for your business from the start.
Freelancers provide services in the so-called liberal professions (Freie Berufe). In Germany, those typically are artists, teachers, doctors, engineers, scientists, software developers, designers, lawyers, tax advisors, and others. You can find an unofficial list of professions here or take a look at the legal paragraph §18 EStG. We go into more detail about freelancing in Germany in our dedicated guide.
Related Guide: Freelancing In Germany As A Foreigner [How-To Guide]
If your business idea does not qualify as a liberal profession, you are subsequently a tradesperson. Thus, you will need to register with the trade office (Gewerbeamt) in your city to attain a trade license. Should you run an online business, whether it is an Etsy or Shopify shop or a blog that is earning money, you need to register it as a trade business.
Requirements For A Visa For Self-Employment In Germany
To become self-employed in Germany, you need to provide proof of the following requirements for both the visa and the residence permit for self-employment:
- Proof of economic interest for your business in Germany or a specific area
- Expected positive impact of your business on the German economy
- Enough financial resources through equity capital or a loan approval
- Sufficient pension provisions if you are 45 years or older
- You will also require German health insurance already before applying for your visa. This is a complex topic, especially for self-employed foreigners, and we have written an in-depth guide on private vs. public health insurance in Germany. Your best option to get the matching German health insurance for you is to consult Feather. They provide insurance services for foreigners and have great experience with the self-employed.
Types of Businesses in Germany
Since there are many different trade business forms, let’s look at the various legal forms and their meanings. There are three main categories of business types:
1. Sole proprietorship (Einzelunternehmen)
This is a favorite option for individuals starting their own businesses. As a sole trader, your business is generally referred to as a Gewerbe. If you earn less than 22.000 euros in the first year and not more than 50.000 euros in the second year, you can also run your company as a small business (Kleingewerbe) and benefit from less bureaucracy. As a sole proprietor, you are fully liable for all business actions and debts.
2. Business partnership (Personengesellschaft)
Most simply, a business partnership could be described as a sole proprietorship but with two or three people or companies. There are several different forms of a business partnership. The most common ones are the GbR (Gesellschaft bürgerlichen Rechts), a civil law partnership, an OHG (offene Handelsgesellschaft), a general commercial partnership, or a KG (Kommanditgesellschaft), a limited partnership. Except for the KG, all partners are fully liable for all business debts.
3. Corporation (Kapitalgesellschaft)
The corporation is the favorite legal entity among German Start-Ups or funded companies. The most common German corporation is the GmbH (Gesellschaft mit beschränkter Haftung), a limited liability company. A GmbH requires 25.000 euros capital but protects your private finances since it is a limited company. The UG (Unternehmergesellschaft), also referred to as Mini-GmbH, may be an option for entrepreneurs who don’t have the necessary start capital for a GmbH, as the UG only requires 1 euro as a start capital.
We highly recommend consulting legal experts to find out which business formation is best for your company plans. The service provider firma.de (a company in Germany is often referred to as a Firma 😉) offers a free initial consultation. They also offer affordable packages to help you form and register your company and connect you to legal and tax professionals.
For the scope of this guide, we will continue focusing on small businesses and not on funded Start-Ups.
How to Register a Business in Germany?
These are the steps you need to take to register your Gewerbe in Germany, regardless of whether it is a physical or online business.
1. Register your address
After you have arrived in Germany, you need to register your address with your local Bürgeramt.
2. Get a residence permit for self-employment
Make an appointment with your foreigners office (Ausländerbehörde) to change your visa to a residence permit that allows you to start a business.
3. Get your trade license
Once you are registered and allowed to stay in Germany, it is time to register your business with the trade office (Gewerbeamt) to get your trade license. Your trade license (Gewerbeschein or Gewerbeanmeldung) gives you the right to get involved in business activities.
To register with the trade office, you need to fill out a registration form. Firma.de has a detailed English guide on how to fill it out. Once you complete the form, you need to sign it and send it by postal mail to your local Gewerbeamt. You can find the address of your responsible authority on this homepage. In the drop-down menu, select Gewerbeämter and then enter your postal code. We also have a guide on how to send a letter in Germany to help you out with that step as well.
In some trades, you also need to have special licenses; such areas are gastronomy, driving schools, taxi companies, skilled craft businesses, insurance brokers, and others. For more information, take another look at the very informative website of firma.de or check whether your qualification gets recognized in Germany on the homepage of the German government.
4. Register with the tax authorities
Next, you need to register your business with the tax authorities (Finanzamt). This is a very tedious task, even for Germans, as it requires you to fill out a very complicated seven-page questionnaire (Fragebogen zur steuerlichen Erfassung).
The easiest way to complete this step is for you to use the free services of a company called Sorted. They focus on making taxation for freelancers & self-employed in Germany easy and guide you through the process of filling the questionnaire all in English. They also submit it to the tax authorities. Upon processing, your Finanzamt will send you your business tax number and VAT number if you applied for it.
Related Guide: Tax Number And Tax ID In Germany [What’s The Difference?]
If steps 3 & 4 sound too complicated and bureaucratic for you, you can simply hire the services of firma.de, who guide you through the registration process in no time and fill out all the forms for you for a very affordable price.
5. Open your Business Bank Account
Although this is not an absolute must, we highly recommend you to set up a separate business bank account next to your private bank account in Germany. There are two main reasons. Firstly, most banks that offer private bank accounts exclude business use in their terms and conditions. So by using your regular bank account for such, you run the risk of getting your account closed. Secondly, keeping the books of your company clean is very important in Germany. Therefore having a clear overview of your income and expenses is crucial.
There are multiple banks tackling the growing need for modern banking for small and medium-sized businesses, such as Kontist, Qonto, and N26. Most of these banks also allow connecting specific accounting software to simplify the bureaucratic burden.
We have written an in-depth guide, highlighting and comparing the best bank accounts for freelancers in Germany, which also apply for the self-employed.
Related Guide: 5 Best Banks For Freelancers In Germany
Is it difficult to start a business in Germany?
Technically it is not difficult to start a business in Germany. There are very clear steps that you need to take as a foreigner:
- Register your address in Germany
- Get a residence permit for self-employment
- Get your trade license
- Register with the tax authorities
- Open your Business Bank Account
We have explained the steps in detail above for a sole-proprietorship.
However, bureaucracy tends to be a tripwire for many foreigners when it comes to starting a business in Germany. If you are in doubt or would like assistance, you can reach out to firma.de, who happily guide you in English to start your business in Germany.
How much does it cost to start a business in Germany?
To start a Gewerbe, you really only need to pay the registration fee, which ranges between 10 and 40 euros, depending on the region you are in. And that’s it. You decide about all other costs, depending on what is necessary for your business.
To found a company as a GmbH, you should plan around 1.000 euros in fees for the necessary notary, contracts, additional registration in the commercial register, etc. Additionally, you need at least 50% of the required equity capital (25.000 euros) during the foundation, so 12.500 euros.
An Overview of Business Tax in Germany
As a sole trader in Germany, you have to deal with three different types of taxes.
Income tax for the self-employed in Germany
As a sole proprietor in Germany, your revenue (reduced by business expenses) is the basis for taxation. The general income tax applies, which is a progressive tax that ranges between 14% to 42%. Additionally, you will have to pay 5,5% solidarity tax and church tax if you are a member of the church.
To get an idea about how much income tax you will need to pay on your estimated income, you can use this income tax calculator for Germany. You can translate the page to English by using Chrome as a browser. With a right-click, select ‘translate to English’.
When you register your company with the tax authorities, you need to predict your revenue for the coming years. Depending on your predictions and your profession, the finance authorities will inform you whether you will need to pre-pay your taxes monthly or quarterly, or whether a yearly post-pay is sufficient. Because of this system, you may end up over or underpaying taxes. To balance your tax payments with your actual income at the end of the year, you need to submit a tax declaration within the first six months of the following calendar year.
While there is very easy-to-use tax software available in English, the benefits of hiring a tax consultant may outweigh their costs, as they are experts in identifying areas to reduce your taxes and save you a lot of money. Sorted connects you to certified English-speaking tax consultants, who can help you with your self-employed tax declaration and other tax-related questions.
Trade tax for the self-employed in Germany
Unlike freelancers, who are exempt from this tax, you will eventually need to pay trade tax if you are self-employed with a trading company. Your obligation to start paying trade tax starts when your profit is above 24.500 euros a year. This also means that you will not pay trade tax on the first 24.500 euros of profit each year.
The trade tax gets calculated based on a combination of a uniform tax rate of 3,5% (base rate) and a municipal tax rate. How much trade tax you need to pay depends highly on where your business is registered, as this tax is a municipal tax. Each communal area and city has a different multiplier, the so-called Hebesatz. It ranges from 200% to 900%, with an average of 402% in 2018. We know that this may sound like a lot of gibberish right now, but we will give you a calculation example to help you understand.
Here is an example of how the payable trade tax gets calculated:
|Your profit (revenue - business expenses)||€102.700|
|- Tax exemption amount||- €24.500|
|→ Your taxable income||€78.200|
|x 3,5% Base rate||x 0,035|
|→ Trade tax measuring amount||€2.737|
|x 400% Hebesatz||x 4|
|→ Your payable trade tax||€10.948|
You can calculate your trade tax with this online calculator.
Now here comes the great news! Yes, there can be great news even within the dreary tax topic. To avoid double taxation of income and trade tax, you can deduct a big part of your payable trade tax from your income tax. The factor to calculate the deduction has been set at 3,8 times the trade tax measuring amount. Bear in mind, that the deduction can never be higher than the total trade tax measuring amount.
Let’s look at yet another calculation to understand how much of the trade tax you can deduct from the payable income tax.
|Your profit (revenue - business expenses)||€102.700|
|Income tax (without church tax)||€33.997|
|- 3,8 x Measuring amount (€2.737)||- €10.401|
|→ Payable income tax||€23.596|
|+ 5,5% Solidarity tax||€1.298|
In this example, 10.401 euros of the 10.948 euros payable trade tax can be deducted from the income tax.
Combining these two simplified calculation examples, the total payable tax is 35.842 euros (trade tax of 10.948 euros + payable income tax of 23.596 euros + solidarity tax of 1.298 euros).
VAT tax for the self-employed in Germany
While filling out the tax questionnaire to register with the Finanzamt, you will have the option to request a VAT number (USt-ID). Whether or not you need to charge VAT tax (Umsatzsteuer) depends on your estimated revenue for the first two years and whether you operate within Europe.
Especially if you are just starting your own company, it is not always easy to predict how much money you will make in the first year. If you earn less than 22.000 euros in the first year and not more than 50.000 euros in the second year, you can choose not to charge and pay VAT tax. In this case, you will qualify as a small business owner (Kleinunternehmer or Kleingewerbe).
You can, however, opt to charge and pay VAT tax from the start. If you do so, you need to stick to your decision for at least five years. We strongly advise you to consult a tax advisor about your company to make the best decision for yourself. Sorted also offers on-demand access to qualified tax advisors who speak English.
Accounting for Small Business Owners in Germany
Next to taxation, accounting is probably the least liked topic of running one’s own business. However, especially in Germany, it is super important to keep your books clean and orderly from the beginning. One major reason why we suggest that you open your own business bank account.
As a business owner in Germany, you need to keep and archive all of your invoices (incoming and outgoing), receipts, bank statements, and pretty much any other movement of assets for ten years. Within those ten years, you can always get audited by the Finanzamt.
To help you with that and save a huge amount of time, you can use one of the accounting softwares for Germany that is available in English, such as FastBill, sevDesk, and even Sorted. You may also hear of Lexoffice, as it is very popular in Germany; however, their interface is only available in German. Most softwares you can also connect to your business bank account to link invoices to payments, etc.
Please refer to our guide on freelancing in Germany to learn more about what information needs to go on your invoices.
Insurances for Business Owners in Germany
As a German resident, there are a few insurances you must have. When being self-employed in Germany, you might want to consider adding a few professional insurances to those that only cover your private life, such as professional liability insurance.
Please refer to our guide on freelancing in Germany to learn more about insurance for business owners in Germany.
This guide gave you a great insight into what it takes from the immigration and bureaucratic side to start your own business in Germany. Now it is up to you to dig deeper, develop a business strategy that works for the German market and consult firma.de to have a smooth start.
We wish you all the best in your business endeavor! 🚀
Disclaimer: Neither myself as the author of this article, nor Simple Germany as a business, are qualified to provide tax and business advice under German law. We cannot provide specialist tax and insurance services beyond any of the general tips contained herein. For tax advice, we strongly recommend you consult a professional tax consultant.