Being self-employed: When should I start a GmbH?

If you plan on becoming self-employed, sooner or later you will need to choose the right legal form of your business. ‘Gesellschaft mit beschränkter Haftung’, short GmbH, translates to ‘company with limited liability’ and is a common form of legal entity in Germany. It is a good way to secure your private assets, as you are not personally liable for the company’s debts or insolvency. We will tell you what exactly a GmbH is, how to set up a GmbH and what advantages and disadvantages come with it.

What is a GmbH?

The abbreviation Gmbh stands for ‘Gesellschaft mit beschränkter Haftung’ (limited liability company) and is one of many different legal forms for self-employed persons in German-speaking countries. As a Kapitalgesellschaft (corporation), a GmbH is legally considered a person, and represents the counterpart to a Personengesellschaft (partnership).

As shareholder of your GmbH, you are therefore not liable with your private but only with your business assets. This provides a certain financial security, for example because you won’t loose your personal assets in the event of insolvency.

However, one important requirement for founding a GmbH is, that you have a share capital of 25.000€. This must be paid in as a so-called Stammeinlage (capital contribution) and then belongs to the assets of the company.

Can I start a GmbH on my own?

In order to register a GmbH, at least one person is required to represent the company as managing director. In addition, any number of further shareholders can be involved in the GmbH, who have a financial share in the founding of the company. This must be signed in a partnership agreement contract before the official registration.

It is also possible for other legal entities, like associations or societies, to take a stake in the company.

How to start a GmbH?

In order to register a GmbH, a few steps are necessary. First of all, you need to draft your Gesellschaftsvertrag (articles of association). This contract describes the legal basis of your company and defines its purpose. It also determines the financial shares of your shareholders. In addition, the contract specifies if the shareholders must participate in achieving the common purpose of the company.

Next, you need to transfer the share capital of 25.000€ to your business bank account. It’s also important to apply to the Industrie- und Handelskammer, short IHK (German Chamber of Commerce and Industry). Then, you also need to register as self-employed at your Finanzamt (finance office). You can do this online, just submit the Fragebogen zur steuerlichen Erfassung and receive your Steuernummer (tax number) after a few weeks. Finally, you also have to register at your Gewerbeamt (trade office).

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The Pros of a GmbH

The biggest advantage of a GmbH is the important fact, that shareholders are not liable with their private assets in the event of the company’s insolvency. In addition, in Germany there is a tax called Körperschaftsteuer (corporate income tax) on the income from Kapitalgesellschaften (corporations) which is currently always only 15%.

In addition, you have to pay Gewerbesteuer and you might need to pay the solidarity surcharge, but the bottom line is, that you have to pay less in taxes as a Kapitalgesellschaft than a Personengesellschaft, who have to pay regular income tax.

The Cons of a GmbH

One of the disadvantages of founding a GmbH is, that not everyone has a share capital of 25.000€ available. Additionally, there are many regulations for GmbHs which require a great deal of knowledge and professional bookkeeping. For example, you need to keep so called Handelsbücher and prepare lists of your revenues and profits. For this advanced bookkeeping everything from transactions to orders must be stated in all detail, so you need to be familiar with it, if you wish to do it yourself.

Finally, also the costs of a GmbH in addition to the share capital should not be underestimated. Because even though the Körperschaftsteuer is not too much of a tax burden, there are other additional costs like working with a tax advisor who does the bookkeeping or hiring a lawyer for legal matters.

Conclusion – When should you start a GmbH?

Starting a GmbH has many advantages for self-employed professionals and holds especially financial benefits, despite the high share capital that is required. However, it always depends on your individual situation, so if you are not sure if a GmbH can be profitable for you, it’s best to consult a professional tax advisor.

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