Setting up a GmbH in Germany: Procedure, share capital, costs and obligations

What is the process for setting up a GmbH?

The process can be broken down into seven steps:

1. Determine the company name, registered office and corporate purpose. The company name must be distinctive and permissible. Consulting the Chamber of Industry and Commerce in advance can help avoid subsequent objections from the registry court.

2. Draft the articles of association. The articles of association must include, at a minimum, the company name, registered office, corporate purpose, share capital and shares. Where there are several shareholders, provisions should also be made regarding majorities, managing directors, the transfer of shares, redemption, succession and the resolution of disputes.

3. Have the articles of association notarised. The shareholders establish the company. At the same time, the managing director is usually appointed and the list of shareholders drawn up.

4. Open a business account and make capital contributions. Until registration, the company bears the suffix ‘in formation’ or ‘i. G.’. The managing directors must have full access to the capital contributions required for registration.

5. Application for entry in the Commercial Register. The managing directors must, in particular, certify that the capital has been duly raised. The notary submits the application electronically to the registry court.

6. Registration and publication. The GmbH only comes into existence as a legal entity upon registration. The company name, registered office, representatives and list of shareholders are published in the register.

7. Business licence, tax and other registrations. Depending on the nature of the business, this is followed by business registration, tax registration, registration with the transparency register, social security registration, professional or sector-specific licences and, where applicable, VAT registration.

Between notarisation and registration, the ‘pre-GmbH’ exists. It may already enter into contracts, hire staff and maintain a bank account. However, this phase requires particular caution: Section 11(2) of the German Limited Liability Companies Act (GmbHG) may give rise to personal liability for those acting on its behalf. Furthermore, there are risks if the assets pledged at the time of formation are depleted before registration takes place. Major commitments should therefore be deliberately decided upon, documented and financially underpinning.

How much share capital does a GmbH require?

The statutory minimum share capital is 25,000 euros. In the case of a cash formation, at least 25 per cent of each share and a total of at least 12,500 euros must generally have been paid up for the company to be registered in the commercial register. The articles of association may provide for a higher or full payment.

The remaining unpaid amount constitutes a claim by the company against the respective shareholder. It may be called up at a later date by a shareholders' resolution or in accordance with the articles of association. In the event of insolvency, the insolvency administrator will generally call in any outstanding contributions. However, the limitation of liability of a registered GmbH does not depend on the full €25,000 having already been paid up in full. Personal risks arise in particular from false declarations to the registry court, prohibited repayments, hidden contributions in kind or the commingling of company and private assets.

In the case of a formation by contribution in kind, assets such as machinery, receivables, intellectual property rights or shareholdings are contributed instead of cash. The contribution in kind must be made in full, specifically described in the articles of association and substantiated in terms of value. If the actual value is insufficient, the contributing shareholder is liable for the shortfall.

Anyone wishing to start with less capital can set up a UG (limited liability). A share capital of just one euro is legally possible, but rarely makes economic sense: formation, banking and start-up costs still need to be financed.

How much does it cost to set up a GmbH?

The set-up costs consist of notary and registration fees, as well as – depending on the structure – costs for legal and tax advice, translations, apostilles and bank onboarding. The share capital is not a fee, but rather the company’s assets, and may be used for business purposes after registration, provided that capital maintenance rules are observed.

In the case of a straightforward cash formation with the statutory minimum capital, notary and registration costs often range from the high three-figure to the low four-figure range. Customised articles of association, multiple managing directors, powers of attorney, contributions in kind or foreign shareholders increase the costs. The notary’s fees are governed by the Court and Notary Fees Act and are not freely negotiable.

The model minutes reduce notarisation costs because the articles of association, the appointment of managing directors and the list of shareholders are combined in a single document prescribed by law. However, the savings should be weighed against the subsequent costs of amending the articles of association. In cases involving multiple shareholders, investors, family businesses or a group structure, a bespoke set of articles of association is usually more cost-effective.

The following may also apply:

• local authority fees for business registration,
• fees for special licences,
• costs for certified translations and foreign certificates,
• advice on the shareholders’ agreement, tax structure or the appointment of a managing director,
• as well as ongoing costs for bookkeeping, annual accounts, disclosure and compliance.

How long does it take to set up a GmbH?

A straightforward cash formation can be completed within a few weeks. The duration depends less on the date of notarisation than on the subsequent steps: opening a bank account, providing proof of payment, a check against the register and, if necessary, enquiries from the court.

Delays can occur, in particular, if the chosen company name is objected to or if the company’s object is not formulated with sufficient clarity. In the case of foreign shareholders, it is also not uncommon for the necessary powers of attorney, apostilles or up-to-date extracts from the commercial register to be missing. Further practical hurdles frequently arise during the bank onboarding process and when identifying the beneficial owners. Discrepancies between the articles of association, the list of shareholders and the application for entry in the commercial register may also necessitate enquiries or corrections. Additional coordination is required in the case of contributions in kind, activities subject to authorisation, or the unavailability of a foreign managing director at short notice to answer queries from the bank or the registry court.

The company may already operate as a ‘Pre-GmbH’. However, for reasons of liability and capital raising, long-term contracts, large orders or intra-group payments should only be entered into prior to registration following a deliberate risk assessment.

Model articles of association or bespoke articles of association?

The model memorandum of association is available for companies with no more than three shareholders and one managing director. It is particularly suitable for a very simple, single-person structure without any specific governance or succession rules.

However, the model memorandum does not contain any detailed provisions regarding:

• qualified majorities and approval requirements,
• pre-emption rights and share transfers,
• the redemption and exclusion of a shareholder,
• the calculation of compensation,
• succession and the death of a shareholder,
• non-compete covenants,
• multiple managing directors and areas of responsibility,
• investor rights or employee share ownership,
• as well as deadlock and dispute resolution.

As soon as there are several shareholders, or if the company is set to grow, invest or be integrated into a group as a subsidiary, a bespoke set of articles of association is usually the better basis. Where necessary, this may be supplemented by a shareholders’ agreement to regulate confidential details. Both documents must be consistent with one another.

GmbH, UG or GmbH & Co. KG: Which structure is right for you?

The appropriate legal form does not depend solely on the available capital. Equally crucial are issues relating to liability, the ability to attract investors and secure financing, the tax structure, business succession and the ongoing administrative burden.

The GmbH is a well-established limited company with clear separation of liability and is generally well regarded by banks, investors and business partners, whilst requiring a relatively low minimum capital. Whilst there are formal requirements regarding resolutions, accounting and disclosure, these can be managed effectively with a manageable amount of effort. For operational companies with staff, ongoing contracts and financing needs, it is therefore often a well-balanced starting point.

The UG (with limited liability) does allow for incorporation with significantly lower share capital and may therefore be particularly suitable for lean start-up phases. However, statutory reserves must be set aside, and insufficient capitalisation can restrict the company’s ability to operate effectively. Furthermore, the UG is sometimes perceived as less established in business dealings. With this legal form, too, the level of capitalisation should therefore be realistically aligned with actual financing requirements. 

The GmbH & Co. KG combines the limitation of liability of a corporation with the flexibility of a partnership. It may be of particular interest for family businesses, succession planning or specific investment and tax structures. However, as two companies generally need to be managed, the administrative burden is higher. Coordination under company law and tax law is also often more complex.

Which legal form is most suitable therefore depends on the specific business model and the long-term objectives of the shareholders. The GmbH is the obvious standard solution for many operational companies. The UG is particularly suitable for start-up phases with limited capital, whilst the GmbH & Co. KG is worth considering, especially where there are specific tax, family or shareholding-related requirements.

What do foreign founders need to bear in mind?

Foreign individuals and legal entities may set up a German GmbH and also hold all the shares. Furthermore, the managing director does not, in principle, need to be a German national or resident in Germany. However, admissibility under company law and eligibility under immigration law are separate issues: appointment as managing director does not confer a visa or a work permit.

In the case of international company formations, the following points in particular must be clarified at an early stage:

• Proof of authority to represent the foreign parent company: A current extract from the commercial register in the correct format, the articles of association and proof of the persons authorised to represent the company.
• Apostille or legalisation: Whether foreign documents require additional certification depends on the issuing country and the applicable conventions.
• Certified translation: The registry court, notary and bank may require German translations.
• Power of attorney or online notarisation: Cash incorporations and certain other incorporation procedures can be carried out via the notary’s online procedure. If the contribution in kind itself is subject to formal requirements – such as a plot of land or a share in a GmbH – a separate notarial deed is usually still required.
• Bank account and KYC: Identifying the chain of ownership and the beneficial owners is often the most time-sensitive step.
• Management and Taxation: A foreign managing director must be practically able to fulfil their duties as a director. The place of management, permanent establishments and transfer pricing must be reviewed with a tax adviser.
• Residence and staffing: Residence permits may be required for managing directors and employees from third countries.

What obligations apply following registration?

The GmbH’s ongoing obligations commence upon entry in the commercial register. These include, first and foremost, the notification of beneficial owners to the Transparency Register. Changes must be reviewed on an ongoing basis and updated where necessary. The list of shareholders must also be kept up to date. Any changes to the shareholder structure or the extent of shareholdings must be submitted to the commercial register without delay.

In addition, the company must be registered for tax purposes. This includes, in particular, completing the tax registration questionnaire, applying for a tax number and, where applicable, a VAT registration number, as well as setting up the necessary payroll tax returns. At the same time, proper bookkeeping must be ensured. The annual accounts must be prepared by the deadline, approved by the shareholders and disclosed in accordance with statutory requirements.

There are also formal requirements regarding the company’s external communications. Business letters, emails and the company website must contain the information required by law, in particular the company name, legal form, registered office, court of registration, registration number and managing director.

If the GmbH employs staff, they must be registered with social security. In the case of shareholder-managing directors, an additional assessment of their social security status may be required. Depending on the specific activities, trade, professional, product or data protection-related licensing and compliance requirements must also be observed.

Proper corporate housekeeping is also essential. Shareholders' resolutions, managing directors’ powers, contracts with shareholders and capital measures should be documented in full and in a transparent manner. Particularly in the case of subsidiaries of foreign corporate groups, it is advisable to have a clear annual calendar for resolutions, annual accounts, register filings and intra-group contracts.

Which start-up mistakes can prove costly later on?

Articles of association that are too simplistic can significantly exacerbate future shareholder disputes. If there are no clear provisions regarding the required majorities, the withdrawal of shareholders, compensation or the transfer of shares, disputes can often only be resolved at great expense.

The raising of capital must also be carefully planned and documented. Hidden contributions in kind, repayments to shareholders or inaccurate declarations regarding the payment of share capital can result in contributions becoming due again or managing directors being held personally liable.

Particular caution is also required regarding operational activities prior to registration. Although the ‘Vor-GmbH’ is already capable of acting, it is not risk-free. If significant commitments are entered into during this phase, personal liability risks and a negative net worth may arise.

Furthermore, the appointment of a managing director should not be considered in isolation from the employment relationship. The director’s position, remuneration, social security, D&O cover and the termination of employment should be coordinated from the outset.

Similarly, the shareholder structure should be reviewed prior to incorporation. In the case of holding structures, foreign shareholders or investors, issues relating to tax law, foreign trade law, anti-money laundering legislation and corporate governance may already be relevant at the incorporation stage.

Finally, the organisation under company law does not end with registration in the commercial register. A lack of ongoing administrative maintenance and inadequate documentation often lead to problems later on with financing, due diligence reviews, the sale of a business or a tax audit.

The incorporation process should therefore go beyond mere registration and be geared towards ensuring the company’s legally sound and practicable development during its first few years.