Weigh up the pros and cons of a German entity set up versus using a global PEO partner when expanding your business into Germany.
From work permits to employment contracts, there's a lot to consider when expanding your business globally. The first thing you will have to consider when expanding your business into a new, foreign country is setting up a legal entity, otherwise known as a foreign subsidiary. This will allow you to conduct business in a new country, such as Germany. While setting up an entity establishes your company's long-term interest in a new country, it can be a complex, costly and time-consuming task. With this in mind, some companies will choose to instead partner with a PEO or an EOR when expanding into Germany.
Read on as we discuss whether your business needs to set up a legal entity, how to establish a subsidiary in Germany and how a PEO can help you expand in Germany without a legal entity.
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Who needs to set up a German entity?
Put simply, any business that wishes to operate in Germany needs to set up a legal entity. This ensures that tax obligations and employment laws are followed but also helps you to reap the benefits of Germany's strong economy.
If your company does not have a physical presence in Germany, for example if you are using contractors that are based in Germany but are not conducting your business there, then you do not need a legal entity.
What type of German subsidiary do I need?
There are four main types of company entities in Germany, including:
- Limited Liability Company (GmbH)
- Limited Liability Entrepreneurial Company ("Mini GmbH")
- Stock Corporation (AG)
- Partnership Limited by Shares (KGaA)
The most popular type of entity is a Limited Liability Company (GmbH). It is vital that you select the correct entity type for your business to avoid non-compliance.
How do I set up a subsidiary in Germany?
The type of subsidiary you require will determine how you will apply. However, as a general rule to set up the most common Germany entity - Limited Liability Company (GmbH) - you will need to:
- Obtain a business address in Germany - this can be a physical office or a virtual space
- Open a German bank account and deposit the required share capital (Stammkapital)
- Find a company name - you will need to check this is not already taken on the Handelsregister
- Set up a company object or purpose - this is called the Unternehmensgegenstand
- Check the company name and objective at the German Chamber of Commerce and Industry (IHK)
- Complete a Musterprotokoll
- Complete both tax and trade registration
- Register with the Chamber of Commerce and Industry.
This is not a definitive checklist for setting up a legal entity in Germany, with many more steps being required depending on your company and any discrepancies in your paperwork. It is therefore important to seek expert advice when establishing your company.
German entity laws
In addition to ensuring the correct business entity is established, companies must also comply with Germany laws on taxes, company accounts and social insurance. Meanwhile, annual business accounts must be submitted to the German Chamber of Commerce and Industry (IHK).
As you can see, compliance with German entity laws is an ongoing process. From initial registration to annual accounts, German entity laws require a vast amount of resource and time from expanding businesses. Meanwhile, non-compliance with German entity laws can cause an abundance of risk for your business, from delaying your business startup in Germany to fines and penalties.
The benefits of setting up a German entity
With one of the largest GDPs in the world and thriving automotive, engineering, healthcare and service industries, Germany is one of the most popular European locations for business expansion. Setting up a legal entity in Germany establishes your company's intentions for a long-term, fruitful investment in the country.
Meanwhile, companies in Germany benefit from 0% VAT for trade between EU member states as well as rich, diverse talent pools.
Why use a PEO partner instead of setting up a legal entity?
Setting up a legal entity in Germany is costly as well as risky. From initial paperwork to the recurring processing of tax and accounts reports, companies need to be able to dedicate repeated resource, budget and time to setting up an entity.
By outsourcing your German business expansion to a PEO or an EOR, you can start reaping the benefits of Germany's thriving business network without the stress and financial burden of a legal entity. This provides more flexibility for expanding businesses as well as saving you much-needed time and resources. Opting for a PEO over a legal entity doesn't mean your business is perceived as any less 'serious' in Germany but rather lets you focus on the key aspects of business growth knowing that the legalities of tax, national insurance, onboarding employees, work permits and employment contracts are handled compliantly.
At Leap29, our German PEO team have in-depth knowledge and first-hand experience of the German business market meaning that they can be fully relied upon to navigate your expansion in Germany taking into account relevant employment and subsidiary laws.
If you want to find out more about how our PEO Services in Germany can support your global expansion, call our experts today on +44 (0) 1625 537 555 or email [email protected].
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"For the last few years, we have worked very closely with Simon and the team at Leap29 on a number of different projects in multiple countries across the globe. Leap29 have been a fantastic partner for us and are always willing to think with us to find the best solution. The communication with the team at Leap29 has always been excellent and Simon, in particular, is great to work with! They come highly recommended from us!"
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