How to start a limited liability company in Berlin — A (sort of) quick & dirty Guide to the GmbH

Disclaimer: As much as I’d like to help you set up shop in Berlin comprehensively, IANAL! IANAA! I Am Not A Lawyer & I Am Not An Accountant and none of the below should be understood as legal advice.
I am an entrepreneur, which is the French word for someone who doesn’t know what they’re doing — you’ve been warned! ¯\_(ツ)_/¯

If you’re looking to start a company in Berlin, it’s tempting to stick with what you know — for example, a UK Ltd, or a C Corp. Yet, and as much as it might not feel like it, Berlin is part of Germany, and Germany has its own corporate law and tax code. Trying to make a British or US corporation work within the German legal system is a bit like running iOS on a PC: what initially looks like a slick and clever hack comes with a real risk of turning your whole setup into a buggy, unfixable nightmare once you’re operating on a slightly more advanced level. The only people you’ll be making happy then will be the finest of accountants.

That’s why the prudent remaining choice (no pun intended) for the ambitious startup entrepreneur in Berlin is to use a German corporate form. For most technology/software businesses, this will be a limited liability company that allows you privately sell shares to investors, set up employee stock option programs and eventually IPO or sell the company to another via M&A.

The German version of a Ltd or C Corp is the GmbH, short for the poetic Gesellschaft mit beschränkter Haftung (German for “limited liability company”). Before you start one, let’s look at how it’s different to what you may already be familiar with.

How is the GmbH different to a Ltd / C Corp?

The two things to immediately understand about the GmbH are:
1. Compared to a US C Corp and especially the UK Ltd, the GmbH will look and feel very unwieldy.
2. It’s not as terrible as it seems, and will likely be much better for your Berlin-based business than all other options. However, the GmbH does suck most badly when you’re forced to figure it out as you go, so it’s best to learn a bit more about its specifics before you dive in.

For this post, I’m assuming you’re familiar with Anglosphere’s corporate governance system, and will contrast the way in which the GmbH functions based on what I know about the Ltd and the C Corp. If you’d rather just learn about how to set one up, feel free to jump to “How to start a GmbH” below.

If you’re like me and you don’t enjoy process or regulations for the mere sake of themselves (although there’s probably nothing terribly wrong with that). Personally, I find it helpful to at least fantasize about the intentions of a system and I’ll try to provide a brief interpretation for each listed difference at the end of its summary.

The first big difference to the UK system is that the out-of-the-box GmbH doesn’t come with a Ltd- or Inc style one-tier board of directors system. Instead, the initial basic setup consists of:

1. The shareholders (called Gesellschafter) and the Shareholders’ Meeting (Die Gesellschafterversammlung)
2. One to n managing director(s) — Der/Die Geschäftsführer. Alas, that’s just what they’re called.

On first blush, this does sort of look like a Ltd, and the big difference only becomes apparent when you try to add non exec directors or board members that aren’t managing directors / C suite — as you can’t.

Unlike the US and the UK, Germany (along with China) uses a two-tier board system. This means that the management board / C-Suite runs the company day to day, whereas an optional supervisory board provides supervision with respect to larger strategic initiatives. And no, alas the whole idea is that you can’t have someone be part of both boards simulatenously. Of course, you can still be both a Managing Director and a shareholder.

The good news is that you won’t legally need the supervisory board until a much later stage (I believe that’s at employee #500), at which point you’ll have vastly more qualified (think: qualified) advisors than this blog post written by a non-lawyer & non-accountant and general ignoramus.

What you can do early on is to use these available GmbH add-on modules (like a supervisory or an advisory board, called Aufsichtsrat or Beirat, respectively) to emulate some of the things we know from UK/US corporations, but such details are best left aside for now.

In the basic setup, it’s effectively the shareholders themselves that take over the role of the US/UK board. Not only do they own the company, but they also hire and fire the managing directors, who run and legally represent the the actual business. The shareholders are ultimately the most powerful organ in the GmbH, and the way they execute their power is through a Shareholder Decision (Gesellschafterbeschluss) which can only be conducted through a Shareholders’ Meeting (Gesellschafterversammlung). For example, hiring or firing a Geschäftsführer will require a shareholder decision. Raising your share capital to subsequently have investors subscribe for these shares will require a shareholder decision. Moving some shares from shareholder Harry to Sally will (usually) require a shareholder decision. Selling your company to GooBookZon Inc. for $1 or $1B will require a shareholder decision. Etc.

A shareholder decision is essentially just a vote, and you can set the required majority parameters within the Company Articles, called Gesellschaftsvertrag.

So far, so good— from the perspective of the shareholders, the out of the box GmbH is thus more like a direct democracy, while the standard UK/US system works more along the lines of a representative democracy, wherein the shareholders elect a board to represent their interests.

But, why? I believe the idea of the two-tier board system is based on implementing more checks and balances than one might have with the one-tier system, in which one person can be both CEO and Chairman of the Board. Of course, neither system managed to prevent its Enron or VW moment, so let’s call this a tie.

Again, the basic GmbH setup is probably fine when you’re just getting started, and there are ways to emulate the represenatative system later on when you have more shareholders or investors.

Every GmbH, its shareholders and annual statements are listed and organized in a public share register, called Handelsregister. As far as I understand, there isn’t one Company’s House as in the UK, but larger towns and cities operate their own share register.

Usually, you won’t be dealing with the share register directly. Instead, the German system provides a rather interesting, rather medieval interface, which also takes us straight to the only really annoying thing about the GmbH.

Papers, please

And that’s the second big difference to the UK/US system and first real complication with the GmbH: founding it, changing or amending the articles, hiring or firing a director, raising capital, selling shares, in short: basically every business transaction ( →shareholder decision) that is directly related to the fundamental structure of the business will require notarization.

That doesn’t sound too bad until you physically understand that notarization means that the required majority of shareholders, one way or another, will have to physically enter the office of a public notary and sign a physical piece of paper. Each party is required to bring along their passport and some proof of residency, such as a utility bill. And worse: the notary is required to read out the entire contract you’re signing, which is especially fun when you’re there to fix a single sentence in your 40 page Articles. Again: all of this is happening in meatspace, each of these transactions will be billed by the notary and resistance is absolutely futile.

Should you require the services of a notary, and as a GmbH founder or MD you absolutely will, in principle any notary in Germany will do. They tend to be roughly as common as the slightly more specialized dentists, plus any public notary in the world will do for as long as they can obtain the required ‘Apostille’ to make the document legal in Germany. Pro tip: every German embassy provides notarial services, so that’s a reasonable fallback option when you need to have someone notarize their vote or share subscription (or else) outside of Germany. German notaries have a fixed cost system based on the value of the transaction, so you can’t shop around for cheaper ones. Notaries are a proud people, as only the very best law graduates are allowed to join their guilded and well paid ranks. I found that the best notaries are those with a slight, but perceivable repulsion at their own profession — they’ll read the words much quicker and will be your trusted ally in working with the sometimes somewhat Byzantine share registers.

But, why? The idea of a notary is one of an impartial lawyer, who by law has to be involved in certain business transactions to ensure that everyone understands what they are getting into. In the context of corporate transactions and shareholder votes, they also ensure that the vote count (based on shareholding, articles etc) has been correct, which in theory should lead to less potential for litigation issues later on. I’m not sure if that’s really the case empirically, but I keep telling myself it’s a good thing and as long as the system doesn’t change, so should you! ;)

Monies

The third big difference to the US/UK system is the initial minimum share capital required and involved with founding a GmbH, which is vastly higher than that of a Ltd or an Inc.

While it is possible to start an ‘alpha version’ of a GmbH with total costs of less than 1000 EUR (including notary fees), in theory, a GmbH requires a whopping initial share capital of 25.000 EUR (in German: fünfundzwanzigtausend Euro), which needs to be transferred to the company’s bank account to finalize incorporation.

In practice, you can either set up a proper GmbH with 50% of that amount (ie 12.500 EUR) or start an UG (short for Unternehmer-gesellschaft), the embryonic version of a GmbH, with 1 EUR. Just be aware that buying a single stamp subsequently will bankrupt the company on paper — talk to a real lawyer about this.

You may immediately put that money to good use for the business (with the illegal exception of paying it back to shareholders through anything but actual salaries!), but should know that this is the maximum amount that shareholders will be liable to respective to their shareholding in the worst case. Also, burning through half of your share capital triggers all sorts of legal liabilities for the MDs, both wrt shareholders and wrt external parties. This is a serious matter that you’ll need to discuss with a lawyer in detail — observe the stamp note above!

As the UG is basically just an embryonic form of a GmbH, it will eventually have to grow into a proper one before the shareholders may distribute any of its profits (ie grow its share capital to at least 12.500 EUR). Thus, you can set up an UG with anything between 1 EUR to 12.499 EUR in share capital.

How to actually found a GmbH / UG

This depends a little bit on how much initial capital you have available. If the >12.5k EUR required to go straight for the GmbH aren’t a problem, read on, if they do present an issue, skip the first step. The process for both the GmbH and the UG are:

1. Optional, but recommended: I’d certainly advise to contact a specialized law firm, which will help you set up the most important document of your GmbH: your Articles, aka the Gesellschaftsvertrag. While there are basic templates, they usually don’t cover more specific startupy stuff (vesting, drag along + tag along, majority votes etc) — you should have thought about these a lot and have an idea of what you’ll want. You’ll also need to have a clear idea of your initial equity ownership %s.
   Costs: Good firms will charge around 300 EUR / hour (sometimes, startup rates can be a bit lower) and drafting a basic, startup-friendly, slightly customized Gesellschaftsvertrag shouldn’t take them longer than a few hours. If you don’t speak German, you should make sure to have the firm do a bi-lingual version. I wouldn’t go with a cheaper firm.
2. Required (just like all subsequent steps): Set up a meeting with a notary. Every founding shareholder will either have to be at that meeting or provide you with a notarized proxy (you can hand those in later, but nothing will become effective prior to everyone’s notarized signature!). After handing over your passport and proof of residency you’ll need to provide the notary with:
   1. your Articles (if you skipped step 1, the notary can provide standard articles or even adjust them for you for a small fee),
   2. a shareholders’ list, listing all shareholder names, addresses, birth dates and their respective shareholding (typically, 1 share will be 1 EUR in share capital). Again, ask the notary to draft these up against a smallish fee. Now, the notary will read out to you, more or less loudly, the entire articles contract / Gesellschaftsvertrag.
   Costs: this depends on how many founding shareholders you have, but generally shouldn’t cost more than 1000 EUR.
3. Open a business bank account and transfer your share capital (each shareholder his own!) to it. If you went for the standard, 50% GmbH share capital setup and you have 2 shareholders owning 50% each, each shareholder will have to transfer 6250 EUR (50% x 12500 EUR) to ‘buy’ 12500 shares out of 25000 shares outstanding. Again, note that both shareholders are each personally still liable for up to 12500 EUR, although they only provided half of it at the start.
4. Before the notary is allowed to register your GmbH with the share register, you’ll need to provide proof that the share capital has been paid onto the company’s official account. Usually, an email with a screenshot of your bank statement showing the relevant transactions will get the job done.
5. Share registers take a few weeks to process any changes, including your GmbHs incorporation. Once that is done, you did it!
6. PS: You’ll probably want to get a tax accountant, asap. Absolutely no merit in running this yourself.

HTH!

I’d like to remind you that I’m not a lawyer, nor an accountant, and none of this here is legal advice.

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