The limited liability company (LLC) is the most common legal form for companies in Germany. This legal form is often used by international companies that have decided to set up a subsidiary in Germany; local entrepreneurs also choose this legal form for their small and medium-sized businesses. It combines relatively few obligations with high flexibility to be set up in any economic sector. The limited liability company is subject to corporation tax, trade tax and the solidarity surcharge. The minimum share capital for LLC is EUR 25,000, with a minimum of EUR 12,500 proven in the bank account at the time of company registration. As the name of this legal form suggests, the shareholders are only liable for the capital they have contributed and do not risk their personal assets.
An LLC is usually managed and legally represented by the directors of the company. In the case of a GmbH, at least one managing director must be appointed, who does not have to be a shareholder in the company or a resident of Germany. Typically, shareholders can exert direct influence on the company by issuing binding instructions to the managing director. Before you decide whether LLC is the most suitable legal form for your company, you should keep in mind that this type of company shares cannot be publicly offered for sale. Meanwhile, the administrative and financial controls are less stringent compared to public companies.
Another very similar legal form for companies is called a mini-GmbH, which is essentially the same as the regular GmbH in terms of limited liability for shareholders and no restrictions on doing business. Meanwhile, it allows entrepreneurs to contribute less capital when registering the company in Germany and therefore risk with less funds to start doing business. In fact, no minimum share capital is required at all. Instead, 25% of the company's profits must be placed in special reserves until the total amount of these reserves reaches EUR 25,000. In this case, the company is transformed into a regular LLC. The Mini-GmbH enables young entrepreneurs to start their business with less capital employed, reducing their risk and lowering the cost of capital until the business is successful and generating profits.
German GmbH taxation
Typically, taxes are collected and administered by the local tax office. Local tax offices are typically responsible for administering income tax, corporate income tax (CIT), real estate transfer tax (RETT) and value-added tax (VAT). While trade tax is based on corporate taxes administered by local tax offices, enforcement of trade tax is the responsibility of municipalities. German LLCs are generally subject to the taxes explained below:
Corporate Income Tax – levied on the company's worldwide income, unless a double taxation treaty is in place. The corporate income tax rate is 15%, while corporate income tax is subject to a solidarity surcharge of 5.5%. This results in an aggregate tax rate of 15.825%;
Trade tax – is levied by the municipality where the company is based. The standard tax rate is 3.5%, while the additional multiplier is added in the range from 200% to 500% and is determined individually by each municipality. This results in an aggregate tax rate of 7% to 17.5%.
Both taxes are assessed annually, but companies are required to prepay corporate income tax and trade tax quarterly based on an estimated current year's tax due.