7 mistakes to avoid when setting up a business in Germany
About to set up a new business in Germany? Julia Heinz from firma.de explains the most common pitfalls to watch out for, so you can sleep easier.
Setting up a new business can be a stressful time in your life, especially if it’s not something you’ve done before. Without previous experience or knowledge of the language, it’s easy to overlook important regulations and get yourself into trouble. Here are some common mistakes to avoid:
1. Underestimating the time it takes to prepare
It’s a persistent cliché that Germans are fond of their paperwork. When it comes to starting a company, many international entrepreneurs find this stereotype to be true. Especially in Germany’s cosmopolitan capital Berlin, it can take weeks to even get an appointment with an administrative office. That means planning ahead is crucial.
For international founders (citizens of countries outside the EU or EFTA states), the timeline is determined by your visa application. The second step is obtaining a residence permit that allows self-employment. Without these documents, international entrepreneurs can’t set up a business in Germany - neither as sole proprietors nor as managing directors of a corporation such as a GmbH or UG. The application process is complex and may take weeks or months. If you need a business visa, it takes at least six months to get your paperwork ready.
2. Starting without a proper business address
Every German company needs a registered address. What may come as a surprise is that private dwellings often do not qualify! In fact, if you are renting a flat, your landlord can forbid any businesses in the building. Many municipalities prohibit any commercial tenants in residential areas. Check before you use a private address to set up a new business.
If you want to set up a corporation the rules are even stricter. You’ll need a legal registered address (ladungsfähige Geschäftsadresse). This term describes a physical postal address where someone can accept registered mail in person. It is also entered in the commercial register. Securing a suitable office can be tricky, especially if you are still waiting for your residence or settlement permits to be issued.
Time is of the essence: Before you incorporate your company at the notary’s office, you must have an address in place. The good news is there are services that can offer legally registered addresses at a fixed rate for as long as you need one.
3. Letting your business plan become obsolete
Forecasts made during your start-up phase are rarely accurate. That’s why it’s important to recalculate figures and redefine goals regularly during the first business year. Founders who don’t touch their business plan for a few months usually miss critical events.
Jour fixe is the best practice to prevent this scenario: Discuss key figures once a week and - if necessary - re-evaluate them. This way you can stay ahead of any upcoming crises before they become apparent.
4. Failing to protect your private assets
Germany is a popular place to start a business because it has maintained a good reputation in terms of trustworthy business dealings, a trust that is at least partly based on its strict liability regulations. This means that if companies breach a contract, they can be held liable in a straightforward legal process. On the flip side, it’s essential for shareholders to protect their private assets from any legal dispute.
The easiest way to accomplish that is by setting up a private company with limited liability. The two most common legal forms are GmbH and UG. But protecting personal assets should go beyond that. For example, managing directors are personally liable for neglecting their duties. Additional insurance policies covering professional liability, legal expenses or other individual risk factors are popular choices.
5. Ignoring holes in your business model
Maybe you are new to the German market, maybe not. Either way, innovation and hard work are no guarantees for a thriving business. Trial and error are necessary to get your company off the ground as well as good old-fashioned pragmatism: If the business concept is not working or your proof of concept did not meet estimates, it’s time to cut your losses and adapt.
Pivoting often seems like a bit of a failure but can also be the moment that makes or breaks your new company. In fact, many Germans will envy your flexibility and courage to try something different.
6. Messing up your accounting
Bookkeeping is serious business - especially when you’re new to all the tax regulations that come with running a company in Germany. A common error in judgment is putting it off for a few months. Founding teams often only realise that it’s high time to consult an expert when the receipts have piled up and the finance office has sent a few letters. Unfortunately, fixing botched accounting is expensive. Plus, it’s not uncommon to be turned down by professionals once they have assessed the amount of work they would have to put in.
To avoid this scenario, it’s best to set up an accounting solution early on. There are many inexpensive app-based solutions that help you set up your entire bookkeeping in minutes. Those usually require some know-how. If you don’t want to DIY your accounting, it’s best to find an experienced service provider that can do the correct set-up for you. The same rule applies to payroll and annual financial accounting!
7. Planning without your loved ones in mind
Any long-term business owner will tell you that the first few years of self-employment are going to take a toll on personal relationships. If you forget about your family and friends, things can get tense and uncomfortable pretty quickly. However, a caring support network that can offer advice, stability or just distraction is a success factor that doesn’t get enough credit.
The best approach to preventing conflicts when your work-life balance goes off-kilter is honesty. Talk to your family and friends about the impact your professional life will have on your availability. Discuss expectations openly and ask for their understanding - before disappointments arise. Maintaining friendships takes time so ask yourself: How can you connect without physically being there? A good way is to schedule weekly time slots for personal text messages and phone calls.
firma.de has been a one-stop shop for entrepreneurs and SMEs in Germany since 2012. Their team understands that starting and running your own business is daunting, especially in a foreign language. That’s why firma.de offers a full-on service in English. Set up your bookkeeping, payroll and annual accounting or rent a business address. Their motto is: "no surprises thanks to fixed prices".
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