Starting a small business in Germany: procedures and requirements

Starting a small business in Germany

Small and medium enterprises are the vital part of Germany's economy and so the Government makes it easy for residents and non-residents to start and run a small business in any part of Germany. After considering whether a small business is perfect for you and your lifestyle, you can decide from the five different forms of business ownership. The next step is to choose an appropriate name for your business and then you can apply to the German Federal Ministry of Economics and Technology for license and permits. Understand the taxation rates of Germany and then look for means to brand your business using the right media. When these steps are undertaken, you are all set to begin your small business. The success rate in Germany is fairly high and this means, you have a fairly good chance of being successful.

Introduction

The procedures and formalities involved starting a small business in Germany is fairly straight-forward. This is because the German Government and the society as a whole understands the importance of small business to their economy and has made it easy to encourage entrepreneurs like me. This paper aims to describe what I should do to start a small business in this country.

It discusses the different aspects that I should consider including the lifestyle changes that I have to make. The next step is to decide a form of business ownership and choose the right name for my business. This is followed by an in-depth understanding of the licenses and permits required and the taxation rates. Finally the branding and marketing techniques that I will use for my business is discussed. The paper ends with an overview of the statistics to encourage me to start a business. Based on all the procedures and formalities and the rate of success of small businesses in Germany, I am confident that my business will be a success.

It is easy to start and run a small business n Germany because the society understands its importance and so, the procedures are fairly simple. This paper will elaborate on the simplicity of the procedures and other steps that need to be taken from the point-of-view of the entrepreneur who is looking to start a small business enterprise in Germany.

Aspects to consider before starting a small business

Small businesses are a satisfying way to earn money provided I have my priorities right. I want to ascertain whether this is the right option for me and in order to understand this, there are some questions that need to be answered.

The first and foremost question is why I want to start a business? For me, the answer is clear. I want to have my own company and be self-sufficient when it comes to income. This will reduce my dependence on jobs and the politics that come with it. Besides, a good revenue stream will also help me to live comfortably. The second question is whether I am willing to put in the time and effort required to start a small business because this can be a huge factor in the long run (Weidemann,2007). Until the company is up and running, it requires considerable amount of money, resources, time and effort and I am willing to put in everything. Since I am young and single, this makes it easier for me and I think this is the right time for me to start a business.

The next question is whether I can start it alone. An important part of a successful venture is human capital. It is defined by Cooper & Burke (2011, p.72) as, "the knowledge, skill and experience that top management brings to a venture, which influences venture success." So, I have to look for a partner who is skilled in the areas I am not so that we can complement each other well. Further, my lack of experience and limited financial resources necessitate a reliable partner and this person should share the same business goals and ambitions like I do. Also, he or she should have a passion in this line of business and a diversity of skills would help too. Finally, understanding the amount of risk that I am willing to take in the business should be ascertained at the beginning. There should be an upper limit, which can be a certain percentage of the initial capital or the maximum amount of money that I can afford to lose. If at all I get to that point, I need an exit strategy.

After ascertaining all these aspects, I believe I am a good fit to start a small business and I am going to move on to the next step.

Choosing a form of business ownership

Germany offers five different forms of business ownership and they are:

Limited Liability Company -- This is one of the most common forms of business ownership in Germany and the minimum share capital required to start such a company is €25,000.

Joint Stock Company -- This is a public limited company that requires five members and an initial capital of €50,000.

Subsidiary -- This company is a subsidiary of a foreign company that is registered in Germany to perform operations within this country. Since the parent company has unlimited liability, there is no minimum amount required to start this form of company.

Partnership -- In this form of business ownership, there is a legal contract between the partners and the operations should be based on this contract. All the partners have unlimited liability.

Sole Proprietorship - This is a flexible form of business that can be owned and operated by one individual or by two or more individuals. The basis of the operations of the company is a contract that is signed by all the partners and this contract should also include the terms of liability.

I am going to choose the last option (sole proprietorship) because I am looking for a right partner to work with me. In case, if I am unable to find such a person within the next few months, I would start off alone and as the business expands, I may look for new partnerships. I need a flexible option and I believe this is perfect for me.

Taxes

An important aspect of setting up business is to understand the tax structure. The small business taxation of Germany is one of the best in the world and it is designed to reduce the burden on the owners. This enhances the willingness and ability of small businesses to invest and the burden of taxation is also balanced (Slomp, 2011).

According to the German Federal Ministry of Economics and Technology (2011), there are four kinds of taxes that have to be paid and they are turnover or input tax, income tax, trade tax and corporation tax. The turnover tax or VAT is the tax that is incurred when you sell goods or services. This tax is paid by the customers and it is the duty of the business owner to pay this amount to the government. The current rate is 19% and a reduced rate of 7% is available to artists, journalists and translators. This is not applicable to doctors, insurance brokers and physiotherapists. Also, small entrepreneurs are exempted from this tax if the turnover in the previous year is less than €17,500 and the turnover in the current year is expected to be less than €50,000.

Trade tax has to be paid by all businesses and this is based on the location of the business as well as the company's profit. Corporation tax is paid by joint stock companies and limited liability companies and this rate is 15%. Income tax is paid by every individual earning a salary or profit and for employees, this has to be automatically deducted from the salary.

Branding a business

"A brand is a collection of visual cues: colors, logos and typefaces, as well as emotional associations people have with your company" (Friedmann, 2008, p.137). The branding should reflect the company as well as its line of business and at the same time, it should be easy to maintain for you. For example, if you are a freelancer, then your attire, tone, the services you offer and your office location are all a part of your brand. Understand your business and your client before branding so that it will attract the right type of customers. Effective branding has many advantages like building higher visibility for your business, attracting more customers and helping you to build a large and successful client base.

Marketing a business

Marketing is another integral part of your business. In a study conducted by the Federation of Small Businesses (FSB), 1,700 small businesses were surveyed and 46% of them said that training in marketing would help them to further their business. Another 34% said that training to their employees would be beneficial to their growth (Cabinet Maker Magazine, 2011).

You can use a wide range of media to tell your customers about your business and the products or services that you are offering While traditional media like radio, television and flyers are good, you should keep pace with the emerging trends. Social media is a powerful tool that can help you to get the visibility you need. So, look at Twitter, Facebook and Youtube for popularizing your business. Identify your target audience and reach out to them through these different forms of media. Since German is the primary language spoken in this country, you have to be fluent in it or you should employ someone who is fluent in Germany and can write effective marketing messages for your audience.

Business Failure and statistics

The performance of German small businesses has always been above average. In 2010-2011, the total number of small and medium enterprises (SMEs) were 1,862,476 and this accounted for 99.5% of businesses in Germany. It provided employment to 13,616,742 people or roughly 61% of the total population. It added a value of €657 billion or 53.8% of the total revenue (European Commission Enterprise and Industry, 2011).

There are many reasons for the success of German small business. Firstly, firms that have less than nine employees account for more than 93% of businesses in Germany and so, the Government is inclined to formulate policies that make it easy to start and operate a small business here. It also provides employment opportunities for more than two -thirds of the country's population and so, the government has a big stake in its success. Another reason is that most banks get their money from public savings banks and credit cooperatives and this makes them more robust in the wake of the current financial crisis (Pommereau, 2009).

Conclusion

Germany is one of the best countries in the world for a small business because a good part of the economy depends on small businesses for job creation and employment. Firms that have nine employees or less account for 93% of the country's 1.6 million firms (Christian Science Monito, 2009). The Government also understands the importance of these small businesses and this is why they have simplified the procedures required for starting a small business.

As mentioned above, starting a small business begins with identifying the right niche and more importantly, whether its the right way forward for you. This decision should also be based on vast amounts of research regarding the different forms of business, taxation and the rules and regulations pertaining to starting a small business. Then comes other aspects such as identifying the form of business that would work best for you and how you can go about naming, branding and marketing your business. You are sure to be successful when you make informed business choices.

The support offered by the German Government as well as the society makes it an ideal place for any small businessman like me who is looking to start off their own venture.