Authors: Nicole Kunas, Peter Lennartz, Andreas Funke & Tobias Spath, https://start-up-initiative.ey.com/
The majority of startups deem financial accounting annoying rather than beneficial for their business. Entrepreneurs are passionate about the purpose of their startup and concentrate on solutions that will grow their startup to the next level and into a sustainable business with more customers, more employees, and extended operations. Despite these more exciting sides of building a business, there are obligations companies have to obey. Keep in mind that financial accounting and reporting may also produce benefits for young startups.
Bookkeeping requirements for startups
If a startup has received all its licenses and permits and is registered as a company (GmbH) in the trade register in Germany, it must keep books. The same applies to permanent establishments in the form of registered branches (under certain conditions also unregistered permanent establishments) of a foreign company. The basic requirements how to keep the books are detailed in the German trade law (Handelsgesetzbuch, HGB).
However, bookkeeping is also required by tax laws. Bookkeeping in Germany is primarily based on trade law. Tax laws are mainly identical with trade law. However, specific tax rules must be applied for specific issues, e.g. for deductibility of travel and hospitality expenses, expenses for company events, depreciation and amortization expenses, expenses for accruals, and interest expenses, to just name a few. Specific tax rules also apply for capitalization of self-generated intangible assets, allowances on receivables, deferred taxes, tax losses, transfer prices, and transactions with related parties. Accordingly, the profits or losses shown in one’s statutory financial statements are never the same as in one’s financial statements for tax purposes.
Minimum bookkeeping and accounting requirements
For proper bookkeeping, all business transactions need to be completely entered into the bookkeeping system, in a timely and orderly manner.
The data needs to be maintained and accessible for 10 years, be written in German, be supported by original documents, and be accrual-based, with special requirements for fixed assets, accruals, and deferred items. As accounting data is also the basis for monthly or quarterly filings with the tax authorities, it should be prepared on a regular basis (e.g. monthly), although that is not legally required. Bookkeeping also necessitates corporations to prepare statutory financial statements. The extent, however, is based on the size of the company. Startups are most likely considered “small-sized companies” and must prepare, at minimum, a balance sheet, a profit and loss statement, and notes to the accounts with limited content.
However, if the threshold to a “medium-sized company” is met, a full set of notes and a management report (Lagebericht) must be prepared. That threshold is defined by the following criteria, which must be exceeded (at least two of the following three criteria) in two consecutive years: assets of EUR 6,000,000, revenue of EUR 12,000,000, or 50 employees (on average). SMEs must prepare statutory financial statements within 6 months after the end of the fiscal year. These accounts must be approved by the shareholders within 11 months after fiscal year-end at the latest. If the startup has already grown into a medium-sized company, the financial statements must be prepared within 3 months and be approved by the shareholders within 8 months. However, there is no governmental oversight and, thus, no penalty if the deadlines are not met. Nevertheless, the company is not in compliance with German law in that case.
Rules for the fiscal year-end
For a majority of companies in Germany, the fiscal year ends on 31st December. However, a company is allowed to choose any other date for the fiscal year-end, which, then, must be included in corporate agreements and filed with the trade register. For tax reasons, however, the company must prepare all tax filings based on the 31st December, which requires additional work for the founder(s) and accountant(s) at year-end. It is, thus, more convenient to also choose 31st December as the end of the fiscal year. A fiscal year may never exceed 12 months.
Audited statutory financial statements & penalties
Statutory audits are not required for small-sized companies by law. Nevertheless, there might be a contractual obligation in the enterprise’s investment agreement even for small-sized companies, especially if it receives governmental funding. Audits are required for medium and bigger sized companies and, of course, for all public companies. The audit must be performed by a German certified public accountant (Wirtschaftsprüfer) before the companies’ shareholders approve the financial statements. Audits are governed by the regulations of the Institute of German Certified Public Accountants (Institut der Wirtschaftsprüfer). The auditor must prepare a special report about the results of the audit. The report may be prepared in English. The shareholder meeting must have accepted this report before approving the statutory financial statements. Each German corporation must file statutory financial statements with the filing authorities, the Bundesanzeiger, within 12 months after year-end. Small- sized companies only have to file their balance sheet and a short version of the notes. The Bundesanzeiger reviews the financial statements filed. If they are not filed in time, a notice and an additional six weeks to file are given. If after these six weeks, the statutory financial statements are still not filed, penalties are imposed. These range from EUR 1,000 up to EUR 25,000, with further acceleration depending on the delay.
External accounting services versus doing one’s own accounting
In contrast to other countries, a German certified public accountant is not necessarily a public tax accountant (Steuerberater). Almost all German public tax accountants do offer tax and bookkeeping services, especially for small companies without an own accounting department. The software applied by all German public accountants is DATEV, a widely accepted accounting software with different applications, including cloud solutions. Hiring an external accountant is considered the best solution for international founders due to the complexity of the German tax system. Hiring an accountant will keep you on the safe side with respect to deadlines and all tax questions.
|Important: In the early phases of a business, financial accounts usually do not play a role for investors when it comes to an investment decision as accounting always looks at the past. However, after the investment, one might have to provide monthly investor reports. If a startup is able to provide solid financial statements even in its early phase, that might have a positive effect on its credibility and the reliability of its management team.
Payroll is an integral part of accounting. German labour and tax laws are complex. Therefore, a public tax accountant should be hired to do the payroll on a monthly basis. Employers are obliged to calculate and pay payroll taxes, church taxes and social security contributions on behalf of the employee. These must be filed and paid 10 days after each end of the month. It is further required to sign-in new employees with their respective healthcare plans and social security as soon as they start working for the company. As payroll data is very sensitive, it should be protected and stored with special care. Moreover, to avoid costly mistakes, one must adhere to specific tax regulations if employees request reimbursement for travel expenditures.
If you are working with freelancers, it is important to make sure that he/she is not working for one’s enterprise for too long, because this might lead to obligations concerning social security and payroll taxes (Scheinselbständigkeit). Furthermore, special rules apply to interns, parents, etc.
Other relevant rules for bookkeeping
There are some ground rules that should be considered. One of the most important is to make sure that there is no booking without proper documents.
Compliance in bookkeeping is the responsibility and liability of the management team which describes those individuals who are filed with the trade register. That includes completeness, orderly manner, correct valuation, compliance with laws and regulations, correct storage and accessibility, and German language. Furthermore, it is important to note that in general, all records of a German company must be kept in Germany. Accounting software and documents must also be hosted on servers located in Germany. However, there are exemptions to the rule, for which companies have to apply with the tax authorities. Basically, the founder needs to convince the tax authorities that records are accessible and available for tax audits as if they were stored in Germany.