Various laws govern business closures in Germany:
Types of liquidation
A company closure can occur via voluntary or compulsory liquidation.
Examples of the key reasons for voluntary company liquidation include:
- personal or family reasons (e.g. health grounds, starting a family, career break to care for family members);
- insufficient profitability and too little demand;
- fruitless search for a successor to a business when aiming to transfer it.
A company’s dissolution should be planned carefully in order to avoid risks. Tax advisors, lawyers and management consultants can help with the tax and legal aspects of winding up a company. Free advice is available for company owners from chambers of commerce and business associations.
Information and checklists for preparing and concluding liquidation:
Most compulsory dissolutions occur following insolvency proceedings and a person’s disqualification from running a company. If liquidated companies are not de-registered properly, the relevant local authority may stipulate de-registration at its own initiative. Business difficulties capable of resulting in compulsory liquidation in insolvency proceedings are mostly the result of previous negative developments, e.g.:
- Market trends have not been taken into consideration
- Inadequate staff planning and management
- Poor liquidity and credit management
An effective crisis management can help to avoid the threat of insolvency. Otherwise, illiquidity or overindebtedness may occur, which forces companies to file for insolvency. The insolvency proceedings may lead to a company being liquidated. Insolvency proceedings depend on a business’s legal form and the situation it faces in reality:
Corporations (e.g. limited liability companies, GmbH) must file for insolvency where there are grounds for opening insolvency proceedings, such as illiquidity of overindebtedness; the corporations then have a maximum period of three weeks in which to redress the situation. If this cannot be done, company managers are obliged by law to file for insolvency. Companies can also file for insolvency where there is only the threat of illiquidity.
Self-employed, who are held accountable as (former) individuals or as (former) associates for accrued liabilities in a partnership, are under no obligation to file for insolvency. They may however file for insolvency owing to (the threat of) illiquidity. In individual cases the question is whether (or when) an insolvency petition is advisable in order to settle debts.
When there are major tax and social security arrears, or if payment is taking too long, an individual may then face the threat of being disqualified from running a business by the relevant licensing authority on the grounds of unreliability. Often these proceedings are requested by tax offices and health insurance funds. Often these proceedings are induced by financial authorities and health insurances.
When proceedings are initiated, aspects like ‘poor economic performance and will’ and ‘lack of professional responsibility’ may be cited, as may punitive or administrative offences as well as violations of tax and social-security obligations.
If a business has effectively ceased trading, but de-registration from the relevant local authorities does not happen within a suitable period, the responsible authority may pursue de-registration at its own initiative.
When filing for bankruptcy is the only option left for a business owner, it pays to cut losses, initiate proceedings sooner rather than later, and move on to a new business project.
At the same time as it ceases trading, a business must officially de-register from the local authority in which its registered office lies. There are no standard forms for the whole of Germany, but the required forms can usually be found on the websites of the relevant local authorities.
If your business is registered in the commercial register, then you must apply for cancellation of your business from the commercial register at the relevant district court together with a notary. The application must be submitted immediately upon deciding to wind up a business.
Social security de-registration
When winding up a company that employs staff, factors such as corporate liability make it advisable to notify the central business registration service of the Federal Employment Agency of the cessation of business, thus allowing the former registration number to be cancelled.
Businesses with over 20 employees must fulfil their duty of disclosure in the event of mass redundancies. Mass redundancies must be notified in writing to the Employment Agency. Works councils must also be informed of any pending redundancies.
Within six weeks following the cessation of a business, the owner must de-register his former staff from the relevant social security health insurance fund. De-registrations take place only electronically under the previous fleet number using officially licensed, dedicated software.
The health insurance fund will notify the German pension insurance scheme about the closure of your business. In turn, the German pension insurance scheme will usually conduct a company audit within three months, during which time relevant documents and information must be kept ready for scrutiny.
The cessation of a commercial enterprise must also be notified within four weeks to the subject-matter and locally responsible employers' liability insurance association.
Businesses should contact their tax office to clarify the tax procedures they need to take into account for their own individual case (legal form, owner/associate or management structure, line of business, etc.).
It will be helpful for businesses to inform the tax office about any changes to a company’s status informally so that it can arrange any necessary formalities.