How To Launch Your Startup in Berlin

german_desktop_250x250Berlin is one of the most popular centres in Europe for new Web startups.

It’s estimated there’s an average of one new business startup in Berlin every day.

That might be an exaggeration, but you certainly get the impression there’s a lot of startup activity going on in Berlin.

How To Launch Your  Startup in Berlin

There’s a definite entrepreneurial feeling in Berlin, at least in the city centre Mitte district and surrounding areas.

The Samwer brothers and Rocket Internet are perhaps the most high profile IT startups in Berlin right now. SoundCloud also always gets a mention. But there are many many more.

Berlin is also popular with many solopreneurs active in the digital online sector who come to Berlin to work on their businesses and to make contact with like minded souls. There are plenty of meetups and co-working groups for digital entrepreneurs in Berlin which provide a network of support and a source for useful contacts.

A lot of overseas entrepreneurs are being drawn to Berlin to launch their startup.

So how come Berlin is suddenly so popular?

What Are The Benefits of Launching Your Startup in Berlin?

Berlin offers a number of big benefits for new business startups.

There’s the positive entrepreneurial climate that exists among the startup community in the city. If you move to Berlin to launch your startup, then you certainly won’t be alone.

Berlin is becoming nicknamed “Silicon Allee” (Allee is German for boulevard). There are plenty of like-minded people there involved in starting their own Web businesses.

On the financial front, the cost of living is still surprisingly low in Berlin compared to other cities in Europe.

Office space is also very cheap, even in the city centre.

Berlin is extremely popular with young and creative people, which means it’s not difficult to find qualified staff.

Salary rates in Berlin are also lower than in other parts of Germany.

And after a slow start, Berlin now has plenty of affordable co-working space available for new startups.

Co-working spaces provide office and Internet facilities where people working on different ventures can gather to work and socialize. Such as Betahaus, who are probably the most well known co-working center right now in Berlin.

Outgoings for new Web startups in Berlin are lower than other big cities in Germany. And they’re lower still than other big international centers such as San Francisco, New York, London, Paris or Tel Aviv.

And although it might not always seem like it, the level of bureaucracy and regulation for new businesses in Berlin is not as restrictive as in France, Belgium, Italy, Spain or some other countries on the Continent.

But it’s not all easy-going for startups in Berlin.

What’s The Downside To Starting Up in Business in Berlin?

Germany still has a bit of a problem with the idea of startups or even entrepreneurship in general which is at odds with that found in the US or UK.

Germans also have a different attitude to risk.

American startup entrepreneurs often say: “the best advice on how to succeed is to fail – and fail fast”.

In Germany – and in France and other countries, such advice is rare. Failure is considered a severe social handicap and a stigma. Bankruptcy is seen as more serious than in the US. You might not get another chance.

Banks and real estate agents will often not touch applicants who have ever had a bankruptcy or court proceedings against them in pursuit of debts.

Unlike in the US where starting up in a garage is a badge of pride  (for example as with Amazon, Apple and Microsoft), Germans tend to look down disparagingly on such new businesses as “garage firms” which are not proper businesses. In any case, starting a business in a garage in Germany is “verboten”.

According to surveys, the most coveted career destination for German graduates is public civil servant. In second place comes working for a medium-sized blue chip corporation.  So you can see that Germany is not exactly the land of go-getting entrepreneurship and bold risk-takers.

Venture capital infrastructure in Germany is also underdeveloped compared to the US. What German venture capital investors there are tend to be very cautious. Germany’s banks are also wary of Internet entrepreneurship – if they understand it at all.

The social welfare system is more extensive in Continental Europe than in the UK, let alone the US. Whilst this gives people a safety net, it also means for Europeans entrepreneurship and risk-taking does not come as easy to the Germans as it does to Americans – or even to the British.

People in Germany do not readily change career direction or move from one business sector to another like in the US. If you try to do this in Europe, you will regarded as non-serious, an amateur. Someone who cannot stay the course and become a professional in one field. So beware of how you present yourself.

Selling out your business startup is also rarer than in the Anglo-Saxon world. Once they’ve founded their business – traditionally known in Germany as the “Mittelstand”, Germans tend to hang on to their businesses as owner managers for life. The idea of building up a new business and then selling it off to someone else is alien to Germans.

However, things in Germany and Europe are slowly changing and no more so than in the IT and Web startup sectors. Like most everything else, trends in America tend to arrive in Europe a decade or two later. But arrive they do.

German Labour Laws Are Very Different To The US

Employment regulations and social insurance rules are more extensive in Germany than in the US. Hiring people isn’t cheap and labour laws are more restrictive than in the US. So be careful when employing staff.

Don’t think you can just hire someone one week and simply fire them the next – or in three or four months time. Make sure you get proper legal advice in Berlin before you take on staff, so you understand how things work. If you want to be able to do this, then you need to make sure your contracts of employment are framed accordingly.

There are legitimate ways businesses in Berlin can avoid getting snared by German employment regulations.

There’s a ruling in Germany called the “mini-job” which allows businesses to employ people without employer or employee having to pay social insurance, provided they are paid under 400 Euros a month.

You have to be careful what duration of employment contract you offer. Don’t assume things operate as they do in the US, or even UK – they don’t.

You can also offer internships at low pay – or no pay in some cases if you have no qualms of conscience (but I hope you do). At the time of writing Germany does not even have any minimum wage legislation – but this is soon set to change.

You can employ people in your startup on a freelance contracted basis. This means you avoid the employment law and social insurance tie-ups and costs. Employing contractors is a common and established procedure in the IT and Web startup sectors in Berlin.

But you have to make sure that your contractors are really contractors and not disguised employees. Not just in terms of what it says in their contract, but also in the sense of their level of integration into your workforce and the way they work.

Again, research this carefully first so you get it right. Otherwise there can be a danger that the German tax and social insurance authorities will come after you years after the event.

Tax Issues in Germany

If you’re a freelancer, you need to apply for a Steuernummer or Tax Number before you write any invoices. Complete a “Fragebogen zur steuerlichen Erfassung” online and send it to your local Finanzamt (tax office).

I strongly recommend you get yourself a Steuerberater or tax accountant to help you in your dealings with the Finanzamt and your annual Steuererklärung or Income Tax declaration.

German tax is complex but the good thing is it lets you make many different business expense tax deductions. You can also make deductions for travel expenses, education and training, meals and entertaining clients, subscriptions, and a host of other things.

You may also be able to claim for office space at home. However, you have to make sure that the room you designate as an office is not also in use as “living space”. So it cannot strictly speaking also serve as your living room or bedroom or whatever. The tax people may even come to check, though this is rare.

If you have a home office, then you may also have to pay attention to the conditions of your apartment lease. This may prohibit having an office in your apartment.

So if the managing agent or caretaker calls by, you will need to make sure your home office looks like your living room and not a home office.

And if the German tax people call by, you will need to make sure your living room looks like your home office and not a living room.

It’s a crazy world.

Kleinunternehmer

A Kleinunternehmer is a “small enterprise”, meaning for tax purposes a business that generates revenue of under 17,500 Euros gross in one year and does not envisage exceeding 50,000 Euros in the following year.

Kleinunternehmer do not have to charge and remit VAT or Mehrwertsteuer (or Umsatzsteuer as it’s sometimes called).

This saves you having to produce monthly VAT declarations for the tax office and it also saves you having to make advance VAT payments to the Finanzamt as well.

The downside is that you cannot claim back your input VAT (ie the VAT on the items you purchase).

If you’re freelance you are not required to pay into the German state pension scheme – but you can if you wish as a voluntary member.

The pension contributions are 19% of your monthly income, before tax.

Scheinselbständig – Pseudo Self-employed

You should also try to have more than one client at one time, or at least one after another. This is to avoid possible Scheinselbständigkeit (pseudo self-employed) allegations by the tax office or pension authorities.

Very generally, if in one year you earn more than 80% from one client, you run the risk of being considered “scheinselbständig” and you can then be required to contribute to the state pension scheme – and you can even be liable for back payments as well. This can be expensive.

Gewerbe or Freelancer?

Freelancers (in German Freiberufler) enjoy certain tax and other privileges in Germany that commercial business traders do not.

Gewerbe have to pay “Gewerbesteuer” which is a local business tax based on a proportion of your turnover.

Gewerbe also have to join the Handelskammer or Chamber of Commerce. Under German law, you have no choice in this and membership isn’t cheap.

So it may be worth your while to see if you can be classified for tax purposes as a freelancer.

If you are selling a product or service, and you are not one of a number of listed “Freie Berufe” or freelance professions, then you will be classed as a Gewerbe or commercial trader or enterprise.

If you are selling a physical product you will almost certainly be considered a Gewerbe. Everyone who runs a Gewerbe has to register with the local Gewerbeamt of the borough in which their business is based.

It is also possible to be classed as a freelancer even if you are not on the list of Freie Berufe. Notably if you are a consultant (Berater) or a software developer.

Although here, strictly speaking you have to be classed as a programmer who creates “system software” rather than application or commercial software!  And nor are all consultants considered by the authorities to be legitimate Freiberufler.

Get advice from your Steuerberater (tax accountant) – but bear in mind not every Steuerberater is fully informed about the situation either.

The whole Freiberufler-Gewerbe issue in Germany is an ongoing minefield and very arbitrary and uncertain. To some extent it also reflects a rather old fashioned view of professions and trades. There seems to be little logic behind it. The system basically needs reform, but for now it is as it is and unfortunately we have to operate under it.

Get Yourself a Steuerberater

The best advice is to appoint a German Steuerberater. But it can be hard to find one who understands IT and Web startups.

Some Steuerberater have surprisingly little knowledge of startups and the way that IT entrepreneurs and freelancers operate. Unfortunately I have first hand experience of the ignorance of some Berlin Steuerberater.

My first Berlin Steuerberater did not even understand the rules regarding VAT for IT freelancers. They also displayed surprising ignorance even about the nature of IT consultants and freelancing. I seemed to spend more time advising them than they did advising me.

When I challenged them on this they responded by calling it a “new sector”. I guess a bit like Chancellor Angela Merkel calling the Internet  “Neuland” – new territory. At one point (for tax registration purposes) they even asked me if my IT software work was “data processing”. That must be a term that hasn’t been heard in the IT sector since the 1960s.

I could have understood all that if the Steuerberater concerned was from the East, for whom Western German tax rules and the IT freelancing and startup scene were relatively new, but this Steuerberater was located in Western Berlin and should surely have known better.

One other thing that amused me was their name included the words “…Office Automation GmbH” – and yet they had a secretary in the lobby sitting at an electric typewriter instead of a PC. Not much automation in evidence there.

After a series of daft questions and mess-ups with my VAT caused by their incompetence, I fired them shortly afterwards.

My advice: Get yourself a competent Steuerberater who understands IT startups rather than just 100 year old medium-sized widget manufacturers.

Resources For Startup Entrepreneurs in Berlin

The most useful resources of all for new startup entrepreneurs in Berlin have to be these two guides:

Starting a Business in Berlin from the Berlin IHK or Industrie and Handelskammer (Chamber of Commerce), and

Successful Startups in Berlin from the Berlin City Council

Both these handbooks are in English and they are packed full of practical up to date information for new entrepreneurs in Berlin. You can download them free of charge

My advice: Get hold of both these guide books right away. These two books are essential reading for all new entrepreneurs in Berlin. They will tell you all the basics that you need to know if you want to start a business in the capital.

The Berlin IHK is at www.ihk-berlin.de/English

The Berlin City Council has a Webpage which focuses on startups on their official berlin.de website at: www.berlin.de/special/computer-und-handy/internet/startups/

as well as another page of links to organizations concerned with business and startups at: www.berlin.de/wirtschaft/service/ansprechpartner/

How To Meet Other Startup Entrepreneurs in Berlin

One of the best known hangouts for startup entrepreneurs in Berlin is the Cafe St. Oberholz in Berlin Mitte, right near the Rosenthaler Platz U-Bahn station.

Cafe St. Oberholz has become a bit of a well-worn stereotyped hangout for Web entrepreneurs and “möchtegern” (would-be entrepreneurs) but it’s still the place where a lot of Berlin’s Web entrepreneurs hang out, at least some of the time.

And finally, there’s one single thing which you can do which will help you enormously with doing business successfully in Berlin.

Learning to speak German.

You Need To Speak German In Berlin

People in Berlin are not so willing to speak English as they are in for example Holland or Belgium.

Business people in the Web startup areas tend to speak some English, but native Berliners are generally much less fluent in English and don’t tend to go out of their way to speak it.

Government and city departments in Berlin also conduct their business mostly in German. This is in fact a requirement under German law. Which can make dealings with the authorities problematic if you don’t speak German.

Get Started Learning German Before You Move To Berlin

The best way to ensure things go smoothly and to get the most out of Berlin is to learn at least some German. And the best time to start doing that is BEFORE you actually move to the capital.

Being able to understand and speak German is THE KEY to getting the most out of Berlin rather than just trying to get by with English the whole time.

There are some newcomers who hardly speak a word of German and who try to manage with English the whole time. But not being able to speak German soon becomes a handicap, especially if you are setting up and running a business in the city.

Being able to speak and understand everyday German will help you enormously in getting the most out of your stay in Berlin.

Speaking German will also give you the best chances with business contacts.

And one other thing: being able to speak German is also the key to getting the most out of Berlin’s famous social life. Say no more.

My advice: Get started learning German right away and make the most of your business chances in Berlin

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