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29. July 2022 | Franchise as an alternative to branch and subsidiary

28. July 2022 | Founding a subsidiary: what you have to consider here

27. July 2022 | Establishment of a branch – you should consider these 5 points (this article)

Anyone who wants to set up a branch for their own company should be informed about a large number of details. Thus, an establishment has limited autonomy, especially when it comes to operations that only concern the establishment. For topics that affect the entire company, decisions are made at management level. In addition, an establishment itself cannot enter lawsuits or real estate in the land register in court. This is also reserved for the company as a whole. Accordingly, there are also numerous regulations that you have to observe if you want to set up a business. Here, a commercial register entry of the establishment in the commercial register of the main establishment is required. A trade registration as well as the obtaining of a permit to take up commercial or other activities by the respective competent chamber are added as further requirements. Furthermore, there is no separate taxation of the profits of the establishment. Instead, you can create a separate balance sheet for the establishment.

Establishing 1st Establishment – Introduction

Are your business doing really well? Can you hardly save yourself from the demand? Then you have certainly already thought that you should set up a branch. Successful startups in particular often face this question within a few years. You can choose from several alternatives. On the one hand, you can set up subsidiaries at new locations. On the other hand, you can also think about a franchise. However, you would not have your own branch or office. Instead, one would only be the contracting and contact person for questions about logistics, infrastructure and licenses on the part of completely independent franchisees. A simple establishment could also be considered for some purposes. However, the fourth alternative is the classic we would like to briefly introduce here, namely how to set up a branch to expand.

Setting up a branch to expand

Admittedly, with the word expand you often first connect a positive impression. At least this applies in economic terms, i.e. when a company expands. Whether the expansion of the universe is also positive, however, may be a question of a purely philosophical nature. And we would prefer to do without an evaluation of the expansion of the great rich here as well.

So we are looking at the expansion of a company that wants to establish a branch. For the company, this means that additional sales are to be generated at the new location. At least one wants to create the conditions at the new location in order to increase the turnover of the company in general.

Setting up a branch: what is actually a branch?

But what exactly is a branch? After all, the legislator has not given this term its own definition. As so often in such cases, when a legal definition is missing, one must look to the established practice from jurisprudence and literature as well as the practice based on it.

In addition, you will find the description that a branch is part of the main company, which on the one hand is dependent on it and on the other hand can also make its own decisions. An important feature here is the geographical separation from the main company. Here, the spatial separation only means the presence of own premises. These can thus also be established, for example, at the same address, but in different rooms, offices, such as the main branch. A further feature of an establishment is that it could continue to act independently and thus continue to exist if the main establishment were to cease operations. Moreover, the activity of an establishment must in no case be ancillary to the main activity of the undertaking. For this reason, for example, a warehouse for a supermarket chain is not a branch, but a branch is.

At this point, another conceptual distinction should be mentioned. Since the main establishment is also basically an establishment, the term branch or branch would be more appropriate to describe what we simply call an establishment here. Instead, in this article, we refer to the main office when we mean the actual central office. Similarly, the term branch must be limited to the fact that this is a sales branch. For other activities, however, the term branch is unsuitable as a designation for an establishment.

Establishment: the legal framework

4.1. Nature of establishment as distinct from permanent establishment and subsidiary

If you want to set up a branch, you should first look at the legal framework. In this regard, we would like to underline once again that a branch operates independently on the one hand, but on the other hand depends on the main company. The own initiative of the establishment is directed at the processes on site. However, decisions that affect the company as a whole are then made solely by the management at the location of the management. In this respect, an establishment differs from other structures where self-determination at the new location is either more restricted or free. For example, a company is dependent in every respect on the decisions of the management. An independent subsidiary, on the other hand, has significantly more freedom of decision than a branch, because it is only responsible to its shareholders. However, in the way she conducts her business, she is completely independent.

But this also means that you do not have to establish a new company to set up a branch. This is only necessary in the case of a subsidiary.

4.2 Establishment: Implications of the characteristics of an establishment

4.2.1. Limited freedom of choice of an establishment

In this context, you have to determine whether you want to set up your own branch management at the new location, or whether you as managing director prefer to continue to make all decisions yourself. In the latter case, however, one speaks of a business establishment instead of a branch. So if you want to set up a branch, you must also be prepared to let the decisions on the spot be taken by an independent branch management.

On the other hand, the actual company continues to bear rights and obligations. For example, a branch has no right to enter its own property in the land register. This is reserved even after the establishment of a branch of the main establishment. Accordingly, it is and remains the main establishment that has a plot of land intended for secondary establishment registered in the land register in the name of the company.

4.2.2. The right to sue

Even in legal matters that you want to settle by way of a legal action in court, it is only the company that is entitled to do so as a legal personality. An establishment therefore has no right to sue in court for its interests. This is also relevant with regard to complaints before the Finance Court or the Bundesfinanzhof.

4.2.3. Is an establishment subject to taxation?

This brings us immediately to the tax aspects that affect a branch. Since an establishment depends on the general directions of the company’s management, taxation is usually only at the level of the entire company. Exceptions are branches abroad, where there may be a limited tax liability, which must then be considered in detail. For the taxation in Germany, only the entire company together with all branches and permanent establishments can be considered. And this again depends largely on the form of company.

4.2.4. Can an establishment draw up its own balance sheets?

In this context, we also want to talk about another aspect related to taxation, namely accounting. You can choose whether the branch you want to set up should create its own balance sheets or whether this is exclusively the responsibility of the company as a whole. The creation of a separate balance sheet for the establishment has the advantage that you can differentiate your contribution to the overall success. However, this entails additional costs.

Pay attention to these 5 points when setting up an establishment

So let’s go into the five most important points that you should consider when starting a business. Because the measures and steps that go along with a start-up are just as varied as the features that characterize a branch. Therefore, let us focus here on the five most important aspects. However, discussions on how to establish a branch as a foreign company in this country are completely ignored. The reason for this is that you have to master a whole series of additional and sometimes very special challenges. However, the general points that are the focus of our considerations here apply to them as well.

5.1 Establishment: Business registration

The first aspect we would like to address on the subject of setting up a business is related to the question of whether there is a trade. Because in this project you have to make sure that all relevant regulations are applied. So if a commercial activity is to take place at the new location, then going to the competent authority for business registration is mandatory. For this purpose, applicants must identify themselves. They must also prove that they are entitled to register the trade. This is done either by a power of attorney or, in the case of managing directors, authorized representatives or board members, by an excerpt from the commercial register. You should also have a commercial register statement with you to prove that the company is properly registered there.

5.2. Establishment: Entry in the Commercial Register

The provisions of § 13 HGB stipulate that a branch must be entered in the commercial register. In this way, it is made public that as a company you run the designated branch. Thus, the entry of the establishment in the commercial register has declaratory effect. You have to register the establishment in the commercial register in which the main company is also registered. Thus, it is an additional entry to the main company. For this purpose, one must also indicate the address of the establishment at the time of registration. Also subject to registration under this law are future changes in connection with the establishment.

However, if the registry court receives information that there is actually no branch at the specified location, the registration in the commercial register is omitted. It therefore only takes place if the establishment of the establishment actually took place. However, the register court responsible for the application does not make its own investigations. However, it may obtain information about its existence from the registry court responsible for the district where the establishment is to be located.

Many years ago you had to register a branch with the register court at the new location. However, the legislature has now abolished this regulation. The registrations of branches that took place before the change in the law have now been closed.

In this context, one must also talk about the company under which one enters the branch in the commercial register. Here you take over the company of the main branch. However, you can also add an addition that refers to the establishment. This shows that this is not an independent company, but a branch of another. However, the addition to the company, which informs about the establishment, is mandatory if there is already a homonymous company at the new location or if one provides for the establishment a procura with restrictions against third parties.

5.3. Establishment: Information in the business letter

Furthermore, you have to make sure that you provide business letters of a branch with certain information. Thus, on such a business letter one has to mention the headquarters of the main company. In addition, there is information about the commercial register with which the main establishment is registered. For this purpose, the corresponding commercial register number and all other generally required data are also specified in the letter.

5.4. Establishment: Registration with the competent Chamber

In addition, you have to register with the competent chamber if you want to establish a branch. In the case of artisanal enterprises, the rule applies that one must obtain a permit from the competent Chamber of Crafts in order to carry out an activity requiring a permit. The prerequisite for this is that a master takes over the management of the branch. In the case of other companies, such as liberal professions, for which there is also a licence requirement, it is of course also necessary to meet the requirements of the respective competent chamber in order to obtain the licence to carry out the activities within the framework of the establishment.

5.5 Establishment: Registration with the professional association and other offices

Since you set up a new company when you set up a branch, you must also register the branch with the relevant professional association with regard to the employees employed there. As a result, the compulsory insurance of the employees takes place within the scope of the accident insurance.

If the establishment you want to set up would be an independent company, and this would then be subject to certain regulations that involve the health department, then these regulations also apply to the establishment. For example, as a catering company, you have to be able to show proof of the health authority about the information on hygiene regulations and a health certificate.

Furthermore, the building office could be involved in the establishment of a new branch. In any case, the competent authority issuing the business licence shall, after registration of the establishment, inform the relevant competent offices of the start of operations at the new location.

6. Setting up a branch – our conclusion

So what can we sublimate to the conclusion of our considerations? We have seen that the characteristics of an establishment are basically between the restrictions of an establishment and the freedoms of an independent subsidiary. In addition, you have to pay attention to an astonishing number of details if you want to set up a branch. This is accompanied by various regulations for registration in the commercial register as well as other regulations regarding information in the business letter. However, all these aspects that have to be considered here only require one-off actions at the beginning of the business operation of the newly established branch. In the longer term, however, the question of accounting must be clarified. From a tax point of view, there are no significant effects; the contribution of the establishment to turnover and profit is subject to corporate taxation as a whole.

So when it comes to starting a branch, there is hardly any difference to starting an independent company. In any case, the steps that have to be taken in the beginning to set up a branch are hardly distinguishable from those of a subsidiary. There are differences here, especially with regard to taxation.