How to do bookkeeping for your LLC in Germany

Tax basics for LLC bookkeeping

Limited liability companies offer operational flexibility, but they must follow specific tax rules. The key tax components include:

• Corporation tax of 15% plus a solidarity surcharge of 5.5%
• Withholding tax of 25% on profits distributed to shareholders
• VAT of 19% on taxable goods and services
• Payroll taxes — income tax, solidarity surcharge and, where applicable, church tax — if the company has employees

On the day the company is formed, an opening balance sheet must be prepared, recording the shareholders’ contributions and providing an initial overview of the company’s capital and assets.

Profit distribution for a GmbH or UG follows the same principle: distributions are based on each shareholder’s capital contribution. Decisions on profit allocation and retained earnings are made through a shareholder resolution.

Double-entry bookkeeping

LLCs cannot use a simple cash-based accounting method. As they are subject to the German Commercial Code (HGB), they must use double-entry bookkeeping and prepare a balance sheet. This system records every business transaction twice to give a complete and accurate picture of all assets and financial movements.

The core components of double-entry bookkeeping are two main ledgers:

• Day ledger (journal) – records all transactions in chronological order
• General ledger – groups transactions by account to show how they affect assets, liabilities, equity and costs

Additional subsidiary ledgers may be used to support the main books. Every transaction is recorded with the date, reference number, supporting document and amount, and posted to both an account and a corresponding offsetting account.

Accounting terms

Account management

Each business transaction is recorded in two accounts to ensure accuracy and reveal discrepancies quickly. Even internal transfers — such as moving money from the current account to the business account — must be recorded. Every business partner also receives an individual account, allowing all payables and credits to be tracked clearly.

Debit and credit

Double-entry bookkeeping records every transaction on a debit (left) and a credit (right) side. The use of funds is entered on the debit side, while the source of funds is shown on the credit side. Both sides must always balance.

Comparison of operating assets

Profit is determined by comparing the company’s assets at the beginning and end of the financial year. Operating assets are calculated as:

(Fixed assets + current assets) – liabilities

Accounting obligation

At the end of each financial year, companies must prepare annual financial statements consisting of a balance sheet, a profit and loss account and, if required, additional notes. This obligation is set out in the German Commercial Code (HGB) and the German Accounting Law Modernisation Act.

Inventory requirement

At the close of the financial year, the company must carry out a full inventory and include it in the closing balance sheet.

Annual accounts

Annual accounts summarise a company’s financial position and performance. They consist of the balance sheet and the profit and loss account.

Obligation to record all business transactions

All business transactions must be recorded in full. This information forms the basis for checks carried out by the tax office.

Essential tips if you manage your own accounting

DIY accounting can work — but only if you stay highly organised and pay close attention to legal requirements. German compliance rules are strict, and small mistakes can lead to costly consequences. The following points are crucial:

• Stay extremely organised. German bureaucracy is complex, so assume you may miss details and double-check everything.
• Use professional accounting software suitable for your business (e.g. Lexware, Datev) and keep it fully updated to comply with current regulations.
• Set up a clear document management system for bank statements, receipts, invoices and contracts. Avoid the “shoebox method” — proper organisation saves enormous time during audits.
• Observe all legal retention periods before disposing of documents. Files may still be required in future audits.
• If your company started with low share capital, avoid overspending in the first year to reduce debt risk.
• Prepare your annual accounts within six months after the end of the financial year. Missing this deadline may result in fines of €2,500 or more.
• Remember the retention (reserve) requirement for UGs: annual profits may not be distributed in full. 25% must be allocated to statutory reserves until €25,000 in capital is reached. Only then can the UG convert to a GmbH.
• Your annual accounts must be published in the Federal Gazette (Bundesanzeiger).
• If a UG fails to create required reserves, the annual accounts become invalid. Liability protection may lapse, and distributed profits may need to be paid back.
• Germany’s tax law is extremely complex. It’s strongly advised to have a tax adviser prepare your annual accounts to avoid expensive errors.

Following these guidelines will help you manage your UG’s accounting more safely and efficiently. Because accounting is strictly regulated, even minor mistakes can create legal issues. When in doubt, consult a qualified tax adviser.