Company Forms in Germany
Germany is ranked by the World Bank Group on the 17th rank overall when it comes to doing business and on rank 114 when it comes to starting a business. With this post, I would like to introduce the different Germany company forms to you.
Please take note that this is not a professional advice and if you have further questions you should always seek consultancy of a professional lawyer, notary, or tax accountant.
Choosing the Right Legal Form
You are reading this because you want to start a business in Germany soon? It is important for you to look at different legal forms for your next business as all have different personal, financial, fiscal, and legal consequences. I am recommending everyone to choose a legal form solely based on long-term goals. It might happen that one legal form offers you attractive taxation benefits in the first year and you will feel the disadvantages of this corporate form in the second year.
Sole Proprietorship and Joint Partnerships
The sole proprietorship is the most popular legal form in Germany. Around 75% of all businesses registered in Germany were sole proprietorships in 2015. The largest characteristic of sole proprietorships and joint partnerships is the unlimited liability with the all personal assets. They both do not require any minimum capital and all proprietors are the managers of the business at the same time.
A limitation of the personal liability is an important point for high-risk companies. Shareholders of corporations enjoy a limited liability. This means that shareholders are only liable amounting to their deposits and corporations are only liable
To find out which German legal form suits best your business goals I suggest you go and think about the following crucial points.
The more complicated your corporate form is the more paperwork you will have to administer. Examples are resolutions of the supervisory board and the convocation and documentation of general assemblies. It is important to keep in mind that when you are a startup with a limited budget all these tasks will stress your limited resources. If you are a sole proprietor you can easily use your business assets for your personal expenses. This is not possible with a corporation like a GmbH where these payouts have legal restrictions. Depending on your personal goal this can be an advantage as well as a disadvantage.
Legal forms with few paperwork: Sole proprietorships and GbR and UG (haftungsbeschränkt) or GmbH if founded with a standard protocol (I highly discourage you from doing so)
A lot of paperwork: All other legal forms
Even more, paperwork: AG, SE
There are always reasons why your customer or competitor has an interest in bringing you to court. It might be a product fault or patent issues. As already mentioned earlier, sole proprietors and joint partnerships have an unlimited liability which includes all personal assets of the business owners. A few partner companies enjoy partly limited liability. Shareholders of corporations like the GmbH enjoy a limited liability. A limited liability is a big advantage when companies are dealing with uncertainty.
Limited Liability Companies: GmbH, UG (haftungsbschränkt), GmbH & Co. KG, AG
Partly Limited Liability Companies: Partner Companies (the partner who is responsible is liable), Limited partner of a KG
Unlimited Liability businesses: Sole proprietorships, joint partnerships (GbR, OHG), General partner of a KG
Raising of Capital
Businesses can be financed through personal investments and outside capital like credits or private equity. If you are looking forward to found a startup whose goal is to grow rapidly your legal form should allow your to raise outside investments. The legal form is very important as it defines which control rights the investors have. Corporations are the way to go if you want to raise outside investments.
Minimum Capital Requirement
A minimum capital requirement only exists for corporations:
- GmbH: 25,000€
- UG (haftungsbeschränkt): 1€
- AG: 50,000€
The cheapest way to start a business is a sole proprietorship. The startup costs for all other businesses are varying depending on the company agreements, contracts, the amount of shareholders etc. The expenses for lawyers and notaries is in general dependent on the share capital. If you are forming a 500€ UG (haftungsbeschränkt) you will pay less for the notary than a 5.000.000€ formation of a GmbH. I recommend every partnership and corporation to create an individual company agreement which is regularizing different scenarios (best and worst case). This will result in an additional lawyer and notary bill.
Obligation to Publicly Disclosure
The legal forms of GmbH, UG (haftungsbschränkt), AG, and GmbH & Co. KG are all obliged to a public disclosure. Depending on the size of the company they need to release their balance sheets in the commercial register. The larger the company, the more information are required to be published.
The outside image of a company is partly represented by its legal form. A UG (haftungsbeschränkt) is legally the same legal form as a GmbH but it requires only a minimum capital of 1€. This might immediately make the impression that this company is newly founded and not yet established on the market. There are also scenarios when a GmbH might be the worse alternative. If you are for example a doctor and your doctor’s office is a GmbH it might result in a loss of confidence. Why does a doctor need to limit its liability when he is doing his jobs 100% conscientiously?
The more advanced your legal form is, the more accounting will be required. While a sole proprietorship only requires a statement of receipts over expenses, a GmbH needs to prepare a full annual financial statement. In general: every business is required to do accounting.
Every merchant has to publish their company into the Germany commercial register. On all business letters, invoices the business is required to state the following information: company, official name, legal form, headquarter, and register number. The advantage: The business is conceived as more serious and professional.
Overview about German Legal Forms
Sole Proprietorship – Einzelunternehmen
When registering a business you are opening automatically a sole proprietorship or Einzelunternehmen if you are not choosing otherwise. It is great for small businesses, freelancers, or mechanics as it offers full control of the business. With full control comes also a full liability for the business even with private assets. It is a great way to start as a freelancer but not appropriate if you want to form a company.
Joint Partnerships – Personengesellschaften
A GbR is a company constituted under civil law. It requires at least two partners (or shareholders), no minimum capital and even a verbal company agreement are sufficient to form a GbR. The GbR is unlimited liable including all personal assets of all shareholders. The GbR is an easy way to start a small business, trade company, agency or a doctor’s office.
Partner Company (with profession oriented limited liability)- Partnergesellschaft (mit beschränkter Berufshaftung) PartGmbB
The PartG or the PartGmbB is a legal form which is only interesting for freelancers. If a limited liability company is too complicated or expensive two natural persons might decide to form a PartG or PartGmbB. Both company forms , with a written partnership agreement which is published in a partnership register. No minimum capital is required to start a PartG or PartGmbB. If the business
General Partnership – Offene Handelsgesellschaft (OHG)
The OHG is one of many banks preferred legal form. All partners of an OHG are personally liable for all their liabilities. Two natural person who intends to start a commercial business are able to form an OHG with a simple company agreement. The OHG requires no minimum capital. Like corporations, an OHG has to be resisted in the commercial register.
Limited Partnership – Kommanditgesellschaft (KG)
A KG is designed for merchants who require additional capital or for partners who don’t like to be personally liable. A KG consists of one or several general partners(s) (Komplementär) and one or several limited partner(s) (Kommanditist). In a KG the general partner (Komplementär) is doing the business. Limited partner(s) participate only financially in the business. The general partner is thus personally liable for all liability of the KG. The limited partners are only liable for the amount of their deposits. This legal form is great for family businesses in which some family members participate only financially in the business while other family members take over the management.
GmbH & Co. KG (mixture between GmbH and KG)
The GmbH & Co. KG is a KG in which the general partner is a GmbH and not a natural person. The liability of the GmbH & Co. KG enjoys thus a limited liability as a GmbH. The limited partners (Kommanditist) is only liable in the amount of their deposits.
The GmbH & Co. KG requires a minimum capital requirement of 25,000€ as the general partner is a GmbH. The shareholders of a GmbH are usually also limited partners of the GmbH & Co. KG.
Limited Liability Company – Gesellschaft mit beschränkter Haftung (GmbH)
A GmbH is a limited liability company. A GmbH is only liable with its assets. It is perfectly suited for entrepreneurs who want to limit their personal liability or for entrepreneurs who don’t intend to work actively in the company. A GmbH may be founded as a one-person GmbH (Ein-Personen GmbH) or with several founding shareholders. A GmbH requires a company agreement or a standard protocol which both need to be signed by a notary. Every GmbH is required to be registered in the German commercial register. The minimum capital of a GmbH is 25 000€.
Limited Liability Company – Unternehmergesellschaft (UG) haftungsbeschränkt
A UG (haftungsbeschränkt) is a variant of the GmbH. Legally both legal forms are the same. The difference is that the UG (haftungsbeschränkt) only needs a minimum capital requirement of 1€. The UG (haftungsbeschränkt) is legally required to create a capital reserve until a share capital of 25.000€ is raised.
The standard protocol is the easiest way to form a GmbH or a UG (haftungsbeschränkt) as it combines the company agreement, shareholder list, and the appointment of the managing director in usually 1 or 2 pages. I personally don’t recommend using the standard protocol if you are forming a company with one or several partners.
The liability of a GmbH and a UG (haftungesbeschränkt) is limited to the company’s assets but if the managing director(s) break(s) the law he is personally liable for the resulting damage.
Small Stock Corporation – Kleine Aktiengesellschaft (AG)
The AG is a stock corporation which may or may not is listed on the stock exchange. The AG allows an easy access to capital and it is a great corporate form to transfer the business to a new owner. The liability is limited to the company’s assets. The management of an AG consists of an executive board (Vorstand) and a supervisory board (Aufsichtsrat). An AG requires a notary approved company charter, a registration to the commercial register, and a minimum capital of at least 50,000€.
Registered Cooperative – Eingetragene Genossenschaft (eG)
The eG is a legal form for founding teams and a corporation model for small and medium sized businesses. The eG consists of three organs: (1) a general assembly of all members, (2) an executive board, and (3) a supervisory board. The liability of an eG is limited to its assets and a formation is possible without the consolation of a notary. Every eG is registered in and verified by a Genossenschaftsverband (association of cooperatives).