In this article we present various legal forms in Germany to conduct business for entrepreneurs and start-ups.
The choice of legal form not only affects liability, taxation as well as creditworthiness, it is also associated with different requirements in the process of setting up and registering the company. The choice of the suitable legal form should therefore be carefully considered. Our on-demand legal experts can offer comprehensive legal advice on setting up your company in Germany.
Distinction between partnerships and corporations
First of all, a distinction must be made between partnerships and corporations. This is particularly important for entrepreneurs and start-ups since there are noticeable differences regarding the liability as well as the minimum amount of share capital in order to set up the company.
1. The Partnership
The partnership is an association of at least two persons to conduct a business. A characteristic feature of a partnership is that the partners are liable for the company’s obligations with their private assets, which can be of high risk. Founding a partnership is largely informal and relatively uncomplicated in contrast to the founding process of a corporation.
The civil law partnership – GbR
The civil law partnership (GbR) is an inexpensive and uncomplicated way of setting up a company if two or more people want to join forces to do business together.
Formation and partnership agreement for the GbR
The GbR is established by concluding a partnership agreement. Since the partnership agreement is not subject to formal requirements, the commencement of any joint activity puts the partnership into existence.
Although the conclusion of a written partnership agreement is not mandatory, it is advisable to conclude an individual agreement in writing with regard to the power of agency, the distribution of profits and for the withdrawal of a partner, shaped to the needs of the partnership.
Without deviating regulations in the partnership agreement, the partners are jointly entitled to manage the business (Sec. 709, 714 German Civil Code (BGB)).
Liability and taxes for the GbR
The risk of personal liability of the partners must be emphasized. The company and the partners are jointly and severally liable for all obligations with both the business and the respective private assets.
The GbR itself is not a taxable entity, but the profit share is subject to income tax if the partners are natural persons or to corporate income tax if the partners are legal entities. If a trade is operated, trade tax is also due.
Pros and Cons of the GbR:
| Pros of the GbR | Cons of the GbR |
| – Simple, fast and cost effective founding process – Partnership agreement is not subject to any formal requirements – free structuring of the partnership agreement – No minimum capital required | – Unlimited liability with private assets – Turnover limit EUR 250,000 |
The general partnership – OHG
The general partnership (OHG) is a special form of civil partnership (GbR) that, in addition to the conclusion of a partnership agreement, requires the operation of a commercial business. The operation of a commercial business is deemed to exist if the business has a commercial character (Sec. 1 (2) Commercial Code (HGB)).
Formation and partnership agreement for the OHG
The partnership agreement is a prerequisite for the formation of a general partnership. In addition, entry in the commercial register and registration of the trade with the competent trade office is required. The management and external representation of the company is the responsibility of each partner with individual power of representation. The partnership agreement may contain deviating provisions in this regard.
Liability and taxes for the OHG
The partners of the OHG are jointly and severally liable with their private assets for all the company’s obligations.
Each partner is subject to income tax or corporate income tax if he or she is a legal entity. In addition, the company is subject to trade tax and, if applicable, VAT.
Pros and Cons of the OHG:
| Pros of the OHG | Cons of the OHG |
| – Simple, fast and cost effective founding process – Partnership agreement is not subject to any formal requirements – free structuring of the partnership agreement – No minimum capital required | – Unlimited liability with private assets – Entry in the Commercial Register required – Accounting obligations |
2. The Corporation – GmbH
In contrast to partnerships, corporations are their own legal entities. Thus, the corporation itself, and not only its partners, can be the owner of rights and obligations. In addition, the liability is limited to the amount of the contributed share capital, whereas the partners are not personally liable with their private assets. However, this also means that in order to found the corporation the respective minimum share capital must be paid. Moreover, there are strict formal requirements applicable for corporations.
The limited liability company – GmbH
The GmbH is a well-known and popular form of company among entrepreneurs and start-ups. The legal framework conditions are regulated in the Limited Liability Companies Act (GmbHG).
Formation and articles of association for the GmbH
The GmbH is founded by articles of association and payment of the share capital. Several shareholders or a single shareholder can found the GmbH.
To found a GmbH the share capital must be at least EUR 25,000, of which at least EUR 12,500 must be paid in as a cash contribution at the time of formation (Sec. 5 (1), 7 (2) GmbHG)).
The costs to found a GmbH are higher than for partnerships. The articles of association must be concluded in writing and contain details of the company name, the registered office of the company and the object of the company and state the amount of the share capital and the capital contributions of the shareholders (Sec. 3 GmbHG). Furthermore, the articles of association must be notarized and subsequently applied for the entry in the commercial register (Sec. 2, 7 GmbHG).
Liability and taxes for the GmbH
A key advantage for entrepreneurs and start-ups is the limitation of liability. There is no personal liability of the shareholders as the liability is limited to the corporate assets.
In addition, however, the GmbH is also obliged to keep accounts and balance sheets and, as a legal entity, is subject to taxation. Corporate income tax and usually trade tax are therefore due.
Pros and Cons of the GmbH:
| Pros of the GmbH | Cons of the GmbH |
| – Limitation of liability to the company’s assets – Foundation by one person possible – Security of business partners through (high) share capital | – Minimum capital required – Formalities of incorporation (and subsequent changes) – Founding costs – Accounting and bookkeeping obligations – Obligation to publish annual financial statements |
The entrepreneurial company (limited liability) – UG (haftungsbeschränkt)
The entrepreneurial company (UG) is not a separate legal form but rather a special form of the GmbH. The legal status of the UG is similar to that of the GmbH and is therefore often referred to as a “mini-GmbH”. The decisive difference to the GmbH is that the minimum share capital upon formation is not 25,000 EUR but only 1 EUR, which makes this form of company extremely interesting for entrepreneurs and start-ups. In practice, the minimum contribution is usually in the three or low four-digit range. The aim of the UG is to save the share capital of EUR 25,000 required for the GmbH, which is why the shareholders are obliged to form revenue reserves which amount to at least 25% of the profit generated each year. This obligation continues until the share capital of 25,000 EUR is reached. After that, the company can either continue in the form of a UG or (under simplified conditions) be converted into a GmbH.
Formation and articles of association for the UG
The formation process is similar to that of the GmbH. The formation costs depend on the amount of the share capital, but are lower than for the formation of a GmbH, since a so-called model protocol can be used.
Liability and taxes for the UG
As with the GmbH, the liability of the UG is limited to the company’s assets. The partners are not liable with their private assets.
In addition, the UG is also required to keep accounts and balance sheets and, as a legal entity, is subject to tax. Thus, corporate income tax and usually trade tax are due.
Pros and Cons of the UG:
| Pros of the UG | Cons of the UG |
| – Limitation of liability to the company’s assets – Foundation by one person possible – low share capital (in comparison to GmbH and AG) – Fast and inexpensive formation with the use of a model protocol | – Addition of “haftungsbeschränkt” to the company’s business name is mandatory – Lower reputation due to low share capital – Accounting and bookkeeping obligation – Obligation to publish annual financial statements |
The stock corporation – AG
Formation and Articles of Association for the AG
The share capital of the AG must be at least EUR 50,000. The articles of association must be notarized. As part of the formation process, the company’s executive bodies must also be appointed. These are primarily the supervisory board and the management board, as well as the general meeting and auditors. The shareholder(s) must make a contribution of at least one quarter of the share capital at the time of formation. The registration in the commercial register formally concludes the founding process.
Liability and taxes for the AG
Upon registration in the commercial register, the liability of the AG is limited to the company’s assets. The shareholders are generally not liable with their private assets.
Notary fees and costs for entry in the commercial register are incurred for the formation of the company. Overall, the cost of setting up the AG is relatively high, which makes this form of company less attractive for entrepreneurs and start-ups. It should be noted, however, that a GmbH could be converted into an AG relatively easily at a later date, if required.
The AG is required to keep accounts and balance sheets and, as a legal entity, is subject to tax. Thus, corporate income tax and usually trade tax are due.
Pros and Cons of the AG:
| Pros of the AG | Cons of the AG |
| – Limitation of liability to the company’s assets – Transferability of shares – Possibility of capital increase through sale of shareholdings – Anonymity of shareholders – Separation of shareholders and management | Share capital of at least EUR 50,000 High formation and administrative expenses Publicity obligations Obligation to publish annual financial statements |
Conclusion
A partnership is suitable if a quick and inexpensive formation is desired and you can imagine a liability with the private assets. If, on the other hand, a limitation of liability is desired, only the formation of a corporation can be considered. This in turn involves a more time-consuming and cost-intensive formation process.
Our on-demand legal experts can offer comprehensive legal advice on setting up your company in Germany.
Contact us today for an initial consultation.
The next part of our blog “Founding a company for start-ups” will have an in-depth look on the legal form of the GmbH.
