If you ever set a foot into the world of Germany’s administrative bodies you clearly know: the level of bureaucracy in this country is no joke and the number of legal forms available can be a bit overwhelming. While Germany is considered to be an attractive launching pad for foreigners to start a business, the hurdles one must overcome in order to call themselves the founder of a startup can be pretty daunting in a country where there is a paper form for pretty much everything.
Assuming you have a promising business idea you might end up at a point where you start asking yourself: What is the right legal form for my business?
There are several legal forms you can choose from, depending on whether you are a single founder or starting a business with partner(s) as well as on your financial capabilities.
Legal forms for single founders
As the name says: this form has one, sole proprietor and is usually chosen by small companies or people with an ancillary trade. All you have to do is apply for a tax number and communicate your activities to the tax office (Finanzamt). Merchants additionally have to report their work to the commercial office and be entered in the commercial register. No minimum capital is necessary.
While the sole proprietorship is considered to be the simplest legal form of a commercial or business activity in Germany it comes with a downside: sole proprietorship has no limitation on liability at all, which means you as a sole proprietor are liable for all business obligations with your private assets (e.g. in case of debts or mistakes).
If the thought of bearing the entire liability for your sole proprietorship scares the s*** out of you, you can also set up a limited liability company. In this case, you are not directly liable to the company’s creditors and only risk the loss of your original contribution in the worst case. However, this setup – also known as Ein–Personen–GmbH – requires a minimum capital of €25,000. You furthermore need to register your company in the Commercial Register and need a company agreement, which stipulates the managing director of your GmbH.
Pretty much a simpler form of the GmbH but with an essential difference: the entrepreneurial company at an UG can be founded with as little as €1, hence you don’t need to hold €25,000 of capital. However, as a founder you are obliged to deposit 25% of your company’s profit into the reserve in order to achieve the share capital of a GmbH one day. Liability is assumed by the UG, not the founder personally.
Legal forms for founders with one ore more partners
The GmbH is the most common of the legal forms in Germany and the one most preferred by foreign investors when investing in a German company.
To found a GmbH, at least one founding shareholder is required, who is either a natural or legal person, but it can also be another legally capable company (e.g. OHG, KG). The nominal capital required for founding is at least €25,000. An alternative to this is an asset-based founding, whereby the contributed economic goods (e.g. real estate, company shares, etc.) must also have a common value of at least €25,000.
This American legal form is also viable in Germany and pretty similar to the GmbH.
By setting up a private limited company, it becomes separate from the people running it. Any profits made by your company can be pocketed after taxes are paid. To avoid confusion, the company’s finances must be kept separate from any personal ones.
Are you aiming to establish a limited liability company but missing the cash to do so? Then the UG (Unternehmergesellschaft) might be right for you. To form this type of entrepreneurial company requires just €1 of share capital. It is basically a low-cost ‘lite version’ of the GmbH. An UG can have an unlimited number of shareholders, their rights and obligations are based individually on the participation of the individual shareholders and are in part determined by their individual share percentage. As an alternative, the rights and obligations of each shareholder can be individually stipulated in the articles of association – independent of share percentages.
Law firms and doctor’s offices often use this legal form. The foundation of a GbR is fairly simple: an oral agreement between the founders can already be sufficient (although for legal aspects you should consider the written form) and an entry into the commercial register is not necessary. You don’t even need a minimum capital in order to found a GbR. In addition, the GbR is tax-favourable since losses can be expensed against the income of the previous year. Entrepreneurs pay the turnover and trade tax as well as the income tax. The only downside: the shareholders are liable with their personal assets, therefore the GbR is particularly unsuitable for larger transactions.
This legal form is particularly suitable for merchants. The formation of an OHG is pretty easy: a formal partnership agreement between the parties as well as an entry in the commercial register is required. No minimum capital is necessary, whereby all shareholders are liable with their private assets in case of bankruptcy or debts. At the end of each year, the founders have to present a profit and loss account. An OHG pays turnover as well as trade tax, the income tax is paid by the shareholders.
Similar to an OHG, a KG is a partnership business structure in which two or more people team up to run a trade under a common company. However, the KG differs significantly in the fact that there is at least one fully liable partner and at least one limited partner who provides investment but does not participate in the management of the company. A good structure if you want to be able to make all decisions regarding your business on your own but still fancy to involve partners with capital. A formal agreement between all parties involved is necessary and the KG must be entered in the German commercial register. Annual profits and losses must be submitted to the tax office. Good news: minimum capital is not required at the time of formation. However, if an KG goes bankrupt or into debt, the owner’s liability extends to his private assets whereas the limited partners are only liable with their investment.
This legal form is rather rare amongst small companies and complex to realize. The bad news first: founders have to contribute a relatively high minimum capital of €50,000. However, this should not only be seen as a disadvantage as this amount can increase the confidence of potential business partners in your company. In order to establish an AG the founders must first determine their statutes in a protocol and take over all the shares. The management is assured by the management board which is checked periodically by a supervisory board formed by at least three members. For this business type, the accounts must be evaluated by a statutory auditor. All shareholders of an AG are only liable up to the amount they have contributed to the capital. The AG is an advantage for everyone who wants to retain the possibility of quick access to the equity: by selling company shares, founders remain financially flexible.
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