The choice of legal form is much more than a formality when setting up a company. There are many legal and tax opportunities, but also risks to assess. We advise you on choosing the right legal form.
Factors that are decisive in the legal form selection
The form and manner in which a company is founded in Germany should be carefully considered, as many factors depend on it, which in the worst case can lead to costly mistakes that can no longer be reversed. The following factors in particular must be taken into account:
- Minimum capital
- Foundation costs
- Current taxation and on cessation of business/sale
- Liability for obligations by the company and the shareholders
- Ongoing administrative costs (office rent and equipment, personnel costs, bookkeeping, annual financial statements, tax returns, notarizations, commercial register costs)
- Business aspects, e.g. the scope and duration of activities in Germany
- Legal form: Selection of legal form and taxation
Sensible scope for structuring the choice of legal form
How many owners should the company to be founded have?
There are many options here. If only one person is to be the owner, for example, a sole proprietorship, a one-person GmbH & Co. KG or a corporation can be considered.
If several people are to be partners, a civil law partnership (GbR), commercial partnerships or corporations are possible options.
A civil law partnership does not operate a commercial business. For tax purposes, its result is allocated to the partners according to their shareholding. The biggest problem is that each partner is fully liable for all liabilities of the GbR with all of their private assets, i.e. not just up to the amount of their contribution or only proportionately with their share quota. No written partnership agreement is required to establish a GbR. A verbal agreement or mere joint action may be sufficient. You should therefore check exactly who you are entering into a partnership with. In addition, the GbR is only represented externally by all partners jointly, which is very cumbersome in practice.
OHG, KG, GmbH & Co. KG – it is good to take a close look at everything.
If a GbR operates a commercial business, it is a commercial partnership and must be entered in the commercial register. Depending on its structure, an OHG (all partners are fully liable), as a KG (some partners, known as limited partners, are only liable up to the amount of the contribution made) or as a hybrid form with a corporation (e.g. GmbH & Co. KG). In the case of mixed forms, all fully liable partners are corporations. This ensures that no private individual is liable as a shareholder with their entire private assets. Nevertheless, the company is regarded as a partnership for tax purposes, for example. For the purposes of accounting, valuation and disclosure, however, the regulations for corporations apply to the greatest possible extent.
UG haftungsbeschränkt – why it is not recommended!
The UG haftungsbeschränkt, the GmbH, the AG and the S.E. The UG is not recommended because its reputation is so poor due to its low equity capital and many bankruptcies that only a few business partners are interested in doing business with it. Due to the many formal requirements and high minimum capital requirements, the AG and SE are only interesting for companies that plan frequent changes of shareholders, want to operate in many countries with branches, refinance themselves on the capital market or have their shares listed on a stock exchange. They are therefore hardly an option for normal investors. The most popular legal form is therefore the GmbH (limited liability company).
The limited liability company
GmbHs can be founded by one or more persons. They must subscribe a minimum share capital of €25,000, at least half of which must be paid in immediately at the beginning. In the event of problems, the GmbH is only liable with its assets. The managing directors of the GmbH are only liable in exceptional cases (e.g. delaying insolvency, deliberately causing damage). The majority of German SMEs operate in the legal form of a GmbH. This is why it enjoys a very good reputation in business transactions.
