What implies an Entry in the Commercial Register?
Information in brief (see below for more detail)
The law differentiates between the merchant for whom the German Commercial Code (HGB) is definitive, and the non-merchant, who is not entered in the commercial register and who is subject to the provisions of the German Civil Code (BGB).
The law differentiates between the merchant for whom the German Commercial Code (HGB) is definitive, and the non-merchant, who is not entered in the commercial register and who is subject to the provisions of the German Civil Code (BGB).
- Differentiation between merchants and non-merchants
- Corporate Management
- Stipilations governing commercial transactions
- Power of attorney/commercial power of attorney
- Duty to maintain trade books
- Public faith in the commercial register
- The director's liability for the current list of shareholders
- Miscellaneous
An entry has the following legal consequences:
As a merchant, you manage your business under a trade name (name). Corporate law also permits merchants to adopt a company name derived from the company's objectives or an invented name. Certain rules apply to commercial transactions conducted by merchants. As a merchant you may, for example, accept a contract through silence on your part, or you must expressly state if you do not wish to accept the business. This applies equally when you receive a commercial letter of confirmation.
Merchants may also file a claim for payment without express agreement. The merchant benefits in comparison with the German Civil Code in terms of interest due. A merchant may make commitments to pay debts and guarantees effective without following a particular format. No corresponding documents need to be drawn up.
Some of the additional rights and obligations applicable to merchants include due diligence, contractual penalty, invalidity of assignment prohibited, he may make a current account arrangement, delayed acceptance in commercial sales. In the case of bilateral commercial sales, the merchant is subject to a more stringent duty of inspection and complaint when receiving goods. Any statement of fault must precisely indicate the nature and scope.
Only merchants may grant power of attorney. In addition to power of attorney, the German Commercial Code (HGB) also enables merchants to grant commercial power of attorney. Merchants are obliged to create and have ready traceable records (managing trading books) of all business transactions and the company's position.
The commercial register is designed to prove clarity regarding legal relationships which concern commercial transactions. Generally speaking, third parties should not therefore rely on the accuracy of the commercial register (= public faith in the commercial register).
As a merchant, you manage your business under a trade name (name). Corporate law also permits merchants to adopt a company name derived from the company's objectives or an invented name. Certain rules apply to commercial transactions conducted by merchants. As a merchant you may, for example, accept a contract through silence on your part, or you must expressly state if you do not wish to accept the business. This applies equally when you receive a commercial letter of confirmation.
Merchants may also file a claim for payment without express agreement. The merchant benefits in comparison with the German Civil Code in terms of interest due. A merchant may make commitments to pay debts and guarantees effective without following a particular format. No corresponding documents need to be drawn up.
Some of the additional rights and obligations applicable to merchants include due diligence, contractual penalty, invalidity of assignment prohibited, he may make a current account arrangement, delayed acceptance in commercial sales. In the case of bilateral commercial sales, the merchant is subject to a more stringent duty of inspection and complaint when receiving goods. Any statement of fault must precisely indicate the nature and scope.
Only merchants may grant power of attorney. In addition to power of attorney, the German Commercial Code (HGB) also enables merchants to grant commercial power of attorney. Merchants are obliged to create and have ready traceable records (managing trading books) of all business transactions and the company's position.
The commercial register is designed to prove clarity regarding legal relationships which concern commercial transactions. Generally speaking, third parties should not therefore rely on the accuracy of the commercial register (= public faith in the commercial register).
Since 1 July 1998, the earlier distinction in the German Commercial Code (HGB) between the "obligatory merchant", the "registrable merchant" and the "non-registrable merchant" has been dropped. The law now only differentiates in general terms between the merchant for whom the German Commercial Code (HGB) is essentially definitive and the non-merchant who is subject to the provisions of the German Civil Code (BGB).
To ensure the simplicity and speed of the flow of trade, the rules of commercial law currently include significant deviations from the fundamental rules of the German Civil Code (BGB). The German Commercial Code (HGB) assumes that the merchant will take personal responsibility, and largely expects him to assess the risks and opportunities associated with his business operations himself. The law thus sees merchants as in many ways requiring less protection.
This leaflet is designed to explain the legal consequences (advantages and disadvantages) associated with being defined as a merchant. It is designed for new start-ups already obliged to be registered due to the scope of their business activities, but is particularly aimed at non-merchants who now have the option of being entered in the commercial register. You should check and assess the associated rights and obligations before you are entered in the commercial register.
Differentiation between merchants and non-merchants
You cross the border from being a non-merchant to a merchant when your business operations are of such nature and scale as to require a commercially organised business establishment (§ 1 clause 2 of the German Commercial Code (HGB)). This is assessed by means of a complete picture of your business. Important criteria are, e.g., the level of turnover and profit, investment and working capital, a double-entry accounting system, the number and qualifications of employees, the range of services and business relationships, the use of credit and bills of exchanges as well as the size and number of business sites. It comes down to whether your business is already so complex and large that it becomes transparent, manageable and predictable only with an extensive commercial organisation in place. If commercially trained staff are neither required nor employed, this would indicate that you should not be defined as a merchant (examples are: corner shops, small pubs, ice cream parlours, cafeteria, standing-room only bars, kiosks).
Where business operations require a commercially organised business operation, you as the owner (whether you want to be or not) are by law already a merchant. The rules of the German Commercial Code (HGB) thus apply directly, and entry in the commercial register has only declaratory (= confirmatory) effect. Under the new statutory regulations, the type of business you operate is not significant.
As a non-merchant you are, however, not obliged, but are entitled, to be entered in the commercial register. If you exercise this option to be entered in the commercial register, your constitutive (= legally recorded) entry will define you as a merchant. You will be subject to the German Commercial Code (HGB) trading regulations only from the point of being entered in the commercial register.
Corporate Management
As a merchant, you manage your business under a company name. In a legal sense, the company name does not mean the business as such, but rather the name the merchant uses in legal relations and to which he gives his signature. Corporate law also permits merchants to adopt a company name derived from the company's objectives or an invented name (e.g. TOPTEC Computerhandel e.Kfm). The company name must be entered in the commercial register.
Non-merchants, on the other hand, must generally operate commercially under their first name and surname, and may additionally use an invented name or a name derived from the company's objectives.
Using a company-name can promote a positive image of the business, or express a certain degree of solidarity. This is particularly important in transactions with foreign companies which often make contracts dependent on entry in the commercial register. However banks, too, make enquiries about entry in the commercial register before issuing loans.
TIP: Before registering your company in the commercial register, we recommend that you agree your company name with our Chamber of Commerce (Legal Affairs & Fair Play department ). You will also find important basic information in our leaflet "The basic rules of corporate law".
Stipilations governing commercial transactions
Commercial transactions are transactions which the merchant carries out in or for the operation of his business. The German Commercial Code (HGB) contains specific special stipulations to cover this which are adapted to the needs of trading, and therefore includes some deviations from the provisions of the German Civil Code (BGB). We have summarised the most important of these special features, which are found in §§ 343 ff. of the German Commercial Code (HGB), below. Where there is reference to a bilateral commercial transaction, this means a contract between two merchants.
- 1. Silence in relation to procurement requests
In civil law, a contract is formed only by means of an express statement of acceptance. Conversely, if a merchant maintains silence in response to a procurement request in the context of his business, he is deemed to have accepted the request (§ 362 clause 1 of the German Commercial Code (HGB)). You must therefore expressly decline any business you do not wish to accept.
- 2. Commercial letter of confirmation
If you as a merchant have negotiated contractual terms with a business associate verbally or over the phone, and your business associate subsequently confirms these terms in writing, you must expressly disagree with the letter of confirmation if it does not correspond with the content of what you agreed. If you do not, the contract will come into being under the terms set out in the letter of confirmation.
This rule does not apply to non-merchants. You do not need to expressly disagree since your silence in itself is generally not deemed to be a statement of intent. - 3. Remuneration with no express agreement
Merchants may also make a claim for remuneration with no express agreement (§ 354 clause 1 of the German Commercial Code (HGB)). This is because you are not generally expected to provide services free of charge.
The German Civil Code (BGB) is based on the assumption that remuneration between the parties to a contract will be agreed. Where there is no express agreement, "standard remuneration" will apply, i.e. the standard local market price as agreed. Neither are non-merchants expected to provide services free of charge if the services would, given the circumstances, have been expected only against payment. (§ 632 of the German Civil Code (BGB)). - 4. Interest
In bilateral transactions, a merchant may also demand immediate interest of 5% even without arrears (§§ 353, 252 of the German Civil Code (HGB)). The German Civil Code (BGB) makes no provision for interest for late payments.
In the case of arrears in commercial transactions, interest at 8 per cent higher than the basic rate of interest may be demanded. This rate of interest applies to all transactions not involving consumers (§ 18 of the German Civil Code (BGB)). If a consumer is involved, interest of 5 per cent above the basic rate of interest may be applied in the case of arrears. This does not exclude further damage caused by arrears (§288 of the German Civil Code (BGB))
Generally speaking, arrears exist only when the creditor has issued a reminder. Even without a reminder, there is a case of arrears when, among other things, payment is contractually agreed by a specified deadline (§ 286 clause 1 and 2 of the German Civil Code (BGB)).
In additions, arrears occur at the latest 30 days following the payment due date and submission of an invoice. Invoices to consumers must make reference to these consequences (§ 286 clause 3 of the German Civil Code (BGB)).
Otherwise, there is a legal rate of interest between merchants of 5% (§352 of the German Commercial Code (HGB)) in place of the 4% permitted under civil law (§246 of the German Civil Code (BGB)). - 5. No format for quarantees, commitments to pay debts and ackknowledgement of debts
Guarantees, commitments to pay debts and acknowledgements of debts are, according to the German Civil Code (BGB), effective only if they are issued in writing. This protection against hasty statements does not exist for merchants. Merchants' statements are also effective if they are not in a specific format (§ 350 of the German Civil Code (HGB)). A statement made over the phone, for example, or in a face-to-face conversation such as "I vouch for Mr Müller" can thus become a legally binding guarantee.
- 6. Duty of care
With commercial transactions, the law requires a higher duty of care than usual which is described as "the care taken by a prudent merchant". This includes, e.g., the duty to handle with care all letters/telefax/telegrams in and out, to ensure adequate insurance for important correspondence, to check signatures on cheques and to carefully store company letterhead and stamps to prevent misuse.
- 7. Contractual penalty
Contrary to the German Civil Code (BGB), there is no reduction in disproportionately high contractual penalties for merchants (§ 348 of the German Commercial Code (HGB)). Merchants should therefore check carefully that they can ensure compliance with the underlying contract - even without their employees.
- 8. Invalidity of assignment prohibiteds
In the case of commercial transactions, agreement regarding an assignment prohibition is ineffective (§ 354a of the German Commercial Code (HGB)). This has the benefit for the merchant that he can transfer outstanding debts as security against loans even if this is contractually excluded - e.g. in the general terms of business.
- 9. Revolving account/current account
Only the merchant may agree a current account arrangement (§ 355 of the German Commercial Code (HGB)). In a long-term business relationship, mutual claims are thus offset against each other, and no individual claim can be made. After the agreed period, a balance is calculated which replaces the original claims.
- 10. Delayed acceptance in commercial sales
If a buyer does not accept goods ordered, the merchant has wider-ranging rights than a non-merchant subject to the German Civil Code (BGB). The merchant may store the goods at the buyer's own risk and cost, or put them up for public auction following prior warning (§ 373 of the German Commercial Code (HGB)).
For non-merchants, the only option in the case of delayed acceptance is the general right of deposit in accordance with § 372 of the German Civil Code (BGB). The general right of deposit allows only for money, bonds and particularly valuable objects to be deposited with the depositary. - 11. Duty of inspection and complaint in commercial transactions
In the case of unilateral commercial transactions, there is a stringent duty of inspection and complaint on the part of the buyer when accepting goods (§§ 377 ff of the German Commercial Code (HGB)). Merchants are obliged to inspect goods immediately, and report any defects or, if he fails to do so, he will lose his claim to guarantee.
The law differentiates between open and concealed defects. Open defects are those which can be detected on careful inspection after delivery. Where larger quantities are supplied, random samples should be taken (e.g. in the case of cans); machinery that is delivered should be started up; a trial process may be necessary if a defect in the equipment supplied can be detected only in this way. If a fault is detected during such inspection, it must be notified immediately. Even a slight and avoidable lack of attention in the routine course of business can delay complaint. For example, highly perishable goods may need to be inspected and a complaint submitted on the same day as they are delivered.
If the defect cannot be detected on careful inspection and emerges only later, this is a concealed defect. (For example: The samples taken were fine, and defective products were found only at a later stage; a machine defect became apparent only during mass production). A complaint must be submitted as soon as the defect is discovered. Since the buyer must provide evidence of when the defect was discovered and what inspections were carried out, a record of these must be kept.
Notification of the defect must include details of the type and scope so that other defects cannot be "added later". The brief reference "The goods supplied are defective" sometimes found in practice is not sufficient under any circumstances.
If a remedy is provided after the first timely complaint, and the remedy is also defective, a new complaint must be submitted.
As a non-merchant on the other hand, it is sufficient if warranty claims are submitted against the seller within the deadline stated under § 428 of the Civil Code.
Power of attorney/commercial power of attorney
Only merchants may grant power of attorney (§ 48 of the German Commercial Code (HGB)). This gives anyone with authority to sign on behalf of the company wide-reaching power of attorney, facilitating virtually unrestricted trade with third parties. Power of attorney enables all types of transactions to be agreed as they relate to business operations. Certain exceptions include the charge and sale of land. Given its wide-ranging significance, any power of attorney granted must be entered in the commercial register.
Merchants may restrict power of attorney already granted only internally. If power is restricted, any breach on the part of the person holding power of attorney will leave the merchant with a claim against this person. Externally, it is any contracts that have been signed that will come into effect. The law thus gives shareholders a degree of reliability not found in the representational rules of the German Civil Code (BGB).
In addition to power of attorney, the German Commercial Code (HGB) also enables merchants to grant commercial power of attorney (§ 54 of the German Commercial Code (HGB)). There are three different forms of this:
- Commercial power of attorney covering operation of all commercial transactions (General Commercial Power of Attorney). This is similar to power of attorney, but is restricted to standard sector transactions.
- Commercial Power of Attorney to perform a specific type of transaction (Power of Attorney Restricted by Type; e.g. cashier, salesperson). This is the practical rule.
- Power of attorney to perform individual, or even one individual transaction which forms part of a commercial transaction (Power of Attorney for Special Transactions).
Commercial power of attorney is not entered in the commercial register.
Duty to maintain trade books
Merchants are obliged to create and have ready traceable records of all business transactions as well as the company's position. This includes in particular:
- The duty to keep accounts (§ 238 of the German Commercial Code (HGB)). The way in which business transactions came into being and were handled must be traceable, which also implies a duty to keep copies of all business correspondence.
- The duty to maintain an inventory (§ 240 of the German Commercial Code (HGB)). At the start of business operations, and at the end of each financial year, an inventory must be prepared and attached to a list of all assets along with an indication of their value.
- The duty to produce annual accounts (§ 242 of the German Commercial Code (HGB)). A balance sheet must be prepared when trading begins and at the end of each financial year; the balance sheet must show the relationship between the merchant's assets and liabilities.
- The duty of retention § 257 clause 1 of the German Commercial Code (HGB). Merchants must retain trade books, inventories and annual accounts for a period of at least 10 years, and business correspondence for a period of at least 6 years.
Public faith in the commercial register
The commercial register is designed to provide clarity regarding legal relationships which concern commercial transactions. This means that third parties can generally rely on the accuracy of the commercial register in terms of facts which it is compulsory to enter (e.g. granting and revocation of power of attorney, dissolution of a company, shareholder status, shareholders' power of representation, transfer of business). Conversely, neither should third parties accept everything entered in the register. This means in detail:
- Legally it is guaranteed than any unregistered facts cannot be asserted under a claim. This means that a merchant cannot invoke a business partner to revoke a power of attorney, remove a shareholder's power of representation or reverse a transfer of business if the relevant fact was not entered in the commercial register and announced.
- If a detail has been entered in the commercial register and announced, a merchant may appeal after 15 days. For example, he may point to removing a power of attorney even if the business partner has not seen the commercial register and therefore had no knowledge of the detail.
- If a fact is reported incorrectly, a business partner may appeal (for example: the registration court wrongly enters person X instead of person Y as having power of attorney, and a third party relies on this information unaware of the incorrect notification).
TIP: Always maintain the commercial register entry for your own business up-to-date. After making a change, check that the entry in the commercial register and the local newspaper was announced correctly.
The director's liability for the current list of shareholders
Since the business law reform came into force in July 1998, the director of a limited liability company (GmbH) has been obliged to communicate any change in shareholders or in their shareholding to the court of commercial registration. § 40 of the Limited Liability Companies Act (GmbHG) clause 1 stipulates that a list of shareholders including their surname, first name, date of birth and place of residence as well as capital invested should be signed and submitted to the commercial register where changes have been made.
Even under the old rules, there was a duty in this respect in that the law prescribed that a new list of shareholders had to be submitted each year. There was simply insufficient compliance with this requirement. Nevertheless, there could be huge interest in knowing who the shareholders are at the present time.
The courts of registration refuse to maintain pressure for old lists of shareholders to be retained. For staffing reasons alone, this is not possible. Nevertheless, the limited company (GmbH) and its directors should seek to ensure that the court of registration court has updated lists of shareholders out of self-interest alone.
§ 40 clause 2 of the Limited Liability Companies Act (GmbHG) now makes it standard that the managing director is liable to the company's creditors if damages are incurred because the list is not up-to-date. This is classed as a joint and several liability.
Even under the old rules, there was a duty in this respect in that the law prescribed that a new list of shareholders had to be submitted each year. There was simply insufficient compliance with this requirement. Nevertheless, there could be huge interest in knowing who the shareholders are at the present time.
The courts of registration refuse to maintain pressure for old lists of shareholders to be retained. For staffing reasons alone, this is not possible. Nevertheless, the limited company (GmbH) and its directors should seek to ensure that the court of registration court has updated lists of shareholders out of self-interest alone.
§ 40 clause 2 of the Limited Liability Companies Act (GmbHG) now makes it standard that the managing director is liable to the company's creditors if damages are incurred because the list is not up-to-date. This is classed as a joint and several liability.
Miscellaneous
- Note that non-merchants may be released from contributing to the Chamber of Commerce under certain circumstances. If you are entered in the commercial register however, you must make at least a minimal contribution to the Chamber of Commerce.
- Certain consumer protection stipulations do not apply to merchants. It is assumed that merchants, given the definition of a merchant, have adequate understanding of, and experience in, legal matters. Merchants are therefore given less protection than private clients.
- Merchants may enter an agreement conferring jurisdiction which in particular may also be included in the general terms of business with their business partners.