Foundation

Which legal form is most appropriate for you?

There are a number of legal forms that can be chosen for a company. Before deciding which is right for you, the associated business, tax, and above all legal implications must be considered. We recommend that you seek the advice of a lawyer and tax advisor. Commercial and company law sets forth the legally available company types (legal forms). A new legal form cannot be invented and launched onto the market. The basic statutory structures may however be partially amended and consequently tailored to individual needs.
However, one thing is generally true: there is no optimal legal form. Every legal form has advantages and disadvantages. 
  • By how many people should the company be founded?
  • Who should head the company?
  • Does it need to be entered in the commercial register?
  • Should the right to make an entry in the commercial register be utilised?
  • Can the necessary capital and entrepreneurial expertise be obtained independently?
  • Should the company have as high a credit rating as possible?
  • Is the project high-risk?
  • Should personal liability be limited?
  • Does the legal form match the scale of the operation?
The correct company type can also be determined based on other criteria. Key criteria include, for example, matters relating to founding and administration costs, taxation, along with governance rules, liability, the smoothest possible legal succession including distribution of assets in the event that a shareholder withdraws. An initial decision on the future legal form often arises from the anticipated scale of the project. A company type which appears ideal at the start may prove disadvantageous over time due to changes that occur. It is therefore recommended that you check at regular intervals that the legal form is still the right fit for the company or whether it needs to be changed. It is vital that you seek advice on the specific legal steps to be taken as well as the tax implications.

Einzelunternehmen (sole proprietorship), Personengesellschaft (partnership) and Kapitalgesellschaft (capital company)

In principle, a distinction is made between sole proprietorships, partnerships, and capital companies.

1. Sole proprietorships

1.1 Small-scale trades

Small-scale trade professionals are sole trader professionals who do not require a commercially organised business operation because of the type and scope of the company. They are not entered into the commercial register. For companies as well as for creditors, it is crucial to know when the small trade limit is exceeded. The specific legal position depends on whether a commercially organised business operation is required.
The legal basis for small trade professionals is the German Civil Code (Bürgerliches Gesetzbuch, “BGB”), not the Commercial Code (Handelsgesetzbuch, “HGB”) which only applies to traders. “Non-traders” are personally liable without limitation and with all of their assets for liabilities of business operations. This applies to companies with the designation BGB-Gesellschaft as well as to transactions which another shareholder has concluded on behalf of the company. In business transactions the first and last name are written out in full – for companies with the designation BGB-Gesellschaft the first and last names of all shareholders are given. As a non-trader or company with the designation BGB-Gesellschaft, you can voluntarily be registered in the commercial register and in this way acquire the legal character of a registered trader. In this case the rights and obligations arising from the Commercial Code (Handelsgesetzbuch, “HGB”) will apply. However, you are then also personally liable as a registered trader, without limitation, and with your own assets.

1.2 Traders

If the company requires business operations which are set up in a commercial way, registration in the commercial register is required. The assessment depends on the overall picture of the operation.
Key criteria:
The following criteria are indicative and only permit an assessment of the company when viewed as a whole.
  • Type of business activity: Diversity of products and services and business relationships, utilisation and granting of debt financing, participation in cheque and bills transactions, active or passive participation in freight transport, local or long-range, namely international, activities, extensive advertising, large-scale storage
  • Scope of business activity: Sales volumes (note balance sheet profit), fixed assets and circulating assets, number and function of employees (including temporary workers), shift operation, size of the premises, number and organisation of premises, branches outside Germany
  • Sales (indicative/guideline values):
    • Production 300,000 euros
    • Wholesale 300,000 euros
    • Retail 250,000 euros
    • Services 175,000 euros
    • Commercial agent commission 120,000 euros
    • Restaurants 300,000 euros
    • Hotels 250,000 euros
  • Number of employees: up to 5 people suggests that the commercial facilities requirement is not met
  • Business assets: assets with a volume upward of around 100,000 euros suggests the commercial facility requirement is met
  • Amount of credit: amounts under 50,000 euros have no significance
  • Locations: multiple locations or branches suggest that the commercial facilities requirement is met
  • Organisational effort: significant organisational effort in the company’s activities, for example in organising events, suggests that the commercial facilities requirement is met
For registered sole traders (eingetragene Kauffrau/Kaufmann) and for other partnerships registered in the commercial register (OHG, KG, GmbH & Co., KG), the regulations of the Commercial Code (Handelsgesetzbuch, “HGB”) apply. This also applies for capital companies (Kapitalgesellschaften) (entrepreneurial company (UG) with limited liability, GmbH, AG), as long as special regulations (such as the Limited Liability Companies Act (GmbH-Gesetz)) do not apply. Having the right company name is of particular importance. Traders execute their transactions under a company name. Company law permits traders, as a company, to use a factual designation, a made-up name, or a personal name. However, the designation must be distinctive and must not be obviously misleading. In addition, the corresponding legal form addition (for example eingetragene Kaufmann or e.K., OHG, KG) must be added.
For commercial transactions that traders execute, there are many particularities that apply. For example, you can conclude a contract by being silent in response to a quote that is provided to you. Some other rights and obligations of traders include the duty of care, contractual penalties, ineffectiveness of non-assignment clauses, or default in acceptance of commercial transactions. In the case of mutual commercial transactions, the buyer is subject to a strict obligation to examination and giving notice of defects upon goods acceptance. Any notification of a defect must precisely indicate its type and extent. In addition, declarations of suretyship, undertakings to perform an act and acknowledgments of debt by traders are already binding if they are issued verbally, insofar as it is an instance of a commercial transaction.
The commercial register divides the companies into three categories: partnerships (Personengesellschaften), capital companies (Kapitalgesellschaften) and partnership companies (Partnerschaftsgesellschaften).

Personengesellschaft (partnership)

This is a consolidation of at least 2 people. Though the partnership in itself is not a legal person, it can have rights and obligations. The usual partnership types are:
Gesellschaft bürgerlichen Rechts (GbR), a company constituted under civil law
If several people together would like to start a small business or freelance business, they often form a company constituted under civil law (Gesellschaft bürgerlichen Rechts (GbR or BGB-Gesellschaft))
The company constituted under civil law (Gesellschaft bürgerlichen Rechts (GbR)) is based on a consolidation of two or more people set up on a permanent basis, to pursue a certain shared purpose (Sections 705 et seqq. Civil Code (Bürgerliches Gesetzbuch, BGB)). The shareholders are required to support this purpose, in particular making the agreed contributions by depositing investments. A GbR company can be founded for all permitted purposes. These can be for profit or non-material in nature. In practice, the legal form of GbR is used in many ways, e.g. for commercial activities, residential communities, car pools, gaming communities or freelancers (attorneys-at-law and physicians).
This also applies to companies constituted under civil law with the designation BGB Gesellschaft as well as for transactions that another shareholder has concluded on behalf of the company. In business transactions the first and last name are written out in full – for companies with the designation BGB-Gesellschaft the first and last names of all shareholders are given.
As a non-trader or company constituted under civil law with the designation BGB-Gesellschaft, you can be voluntarily registered in the commercial register and in this way acquire the legal character of a registered trader. In this case the rights and obligations arising from the Commercial Code (Handelsgesetzbuch, “HGB”) will apply. However, you are then also personally liable as a registered trader, without limitation, and with your own assets.

General partnership (Offene Handelsgesellschaft (OHG)

An OHG is a partnership the purpose of which is geared toward the operation of a commercial trade under a joint company name. It consists of at least two shareholders. The law does not recognise a limit on the number of shareholders in accordance with the above. The founding of the OHG depends on a minimum capital amount. Each shareholder is liable to the creditor for the company’s debts, directly and without limitation, as joint and several debtors, with all their assets. Written articles of association are not required by the legislator. However, the conclusion of written articles of association is recommended. The OHG is registered in the commercial register which results in commercial law and other special laws becoming applicable. In principle, each shareholder is authorised to manage the business and represent the company. Fundamental matters relating to the company are however ruled out of the power of sole representation by law.

Limited partnership (Kommanditgesellschaft (KG)

A limited partnership (Kommanditgesellschaft) consists of at least two shareholders: the general partner (Komplementär) and the limited partner (Kommanditist). In contrast to the OHG, not all shareholders in a KG are liable with all of their private assets. It has at least one fully liable shareholder (the general partner) but also at least one limited partner for whom the liability is restricted to their investment. As soon as the KG and the amount of the liability contribution by the limited partner have been registered, the restriction of liability on the part of the limited partner becomes externally effective. This company form is often selected by family-owned businesses, in which one or two people take on full liability, but also take on the management of the business. The other family members are limited partners. The limited partners receive interest on their deposit or proportions of the profits from the company’s earnings. Business management and the company’s external representation are executed by the general partners in accordance with the principles that also apply for the shareholders in the OHG. The limited partners are ruled out from business management and representation. However, they have a right to object in the case of unusual transactions, i.e. in the event of an action that goes beyond the usual operation of the company’s commercial trade (e.g. acquiring a plot, participation of silent partners, etc.). Other contractual agreements are however possible.

GmbH & Co. KG

GmbH & Co. KG is a special manifestation of the KG, the personally liable shareholder of which (general partner) is not a natural person but a GmbH (legal person). By operation of law, the GmbH is in turn only liable with their company assets. This construction results in there in fact only being limited liability shareholders.
GmbH & Co. KG is viewed as a partnership although it combines many elements of a public limited company (Kapitalgesellschaft). Represented by its managing director, the GmbH executes the limited partnership’s (Kommanditgesellschaft, (KG)) transactions as the general partner of the limited partnership. The shareholders in the GmbH are often simultaneously the general partners of the KG. The company name must include the addition GmbH & Co. KG. The achieved limitation of liability will however often not be enforceable here. In the allocation of loans, banks – as is also the case with the GmbH company form – will demand that the shareholders offer a private security for required loans. Instead of the GmbH, an entrepreneurial company (UG) (limited liability) can of course also be the fully liable shareholder of the capital company (KG).

Kapitalgesellschaft (capital company)

Companies with limited liability (GmbH) and entrepreneurial companies (UG) (limited liability)

Companies with limited liability (GmbH) and entrepreneurial companies (Unternehmergesellschaft) are capital companies (Kapitalgesellschaft) with a distinct legal personality (legal person). Liability is restricted to the company assets. The entrepreneurial company (UG) (limited liability) does not represent a distinct legal form, but is a variant of the GmbH. Therefore, GmbH rights also apply to the entrepreneurial company (UG) (limited liability). A GmbH can be founded alone or with multiple shareholders. The minimum capital stock of a GmbH is 25,000 euros. This is created in the course of founding by means of the shareholders’ paid-in capital stock that may consist of a determined cash amount or from material assets that are essential to the company (e.g. cars or office equipment). The GmbH is so popular because the shareholders’ liability is limited to the amount of the business share they have deposited. In principle it is ruled out that company creditors have recourse to the shareholders’ private assets. However, creditors generally ensure that when loans are allocated to the GmbH, private securities are also offered by the shareholders themselves.
Since 1 November, 2008, there has been the option, with the form of the entrepreneurial company (with limited liability) (Unternehmergesellschaft/UG (haftungsbeschränkt)), to found a company with limited liability from a capital stock of one euro and up. The amount of stock capital that is actually required depends on the planned business activity. The entrepreneurial company (Unternehmergesellschaft (UG)) must form a legal reserve into which a quarter of the annual net profit from the previous year, reduced by the loss carryforward, must be placed. In other respects, largely the same rules apply for an entrepreneurial company (Unternehmergesellschaft (UG)) as for a GmbH.

Limited liability company (Aktiengesellschaft (AG)

As is also the case with a GmbH, a public limited company (Aktiengesellschaft, (AG)) is also a capital company (Kapitalgesellschaft, (KG)), but it has minimum capital of fifty thousand euros. It is represented by a Management Board that manages the business. In addition, its entities include a Supervisory Board which monitors the Management Board’s activities. The business shares are designated as stock. However, primarily due to the high capital expenditure, founding a public limited company (Aktiengesellschaft (AG)) may be less possible for those new to self-employment.

Partnerschaftsgesellschaft (partnership company)

The partnership is a relatively new company form, in which the members can consolidate independent professions. The company form is comparable to a general partnership (OHG). All partners are liable for the partnership’s liabilities as joint and several debtors and are generally also all entitled to manage the company. A special partnerships register has been introduced for partnerships that the district courts largely manage in accordance with the specifications that apply for the commercial register.
The partnership name must contain the name of at least of one partner, the addition “and partner/partners” or “partnership”, as well as professional designation of all professions represented in the partnership. The addition of first names is not required. The names of people other than the partners must not be included.
Note: The law explicitly permits the partnership, in individual contracts, to restrict liability for claims arising from damage due to malpractice to the partner who is required to perform this professional service within the partnership.
Note: Specialist books and template contracts for all legal forms can be viewed in our chamber of commerce’s Commercial Library. However, it is not advisable to uncritically adopt these contract templates without expert advice or to try to independently adjust or supplement them to a specific case.

Drafting business letters

Before business letters (such as letterheads, invoices or order forms) are printed, it should be checked whether recommendations from Deutsche Post AG need to be taken into account in the drafting process, but in particular all legally required information. The advertised first and last names of the trade professionals must be stated on business letters from companies not entered in the commercial register, as well as the summonable address. Business letters from companies in the commercial register must contain the complete company name in compliance with the wording entered in the commercial register, the legal form addition, the company’s registered office, the registry court of the company’s registered office, and the commercial register number. In addition, all managing directors and, where present, the chairperson of the Supervisory Board must be stated with their family names and at least one advertised first name. More extensive requirements apply for invoices.

The electronic commercial and company register

The commercial and company register is a public directory which, in the framework of the registry court, manages entries concerning the registered traders in a specified geographical area. The commercial register is intended to fulfil a publication, proof, control and protection function. Among other aspects, it contains information about a company’s legal structure, the precise company name, the registered office and purpose of the company, the owner or shareholder, managing director and power to represent, information on the capital structure and the name of the company’s authorised officers.
Tip: Before you register your company into the commercial register, we recommend that you coordinate with our chamber of commerce in advance concerning the company name.
Literature:
Specialist books and template contracts for all legal forms can be viewed in our chamber of commerce’s Commercial Library (opening hours: Monday to Thursday, in each case from 10am to 8pm; Fridays and Saturdays from 10am to 3pm; tel.: 040/36138-377).
www.unternehmensregister.de and www.handelsregister.de
Note: This information is only intended to provide first advice and as such does not assert any claim to be complete. Although it has been created with the greatest possible care, liability for the accuracy of the contents cannot be accepted.