Limited Liability Company and Entrepreneurial Limited Company (Limited Liability)

These changes are contained (or described specifically) in this pamphlet.

The Gesellschaft mit beschränkter Haftung (in the following: limited liability company, GmbH) and the Unternehmensgesellschaft (in the following: UG, entrepreneurial limited company (limited liability)) are joint-stock companies with their own legal identity (= legal entities), for which liability is limited to the company's assets.

GmbH and UG (limited liability) act autonomously – represented by the executive management – during business transactions, are able to file lawsuits and are themselves subject to lawsuits, are able to acquire property and possess their own assets. They are independently subject to taxation. The particular rights and obligations of the GmbH and UG (limited liability) exist autonomously from those of the shareholders and the executive managers.

Both the GmbH with a capital stock of 25,000 Euros and the UG (limited liability) are companies with limited liability. The provisions concerning the GmbH, namely the GmbHG (Limited Liability Company Act), apply for both forms.

The capital stock of the GmbH totals – as before – 25,000 Euros

The UG (limited liability) represents an entry-level model for the GmbH for enterprises, especially start-ups, with a low capital endowment. The capital stock of a UG (limited liability) amounts to at least 1 Euro! 

The UG (limited liability) offers an alternative to foreign legal forms with a low capital stock where founders of a start-up have to subject themselves to unfamiliar legal provisions (the English Limited, for example).

Apart from the difference in capital stock, the UG (limited liability) largely equates with the GmbH. The UG (limited liability) can, however, work its way up to become a GmbH. The UG (limited liability) is obligated, every year, to place one quarter of the annual surplus (minus loss carryforward) in the reserves. Once these reserves have reached the capital stock of 25,000 Euros, the entrepreneurial limited company will be able (but not obligated), by means of a capital increase without change of legal form, to become a GmbH.

The limitation of liability arises once the GmbH or the UG (limited liability) has been entered in the trade register (=Handelsregister). Limitation of liability means that not the shareholders– personal fortune, but the company's assets will be liable for the obligations of the GmbH or the UG (limited liability). Owing to the strict separation between private and company assets, in the event of a crisis the shareholders thus bear only the risk that the investment agreed in the articles of association will be lost. If the investment is not yet fully paid in, the shareholders must, if need be, pay the outstanding difference in full.
It should be clarified that the company is liable strictly with its assets as a whole (therefore, not only up to the sum of the capital stock). An example: a GmbH has been founded with a capital of 25,000 Euros. If this capital is used up as a result of bad investments, there will not be any more company assets available as recoverable assets, either. If, on the other hand, this same GmbH has company assets of 100,000 Euros, it will be liable with these in full. The exceptions from this limitation of liability are, for example, typical cases of abuse or delayed filing of insolvency, along with missed social contribution payments. In these cases recourse may be sought privately against the shareholders and executive managers.

The GmbH (or UG (limited liability)) is started up by the shareholders. The first step on the way towards a GmbH or UG (limited liability) is the conclusion of articles of association – also known as bylaws – between the shareholders. They must be signed by all shareholders and certified by a notary. Representation is possible if any shareholder is unable to attend in person at the signing of the articles. In that event, the proxy must present authorisation which has been accredited by a notary.

Articles of association must contain at least the following:

It is incumbent upon the managing director to manage the company. To this end, he has third-party asset interests under his trusteeship and the duty to ensure a smooth, efficient and profit-oriented course of business. The managing director is subject to various liability risks at the same time. Just to mention some of the most important of these:

Liability in respect of the company may arise from the managing director's position of trust, for example during speculative dealings.

One of the managing director's most important tasks is orderly bookkeeping and preparation of balance sheets. In the event of a breach of obligation in this area the managing director must assume personal liability in respect of the company and of the creditors and will even, potentially, render himself punishable by law.

If the GmbH recruits employees, the managing director will assume the tasks of an employer and must submit advance wage tax and turnover tax statements on a monthly basis, as well as withhold wage tax on the behalf of the employee and pay it to the tax office. The same applies for turnover tax. If these obligations are breached, the managing director will face both liability under asset law according to §§ 69 ff AO (German Employment Regulations) and consequences under criminal law according to § 370 I or § 378 I AO.

Duties arising from social law also concern managing directors. The employees working at the GmbH must be registered with a health insurance institution and the withheld contributions to health insurance, pension and unemployment insurance paid into the health insurance fund concerned. The managing director is liable personally for withheld and non-paid employee contributions to the social insurance premiums and renders himself punishable by law in addition.

In the event of impending insolvency – in the event, therefore, of the company's over-indebtedness or illiquidity – the managing director will be obligated, within three weeks, to make a request for the opening of insolvency proceedings. If he fails to do this in a timely manner, he will face criminal law consequences according to § 15a Abs. 4 InsO (German Insolvency Code).

If the managing director continues to activate payments once the enterprise is ready for insolvency, he will be liable to the company for these payments personally.

Potentially, he will be in breach of fraud and insolvency laws in addition.

When payments are made to shareholders, the managing director's liability is now shifted to the foreground as far as these payments led necessarily to the company's illiquidity, unless this had not been discernible from the viewpoint of a diligent managing director.

The start-up costs are dependent upon the capital stock and the value of the business, and upon whether the more cost-effective formation report or individual articles of association are being used. As far as they have been overlooked according to the stipulations so far, the costs are incurred as follows:

a) With a capital stock of 25,000 Euros and individually devised articles of association, the following notary costs can be anticipated:

- Certification of the articles of association 187 Euros

- Certification of the managing director appointment 187 Euros

- Application for trade register entry and accreditation approx. 62,50 Euros

- List of shareholders 96 Euros

- Outlay approx. 35 Euros

- plus 19 % VAT

The costs are reduced in the case of a one-person GmbH.

b) For the certification of a 25,000 Euro GmbH with the formation report approx. 181 Euros are incurred, while the remaining costs stay the same:

- Certification of the formation report (incl. list of shareholders and appointment of managing director) 168 Euro, (for a one-person GmbH only 84 Euro)

- Application for entry in the trade register and accreditation approx. 42 Euros

- Outlay approx. 35 Euros

- plus 19 % VAT

c) For the formation of an entrepreneurial limited company (limited liability), for which the capital stock can amount to 1 Euro, with underlying capital stock of 1 Euro and use of the formation report the following notary costs will be the result:

- Certification of the articles of association

for the one-person UG (limited liability) 20 Euros

for the multi-person UG (limited liability) 30 Euros

- Application for entry in the trade register and accreditation approx. 10 to 15 Euros

- Outlay approx. 35 Euros

- plus 19 % VAT

d) Without a formation report the costs of forming a UG (limited liability) will be exactly as high as for a GmbH without a formation report. The fee for entry of a company in the trade register is approximately 100 Euros.

Added to these are costs for publication of the entry in the German Federal Gazette and potentially in other bulletins. A sum of the magnitude of 100 to 300 Euros per publication should be considered in this context too. This calculation does not include costs for additional support for certain formulations by the notary and for consulting a lawyer (for the purpose of compiling articles of association, for example). With regard to the compilation of articles of association in particular, it is advisable to address the cost issue in advance, as the fees incurred are not subject to collective agreement.

Once the capital stock has been paid in, entry of the company in the trade register must be applied for by the managing director/s.

When applying for entry of the GmbH in the trade register, managing directors must provide written assurance that no circumstances (grounds for exclusion – see above) prevail which oppose their appointment. Alongside this, it must also be declared whether the services agreed in the bylaws have been effected on the capital stock and whether the capital stock is ultimately at the free disposal of the managing directors.

It must be remembered that the GmbH and the UG (limited liability) will not come into existence until entry in the trade register. Two phases can be distinguished until time of entry in the trade register, namely the pre-start-company and the pre-incorporated company phases (also described as Vor-GmbH, GmbH in Gründung or GmbH i. G.).

A pre-start-up company exists where agreements have been made between the founders with the aim to conclude a GmbH contract or UG (limited liability) bylaws. Legally speaking, a pre-start-up company is to be qualified as a company constituted under civil law. Therefore, during this phase there is also a personal liability risk for obligations which are entered into in the interest of the company yet to be founded. Any release from liability would have to be agreed expressly with the contract shareholders.

Vor-GmbH is the term used once the GmbH contract has been certified by a notary (see numeral 8). A Vor-GmbH is not governed by law, but is recognised by jurisdiction as a company in its own right. A Vor-GmbH can bear rights and obligations: for example, it is competent to assume a name or a trade name. Therefore, a Vor-GmbH is permitted to act under its trade name even prior to entry in the trade register. However, in that case it must carry the adjunct in Gründung or i.G. – undergoing establishment, as otherwise this would constitute impermissible use of a trade name. The persons dealing prior to entry of the GmbH are jointly and severally liable. This promoters– liability will terminate with entry in the trade register. Independently of this, the shareholders will also be liable for the obligations of the Vor-GmbH.

Equity substitution law

Amortisation payments on shareholder loans are not prohibited payments. Shareholder loans and equivalent payments are not to be treated as liable equity. Any shareholder loan will be of secondary importance in the event of insolvency.

Cash pooling

Return to a balance-sheet approach to corporate assets: any payment made by the company to a shareholder cannot be classified as a prohibited payment from the corporate assets if this is a straightforward active exchange, therefore the company's claim to counter-performance or reimbursement against the shareholder covers the payment and is full-value in addition. The intention behind this is to back the cash pooling which is customary in group funding internationally and to place it on a reliable legal basis.

Shareholders– liability during appointment of managing directors

If, deliberately or gross negligently, the shareholders have appointed a managing director who – according to the grounds for exclusion – should not have been appointed managing director, they will be liable for the damage arising from this.

Shareholders– insolvency application duties

The changes in the GmbH law also provide for an expansion of the insolvency application duties and of entitlement to submit insolvency applications. According to the changes (in the case of a GmbH and of a UG (limited liability)), if the executive management is absent any shareholder will be entitled, but not obligated, to submit an application for the opening of insolvency proceedings.

List of shareholders

Lists of shareholders – in detail, with corresponding consequences under liability law – are gaining in significance, as the acquisition in good faith of business shares is also becoming possible in certain cases.

Approved capital

In the bylaws, shareholders can authorise managing directors to increase the basic capital. This opportunity is more in line the German Stock Corporation Act.

Electronic trade register

Due to the introduction of an electronic trade register, the required start-up documents can be submitted to the trade register in electronic form only, and indeed by the notary, who will send application and additional documents to the registry court's electronic PO box; the data can be added to the register directly from there.

This online information can only provide you with a very summarized overview of these topics and does not claim to be complete. If you need more information, you can visit our Commerzbibliothek (Library of Commerce) where you will find all the usual legal literature such as legislation, legal commentaries, collections of judicial decisions, periodicals, and monographs. The Commerzbibliothek is located on the ground floor of the Hamburg Chamber of Commerce at Adolphsplatz 1 in 20457 Hamburg. It is open Monday to Thursday from 10 am to 8 pm and on Friday and Saturday from 10 am to 3 pm.