Legal Form Selection
Selection of the legal form before the foundation of a company is much more than just a formality. There are many legal and tax-related risks and opportunities to be evaluated. We advise you on the selection of the suitable legal form.
Factors, which are decisive in the legal form selection
Foundation of a company in Germany should be well thought through since many factors depend on it. If these factors are not thoroughly evaluated, in the worst case scenario, it can lead to mistakes that prove to be expensive and cannot be corrected later on. The following factors must be particularly taken into account:
- Minimum capital
- Costs for foundation of company
- Current taxation and exit taxation
- Liability for obligations of the company and of the shareholders
- Ongoing costs for administration (office rent and facilities, payroll costs, accounting, annual financial statements, tax returns, notarization, commercial register costs)
- Business aspects, e.g. the size and duration of the planned activities in Germany
Legal form selection: important not only from the legal point of view
Wise creative leeway when selecting the legal form
How many owners is the new company supposed to have?
Many options are available depending on the number of owners. If only one person is the owner, e.g. a sole proprietorship, a single member GmbH & Co. KG or a corporate entity are possible.
If there are several shareholders, a non-commercial partnership (GbR), commercial partnership or corporate entity can be considered
A non-commercial partnership does not deal in trading activities. For the purpose of taxation, its profit or loss is apportioned to the shareholders depending on their percentage of the shares. The most important problem of this type of company is that each shareholder is fully liable for all liabilities of the non-commercial partnership. This means that not only the investment might be lost, but their private assets are also on the line. Written articles of association are not required to set up a non-commercial partnership. A verbal agreement or merely a joint action can be sufficient. Therefore, it is all the more important to be careful who your business partners are. Besides, as a matter of principle, the non-commercial partnership is represented in public only collectively by all the shareholders, which is quite inconvenient in practice.
OHG (General Partnership), KG (Limited Partnership) and GmbH & Co. KG (Limited Commercial Partnership) – It is good to consider everything carefully
If a non-commercial partnership deals with trading activities, it is automatically transformed into a Commercial Partnership and must be entered into the commercial register. Depending on the intended liability of the partners, an OHG (all shareholders are fully liable), a KG (some shareholders, called limited partners, are liable only up to the amount of investment made) or a hybrid form of a corporate entity (e.g. GmbH & Co. KG) can be formed. In the case of hybrid forms, all fully liable shareholders are corporations. Thus, no individual is liable as a shareholder with their private assets. Nevertheless, the GmbH & Co. KG is treated like a partnership for taxation purposes. The legal provisions in the commercial law regarding accounting, valuation of assets and disclosure obligations are pretty much the same as for corporate entities.
UG (Entrepreneurial company) with limited liability (often referred to as mini-GmbH) – why is it not worth considering
UG (Entrepreneurial Company) with limited liability, GmbH (Limited Liability Company), AG (Joint Stock Company) and SE company are types of corporations. The UG cannot be recommended as its reputation is very poor due to low share capital and numerous bankruptcies. Hence only a few businessmen are interested in dealing with UGs. AG and SE have many formal requirements and high minimum capital requirements. Therefore only businessman, who plan to have frequent changes in the shareholder structure, want to be active in many countries with branch offices, intend to collect capital on want to refinance on the equity market, or plan to have shares listed on a stock exchange, should even think about using AG or SE as the legal form for their company. These types of companies are rarely considered by normal investors. The most popular legal form of a corporation is the GmbH (Limited Liability Company).
GmbH (Limited Liability Company)
GmbHs can be founded by one or more persons. These companies must subscribe a minimum initial nominal share capital of €25,000, at least half of which must be immediately paid up at the beginning. A GmbH is liable only with its assets in case of problems. The managing directors of the GmbH are liable only in exceptional cases (e.g. Delayed filing of insolvency, intentional damage). German “Mittelstand” (medium-sized) companies are predominantly active in the legal form of GmbH and it has an excellent business reputation.