What legal form should your business have? A large number of factors come into play when answering this question. For example, the amount of start-up capital you can contribute or the number of people you want to have joining you in the formation. You should also consider the various risks associated with liability.
The prevalent legal forms in Germany are for instance Einzelunternehmen (sole proprietorship), Gesellschaft bürgerlichen Rechts (GbR) (company established under civil law) or Gesellschaft mit beschränkter Haftung (GmbH) (limited liability company).
What is a “legal form” anyway?
The legal form establishes the legal framework within which a company operates. It has personal, tax and financial consequences as well as legal consequences. For example, legal form determines whether and how much equity capital you must contribute at the time of the foundation, the book-keeping obligations that have to be met and how the credit-worthiness of your business is assessed by banks and other institutions providing finance.
Why does a business need a legal form?
A business must have a legal form. You need to decide which of the possible variants you want for your business as soon as you make its formation official and register your business. If you provide no information on the legal form, the government authorities will assume that your business is a sole proprietorship (Einzelunternehmen) or a company established under civil law (GbR) (in the case of a team formation).
Important: Not all legal forms are available for a business. For example, craftsmen have different options to persons of in independent profession (Freiberufler). (1)
The most important characteristic of an independent profession is the close link between personal education and professional independence.
The Act on Partnership Companies of Members of Independent Professions (Partnerschaftsgesellschaftsgesetz) defines independent professions as follows: “In general, independent professions provide personal, responsible and professionally independent services of an advanced nature in the interest of clients and the general public on the basis of special professional qualifications or creative talent.” (§1(2) of the Act on Partnership Companies of Members of Independent Professions).
It is not always easy to define which profession actually belongs to an “independent profession” (5)
Independent professions include but are not limited to health-care related professions, information providers and language-related professions. You can find a detailed list here: https://freiberufler.online/freie-berufe-liste/
What legal forms are available?
Sole proprietorship (Einzelunternehmen)
The sole proprietorship is the simplest legal form for your business if you are starting on your own and the business risks are not great. Using this form you can carry out your self-employment as a second job or full time as a craftsman or as a self-employed independent professional.
At what point must I register a sole proprietorship in the Commercial Register?
If your business is being operated not just under your personal name or your professional designation but is to become a real business organisation with a business name, you must register yourself in the Commercial Register. On the other hand, registration is optional for small traders (Kleingewerbetreibende) and self-employed independent professionals (Freiberufler). The register entry includes your name, the legal form, the owner and main place of business. In addition, the entry provides information on whether insolvency proceedings are ongoing, as well as other matters. The ability of third parties to gather more detailed information on the business means that registration in the Commercial Register increases the possibility of the business being taken more seriously.
When can I form a sole proprietorship?
In principle, any person starting up a business without selecting a particular legal form is a sole proprietor. You can start operations after registering with the Trade Office (Gewerbeamt) and the Tax Office (Finanzamt).
If I select a sole proprietorship, who is legally liable?
If you operate as a sole proprietor, you have personal liability with all your assets without restriction. The sole proprietor is therefore liable with his personal assets for all the liabilities of the business.
Is there a specific minimum capital for a sole proprietorship?
No minimum capital is required for a sole proprietorship. (6)
Partnerships (Personengesellschaften)
If you are starting out with a team, joining forces with other people after having operated as a sole proprietor or want to include people who are providing finance, under German law you can establish one of the following partnerships:
- Company established under civil law (Gesellschaft bürgerlichen Rechts (abbreviated to “GbR”)).
A company established under civil law is the simplest legal form of partnership. This form is often selected by people running a business who do not have a commercial trade.
If you want to form a business with one or more partners, the company established under civil law is a suitable legal form for your business. Registration in the Commercial Register is optional for companies established under civil law. The formalities are also minimal. However, in its founders’ portal “existenzgründer.de”, the German Federal Ministry of Economic Affairs and Climate Action recommends that all the persons concerned should negotiate a partnership agreement.
Who is legally liable in a company established under civil law?
Exactly as in the sole proprietorship, all the partners in a company established under civil law are liable with their personal assets.
Is there a specific minimum capital for a company established under civil law?
No, there is no rule stipulating a specific start-up capital.
- General partnership (Offene Handelsgesellschaft (abbreviated to “OHG”))
A general partnership is a partnership which can be established by persons operating a trading business. It is therefore not suitable for self-employed business professionals (Kleingewerbetreibende).
Who is allowed to establish a general partnership?
There must be at least two partners in a general partnership. The business is deemed to have been established as soon as both or all partners have agreed they want to go into business together.
Who is responsible for the management of a general partnership?
In theory all the partners involved are responsible for the management of the partnership in the case of this legal form. If all partners are not to be responsible for the management of the partnership, the situation must be defined in more detail in the articles of association.
Who is legally liable in a general partnership?
Liability falls initially on the business assets and then on the private assets of the partners. The fact that a general partnership must be registered in the Commercial Register and that the partners are also liable with their personal assets means that a general partnership has a good reputation. The logic is that any person with personal liability will be particularly assiduous in their work and will act responsibly instead of taking unnecessary risks.
Is there a specific minimum capital for a general partnership?
No, there is no minimum capital requirement for a general partnership.
- Limited partnership (Kommanditgesellschaft (abbreviated to KG))
This legal form is also a partnership which is often selected if the main founder needs an additional partner whose sole role is to contribute capital to the business. Limited partnerships must be registered in the Commercial Register.
Who is legally liable in a limited partnership?
A limited partnership consists of the general partner (Komplementär) or several general partners who manage the partnership and the limited partner (Kommanditist) who contributes capital to the business. The general partner or partners bear the greatest risk. They are legally liable with their private assets. On the other hand the liability of the limited partner or partners is restricted to the capital they have contributed. The advantage of this legal form is the ability to establish the business with increased start-up capital.
Who manages a limited partnership?
The general partner is responsible for the management of the partnership and represents the company in all matters. On the other hand, the limited partner(s) has/have only monitoring rights.
Is there a specific minimum capital for a limited partnership?
There is no minimum capital requirement for the formation of a limited partnership. In the articles of association the partners must specify the amount to be contributed and the form the contribution is to take (contributions in cash or contributions in kind).
You will find more forms of partnership here:
- Silent partnership (stille Gesellschaft)
- Registered association (eingetragene Genossenschaft (eG))
- Partner company (Partnergesellschaft PartG))
Limited liability companies (Kapitalgesellschaften)
If you are starting out with a team or if you want to limit your business risk, you may opt for a limited liability company after looking at the matter more closely. The characteristic of the legal forms covered by this general term is in particular the easy way for capital providers to take a stake in the business.
- Limited liability company (Gesellschaft mit beschränkter Haftung (abbreviated to GmbH))
A limited liability company (GmbH) may be founded by a single person. Once founded, there is no restriction on the number of persons who can be shareholders. The articles of association of a company of this nature must be notarised. Registration of the company in the Commercial Register and the obligation of double entry book-keeping are essential features of the formation of a GmbH.
Who is legally liable in the case of a limited liability company?
A GmbH has the advantage that only the company is liable to the full extent of its assets and the founder is not liable with his personal assets.
Is there a specific minimum capital for a GmbH?
Yes, the initial capital contribution on the formation of the GmbH must be at least EUR 25,000.
- Private limited company (Unternehmergesellschaft (UG))
A private limited company / “Unternehmergesellschaft” is a special form of a GmbH and is also a limited liability company. A private limited company can be established by a single shareholder. However, more than one shareholder at the time of the company formation is also possible.
Is there a specific minimum capital for a private limited company?
This legal form is also called a “1 Euro GmbH”. It is suitable for all persons who want to limit their liability but who cannot or do not want to contribute an initial capital of EUR 25,000. A capital contribution must certainly be paid into a private limited company of this nature (UG) but the minimum amount is one Euro. However, the founder undertakes to use 25% of the annual profits to increase the start-up capital.
Who is liable in a private limited company?
The liability of a private limited company (UG) extends to the entire assets of the company. This makes this legal form attractive for founders of a comparatively small business. (6)
You will find more forms of limited liability companies here: Joint stock company (Aktiengesellschaft (AG)
Mixed forms
Mixed forms, for example GmbH & Co. KG, exist alongside partnerships and limited liability companies. The advantages of the relevant legal forms can be combined in companies of this nature. This is often used in collaborations, mergers or spin-offs of subsidiaries. (2)
A complete list of the legal forms can be found here.
https://www.unternehmenswelt.de/rechtsformen.html
We recommend that you obtain advice on the most suitable legal form before establishing a business.
How do I find the right legal form for my business?
The decision on the legal form of your business has personal, financial, tax and legal consequences.
You should consider the following factors when making your decision.
- Do you want to be the only person taking decisions and therefore have sole responsibility or are you starting a business along with other people?
- If things go wrong, do you want the liability to be restricted to the business’ assets?
- Do you want to use a business name and is registration on the Commercial Register absolutely essential?
- Do you want to keep the administration and book-keeping time and effort at a low level or are you happy with double entry book-keeping or the time and effort implicit in documentation and committees?
- Is it essential to select a legal form for your business or can you conduct the business you have chosen as a self-employed business professional? (3)
When choosing a legal form you should therefore consider every possible detail of the legal forms available. (2)
Which legal basis is best suited to your situation and business idea? This legal form test can help you with your decision. (4)
Sources:
(1) https://gruenderplattform.de/rechtsformen
(2) https://www.unternehmenswelt.de/rechtsformen.html
(4) https://www.fuer-gruender.de/wissen/existenzgruendung-planen/selbststaendig-machen/#c44545
(5) https://www.existenzgruender.de/DE/Gruendung-vorbereiten/Gruendungswissen/Freie-Berufe/inhalt.html