Criteria for Choosing the Legal Form
An entrepreneur can choose one of the several forms of business when setting up the business initiative. The options range from a representative office or small and large partnerships through to corporations such as a GmbH or Aktiengesellschaft. Before founders select a legal form for their company, they should answer the following questions:
- Is direct business activity planned in Germany or is the focus initially on maintaining contacts and initiating business?
- How many people are going to establish the company?
- Should there be as few formalities as possible in establishment?
- Are only the company partners going to manage the company, or others, too?
- How much equity capital can be raised?
- Is personal liability to be restricted?
- Should the company have a high credit standing?
- Is an entry in the commercial register necessary?
If a company wants to be present in Germany mainly to initiate business and maintain contacts with business partners, credit institutes or government offices, the establishment of a representative office is the first and easiest step. The personnel, financial, and organizational expense is relatively low. Depending on requirements, it is enough to establish a representative office with one or several employees.
The establishment of a representative office in Germany by a foreign company only requires approval in exceptional cases. For example, representative offices of foreign banks that aim to independently initiate or conduct business with domestic customers require the approval of the bank supervisory authorities.
Sole Proprietorship, Registered Business Person
Anyone wanting to start up immediately is advised to establish a sole proprietorship. This is the easiest way of forming a company, because special formalities such as deeds of partnership or minimum capital are not required. An entry in the commercial register as a registered business person (eingetragener Kaufmann, e.K.) is only necessary if the annual turnover is more than EUR 260,000.00 and the profit is over EUR 25,000.00. Of course, as a sole proprietor you have full liability for the debts of your business.
Civil Law Association (Gesellschaft bürgerlichen Rechts, GbR)
A civil law association is often formed to launch a business idea together with others. This form of company is a type of partnership because at least two partners agreed to establish the company. The partners are liable with their private assets for debts incurred by the company. Written articles of association are recommended on the formation of a GbR but are not compulsory.
The general partnership (OHG) is the classic form for medium-sized and larger companies. Every GbR whose purpose is to run a commercial enterprise, that is a business enterprise of a type or size that requires business operations to be set up in a commercial way, automatically qualifies as an OHG.
General Partnership (Offene Handelsgesellschaft, OHG)
An OHG is required to register with the trade licensing office and be entered in the commercial register. The accounting regulations for an OHG are also stricter than those for a GbR.
The limited partnership (KG) is a legal form related to the OHG, but with the options of limiting liability for some of the partners. In the KG, at least one partner (the general partner) is personally liable without limitation. The liability of the other partners (the limited partners) is limited to their monetary contribution. Like an OHG, a KG must be registered with the trade licensing office and be entered in the commercial register. The most important advantage of a KG over an OHG is the greater flexibility offered by the option of being able to increase the capital base by including additional limited partners.
Limited Partnership (Kommanditgesellschaft, KG)
A GmbH and KG can be combined to create a GmbH & Co. KG, a special form popular because it minimizes the liability risk. However, because of its basic structure as a KG, this form is a partnership, not a corporation. In this combination, though, a GmbH – whose liability is limited to the paid in capital – acts as the personally liable general partner of the KG.
GmbH & Co. KG
The partnership company is specifically for the joint exercising of professional freelance activities. Mere capital participations are therefore excluded. This form of company enables members of the same or different freelance professions to join forces to form a mutually profitable company. As a result, a number of different professional services can be offered from a single company. The personal liability of the partners can be excluded with regard to professional errors for which other partners alone were responsible.
Partnership Company (Partnerschaftsgesellschaft)
Corporations are the alternative to partnerships. The company bears liability, because as the result of the establishment of a corporation, a legal entity is formed with its own rights, obligations, and name. The company itself concludes contracts, possesses assets, and must pay taxes. Liability is limited to the business assets. A minimum capital is required, and the accounting obligations are more extensive than those for partnerships.
Limited Liability Company (Gesellschaft mit beschrÃƒÆ’Ã‚Â¤nkter Haftung, GmbH)
- The limited liability company (GmbH) is the most popular legal form among the corporations, as it combines high flexibility with relatively few obligations. The GmbH is established through the articles of association. For a GmbH to be established successfully, a notary must certify the articles of association and the entry of the GmbH in the commercial register. One individual person can establish a GmbH. The transfer of shares has to be notarized.
- To set up a GmbH, minimum capital of EUR 25,000.00 is required, which can also be made up of non-financial assets. At the time of registration, however, it is sufficient for half of the minimum capital, i.e. EUR 12,500.00, to be actually and verifiably contributed. In the case of property, documents must be attached to the application verifying that the value of the property actually corresponds to the specified counter value of the contribution.
Further information about the limited liability companies:
How do you set up a GmbH
(Ãƒâ€šÃ‚Â© Chamber of Industry and Commerce for Munich and Upper Bavaria).
Limited Liability Company (Unternehmergesellschaft, UG)
- The new form of the limited liability company (Unternehmergesellschaft, UG) was implemented with the law enactment (GmbHG) in November 2008. Especially, the flexibility and simplification of the legal form should be increased. Since this date it is possible to establish a limited liability company (UG) with a minimum capital of 1 EUR. But as long as the minimum capital is below 25.000 EUR it is certainly necessary to deposit financial reserves at the specific amount of 25% of the annual net income (JahresÃƒÆ’Ã‚Â¼berschuss). If the reserves reach the amount of 25.000 EUR it is possible to continue the company as a ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œregular GmbHÃƒÂ¢Ã¢â€šÂ¬Ã‚Â.
Public Limited Company (Aktiengesellschaft, AG)
- The public limited Company (AG) is designed for large capital market-oriented companies and offers the opportunity to initial public offering.
- German law places great importance on the accuracy and transparency of shareholder resolutions. Therefore, the powers and competencies of the executive bodies and shareholders are largely prescribed by statute. Any deviations in the articles of association from the public limited companies Act can be examined via the commercial register.
- The Public Limited Companies Act (Aktiengesetz) is covering the common corporate structure for large cooperations.
- To set up an AG, minimum capital of EUR 50,000.00 is required, which can also be made up of non-financial assets. In the case of property, documents must be attached to the application verifying that the value of the property actually corresponds to the specified counter value of the contribution.
Further Types of Corporations
- Private Limited Company (Ltd.)
Further information about the Private Limited Company
ESTABLISHING A LIMITED COMPANY
(Ãƒâ€šÃ‚Â© Chamber of Industry and Commerce for Munich and Upper Bavaria)