Legal form

There is no single answer to the question of what is the ‘right’ legal form for a new business venture to adopt. In the first instance, an analysis must be made of the respective requirements of the founder(s), such as the cost, liability, administrative burden, whether he is starting up alone or with partners, etc.

Chapter 3.2 will tell you more about what name you should choose for your company and what key criteria apply when naming a company in Germany.

Of course, the legal form you choose has an impact on the taxes you have to file and pay. To find the appropriate legal form for your company’s situation, we recommend that you consult a tax advisor who can analyse your individual needs and advise you on the correct legal form. Further information on applicable taxes can be found below.

What legal form should I choose?

This is a decision you simply can’t avoid: even by simply registering your business, you’ve automatically chosen a legal form! If you start up your business alone, it will be a sole proprietorship from then on. And if your enterprise requires a commercially organised business operation, then a partnership constituted under civil law (GbR) or a general commercial partnership (OHG) is set up as a team effort. Since the applicable legislation for your business depends on its legal form, it stands to reason that the choice of legal form is a crucial decision.

A commercial enterprise or a small-scale business?

This distinction is an idiosyncrasy of German company law with far-reaching consequences. It is frequently confused with what’s known as the small business operator regulation under tax law (see also the ‘What taxes do I have to pay?’ section). A small-scale businessman is someone who is not a commercial trader.

Characteristics of a commercially organised business enterprise

  • Annual turnover (e.g. more than €175,000 for a service provider)
  • No. of employees (more than five)
  • Business assets (more than €100,000)
  • Volume of credit (more than €50,000)
  • More than one branch office

Entry in the Commercial Register

Commercial enterprises must be entered in the Commercial Register, and small-scale businesses can be entered. The following legal forms must also be entered: e.K. (registered commercial trader), OHG (general commercial partnership), KG (limited commercial partnership), GmbH (limited liability company), UG (limited liability entrepreneurial company) and AG (joint stock company). Special formalities must be observed when entering them in the Commercial Register.

Businessmen who have an entry in the Commercial Register have a company name that describes the commercial enterprise. Businessmen may choose a personal, descriptive or imaginative name for their company. By being entered in the Commercial Register, a one-man business becomes a sole proprietorship whose name must be completed with a designation such as e.K., e.Kffr. or e.Kfm. Examples: Bruckers Buchhandel e.K., Hotel Himmelbett e.Kffr., or Putzblitz e.Kfm.

The advantages of registration might be, for instance, that the businessman can grant power of attorney to his employees, and has the right to operate under his company name (rather than his own name), perhaps enabling the company to appear more reputable or to improve its image. In addition, only companies listed in the Commercial Register can be sold, bequeathed or leased, and open independent branches. Some banks, businesses and trade associations will only enter into a business relationship with companies listed in the Commercial Register. On the other hand, one disadvantage of registration is the obligation to use double-entry bookkeeping and prepare a balance sheet in compliance with the German Commercial Code, which is more time-consuming than a simple profit and loss calculation. Commercial traders are also subject to the stricter legal requirements of the German Commercial Code and must, for instance, notify their suppliers immediately if they receive faulty goods, so as to retain their right to make warranty claims.

A selection of legal forms and their special features

Sole proprietorships

This is by far the most common legal form in Germany, and is very easy to set up. A sole proprietorship exists from the time you start work, if you have not chosen another legal form, and if you are starting up alone. The sole proprietorship is managed solely and independently by its owner, but of course staff can still be recruited.

Profile of a sole proprietorship

  • Suitable for an entrepreneur working alone
  • No minimum capital required
  • No listing in the Commercial Register required
  • Unlimited liability of the owner (i.e. including personal assets) vis-à-vis the company’s creditors
  • No company name in the legal sense (the first name and surname of the owner must be given in the company designation)
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, a licence must be obtained

Partnerships constituted under civil law (GbR)

A GbR is the simplest form of start-up where a team of people is involved. It forms automatically when individuals collaborate to pursue the same commercial goal, for instance by preparing a business plan in order to go into business together. Although a written partnership agreement isn’t essential, it is a good idea for you and your partners to draw one up. Otherwise, the provisions of the German Civil Code (BGB) will apply automatically, which is why this legal form is also known as a BGB company. As far as the management of the GbR is concerned, the BGB states that all of the partners should make decisions together and should also represent the company jointly vis-à-vis third parties. This means that all of the partners must act as one to conclude each and every legal transaction. Since this can prove inconvenient in practice, the partners are able to make alternative internal arrangements in their partnership agreement (for example, they may appoint a single partner to manage or represent the company). If your GbR grows to such an extent that it becomes a commercial enterprise, its legal form becomes that of an OHG by law. In this case, you are obliged to have the OHG entered in the Commercial Register.

Profile of a GbR

  • Suitable for at least two business partners
  • No minimum capital required
  • No listing in the Commercial Register required
  • Unlimited liability of all partners (i.e. including personal assets) vis-à-vis the company’s creditors (joint and several liability)
  • No company name in the legal sense (the first names and surnames of all partners must be given in the company designation, as must the legal form suffix GbR)
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, licences must be obtained by all partners
Sample text:
The legal form of a GbR has the advantage for us that there are few costs and formalities associated with the foundation (compared to an OHG). We as partners are liable with our private assets. Under certain circumstances, the conversion into a GmbH may be considered later.

General commercial partnerships (OHG)

At least two businessmen are required to set up an OHG. Each is entitled to manage and represent the company individually; in other words, each partner can act on his own initiative in the ‘normal’ course of business, with the other partners merely being entitled to object to his actions subsequently. Legal transactions can be effected by the partners individually. Alternative arrangements can be made in the partnership agreement.

Profile of an OHG

  • Suitable for at least two business partners
  • No minimum capital required
  • Listing in the Commercial Register required
  • Unlimited liability of all partners (i.e. including personal assets) vis-à-vis the company’s creditors
  • A company name in the legal sense can be used
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, licences must be obtained by all partners

Limited commercial partnerships (KG)

The main difference between this and the OHG is that liability is limited to a specified amount for one or more of the partners. These partners are known as limited partners (Kommanditisten). A partner with unlimited liability is called a general partner (Komplementär). With this legal form, it is very simple to strengthen the equity base by taking on new limited partners who are not, however, given decision-making powers with respect to the day-to-day running of the company. In this case too, a written agreement is not essential but is strongly recommended.

Profile of a KG

  • Suitable for at least one entrepreneur and one further partner
  • No minimum capital required
  • Listing in the Commercial Register required
  • Unlimited liability (i.e. including personal assets) vis-à-vis the company’s creditors of at least one (wholly liable) general partner
  • Liability of at least one limited partner up to the level of his investment
  • Management by the general partner
  • A company name in the legal sense can be used
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, licences must be obtained by all general partners

Limited liability companies (GmbH)

It is no accident that the GmbH is the most popular legal form in Germany after the sole proprietorship. This is because liability is restricted to the level of company assets. In the case of insolvency, creditors cannot generally access the personal assets of the partners, but only the total assets of the business, in other words the share capital at the very least. The minimum share capital is €25,000, at least half of which has to be deposited when the company is started up. This can be made up of material assets instead of cash.

Profile of a GmbH

  • Suitable for one or more business partners
  • Minimum capital of €25,000 required
  • Listing in the Commercial Register required
  • The company has a legal personality (is a legal entity)
  • No personal liability on the part of the partners (in normal circumstances)
  • May be managed by an employee
  • A company name in the legal sense can be used
  • Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, a licence must be obtained by managing director of the GmbH
N.B.:
Legislation provides both ‘specimen documentation for the formation of a one-shareholder company’ and ‘specimen documentation for the formation of a company with up to three shareholders’. The partners can also form the company by drawing up an individual memorandum of association, which must be certified by a notary. When setting up a multi-shareholder company, we recommend drawing up a GmbH agreement that is tailored to your individual requirements. This agreement can include additional provisions that go further than the minimum specifications required by law for the articles of association of a GmbH, thereby precluding potential differences of opinion between the partners later on.
Entrepreneurial companies (UG with limited liability)

This legal form is a specific type of GmbH. Essentially, the same strict rules apply as for a GmbH, but the minimum capital required when setting it up is just €1, and ‘specimen documentation’ can be used to facilitate its formation. If there is more than one partner, however, one should think carefully before using the specimen documentation, as it does not – for instance – contain any regulations about dealing with disputes.

According to the German Companies Act, a legal reserve must be created in the balance sheet to which one quarter of annual net profit must be transferred after first deducting any loss carried forward from the previous year. This reserve must be built up until the sum of €25,000 is reached and a GmbH is registered.
Profile of a UG with limited liability
Suitable for one or more business partners
Minimum capital of €1 required
Listing in the Commercial Register required
The company has a legal personality (is a legal entity)
No personal liability on the part of the partners (in normal circumstances)
May be managed by an employee
A company name in the legal sense can be used
Notification of the regulatory agency (Ordnungsamt) is mandatory and, if required, a licence must be obtained by managing director of the UG (with limited liability)