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Choosing a Legal Form When Starting a Business
When choosing the legal form for your business, economic, tax, corporate law, and especially liability considerations should be taken into account. The following questions can help guide your initial decision:
- Do you want to run your business alone or with partners?
- Can you raise the necessary capital and business expertise on your own?
- Is your venture risky? Should you therefore limit your personal liability?
- Do you place special value on the company name and reputation?
- Is the legal form appropriate for the size of your business?
Tip: Once you have a clear understanding of your requirements, you can choose the most suitable legal form from the overview below.
Non-Merchant or Small Business Operator
If your business does not require a commercially organized operation and you have not voluntarily registered in the commercial register, you are considered a non-merchant. In this case, you are subject to the Civil Code (BGB) and not the Commercial Code (HGB). However, in case of disputes, you may need to prove this to your business partner. As a non-merchant, you can opt to register in the commercial register and become a merchant, thereby becoming subject to the HGB with all rights and obligations.
Merchant
Anyone who has registered a business and whose company requires a commercially organized operation (e.g., accounting, balance sheets, management, representation, and liability) is considered a merchant and subject to the HGB. These business owners are required to register in the commercial register. You are already considered a merchant if your business meets these requirements, even if the commercial register entry has not yet been made.
Civil Law Partnership (GbR)
Business owners can form a partnership with one or more natural or legal persons. If no commercially organized operation is required, the partnership is governed by the Civil Code (BGB) and does not need to be registered in the commercial register. However, if the company requires a commercial business operation, it must be registered in the commercial register, for example, as a General Partnership (OHG) or Limited Partnership (KG).
General Partnership (OHG)
You can form an OHG with one or more partners. All partners are jointly and severally liable with both their business and personal assets for the company’s liabilities. Unless otherwise agreed, each partner is entitled to manage the business. OHG contracts do not need to be notarized, unlike the registration in the commercial register.
Limited Partnership (KG)
The KG offers limited liability compared to the OHG. There is at least one fully liable partner (general partner) and at least one limited partner, whose liability is restricted to their capital contribution. Only the general partners are authorized to manage the business, while limited partners are excluded from this.
Limited Liability Company (GmbH) or Entrepreneurial Company (UG)
If you wish to limit your liability and minimize personal risk, founding a GmbH is advisable. In this case, the company is only liable with its business assets, and shareholders are liable up to the amount of their capital contribution. The minimum share capital for a GmbH is 25,000 euros, which can consist of either cash or assets. Only formally appointed managing directors are responsible for running the company. Shareholders’ decisions are made through the shareholders’ meeting, with voting rights based either on capital contribution or per head. GmbH formation must be notarized and registered with the commercial register. The main difference between a GmbH and a UG (Entrepreneurial Company, also called a “mini-GmbH”) lies in the minimum share capital, capital accumulation requirements, and some formal aspects. A UG can be established with a minimum share capital of 1 euro.
GmbH & Co. KG
The GmbH & Co. KG is a limited partnership where the personally liable partner is a GmbH. This structure limits liability, although it is a partnership. The GmbH typically takes on the administrative role and is often set up with the minimum capital of 25,000 euros.
Stock Corporation (AG)
An AG can be founded by one or more individuals. The minimum share capital is 50,000 euros, and the minimum par value of a share is 1 euro. The AG is liable only with its corporate assets, and the board, which is appointed and supervised by the supervisory board, manages the ongoing business.
Partnership Company
This legal form is specifically for members of the liberal professions. All partners are jointly liable for the partnership’s obligations and are usually authorized to manage the business. There is a partnership register, which operates under similar rules as the commercial register. The partnership must include at least one partner’s name and the addition “and partner” or “partnership.” A unique feature is that liability can be limited in individual contracts to the partner responsible for the specific professional task.
European Legal Forms
In addition to national legal forms, companies also have access to European legal forms, which are especially attractive for companies operating across Europe. These include the “Societas Europaea (SE),” the “European Economic Interest Grouping (EEIG),” the “Societas Cooperativa Europaea (SCE)” as a cooperative association, and the “Societas Privata Europaea (SPE).”
Forming a GmbH in Germany
Important Information for Forming a GmbH
The following information is required by law for forming a GmbH:
- Company name (corporate name)
- Purpose of the company
- Company headquarters
- Names of the shareholders
- Amount and distribution of share capital
- Management structure
In addition, the articles of association, also called the “corporate charter,” must be created. This governs the relationship between the shareholders, such as voting rights and conditions for exiting the company. Lawyers and notaries can assist with this, especially if the GmbH is being formed to obtain and enforce a residence permit.
Checking the Name and Company Purpose with the Chamber of Commerce (IHK)
It is advisable to check the planned company name (corporate name) in advance with the IHK, preferably via an online form. The IHK may later be asked by the court for a statement during the registration process. A prior review helps resolve any potential objections to the name early on. Additionally, it can be checked whether the company purpose requires approval under the Banking Act (KWG).
Certification by a Notary
The notary drafts the articles of association and the formation protocol and prepares the necessary documents for the commercial register, such as the list of shareholders.
Depositing Share Capital
After notarization, the company becomes a “GmbH in formation” (GmbH i.Gr.), which is already operational. A bank account is opened for this, and the share capital is deposited. The notarized articles of association serve as proof for the bank. A payment receipt must be submitted to the notary. For contributions in kind, a separate report on the values contributed is required. It is important to keep the payment receipt to protect against future liability claims.
Registering the GmbH with the Commercial Register
The notary electronically submits the documents to the competent court for the commercial register. In simple cases, registration takes about a week, according to the Cologne register court. For urgent formations, court fees should be paid promptly.
Once registered, the GmbH is officially founded, and the founders receive an extract from the commercial register.
Beware of Fraudulent Letters
After registration in the commercial register, many companies receive seemingly official letters calling for additional registrations, often accompanied by a payment slip. Only in the fine print is it clear that signing or payment results in a costly contract. These letters should be carefully reviewed.
Business Registration
The GmbH must be registered with the competent trade office by submitting the commercial register extract. Any required permits may also need to be submitted. An exception is the license for banking or financial services, which must be submitted at the time of the commercial register application.
In urgent cases, the business can be registered before entry in the commercial register as a “GmbH i.Gr.” It is important to note that the acting persons are personally liable until the final registration.
Registering with the Tax Office
The trade office automatically informs the tax office about the formation of the GmbH. However, it can be helpful to register personally to speed up the process. After completing the tax registration form, the GmbH receives a tax number, which is required for issuing invoices.
Additional Important Steps After Formation
After forming the GmbH, the following steps should be completed:
- Preparation of the opening balance sheet
- Creation of business stationery and an imprint for the website with all necessary information
- Registration with the relevant professional association, depending on whether employees are hired
- Application for a VAT identification number from the Federal Central Tax Office, especially for internationally operating GmbHs
- Application for a company number from the Federal Employment Agency and registration with the health insurance provider when hiring employees
- Taking out insurance, such as liability insurance
- Automatic registration with the relevant chamber (e.g., Chamber of Crafts or Chamber of Industry and Commerce) via the trade office, without the founders needing to take any action.
Contact Us
If you need employment law advice, feel free to call us at 0221 – 80187670 or send an email to info@mth-partner.de.
