Selection of legal form
Information in brief (see below for more detail):
Do you want to set up a business? You may select from the following legal forms for your business:
If your business operations do not require a commercially organised business establishment, you are a non-merchant. In this case, the German Civil Code (BGB) applies to you. You have the option of joining together with one or more individuals or legal entities to form a general partnership. Anyone who has registered a business, and whose company requires a commercially organised business establishment is a merchant and is subject to the German Commercial Code (HGB)
As a merchant, you have the option of selecting between the following legal forms:
Cooperative, and a
professional partnership (Partnerschaftsgesellschaft). The partnership must include the name of at least one of the partners and the appendix "and Partner" or "Partnership" as well as the name of all the professions represented within the partnership.
Even as you decide to set up in business, you are faced with the question of what is the "right" legal form. There is no blueprint to define a tailored legal form for you. Therefore, it's our aim to present some of the potential legal forms to you here.
When selecting the right legal form for your company, you need to think about economic, fiscal, corporate, and particularly legal liability criteria. The following questions may provide some initial assistance:
- Do you intend to work alone or with a partner(s)?
- Can you deliver the necessary capital and business skills on your own?
- Are your plans high risk? Should you therefore limit your personal liability?
- Are the company name and status of your company particularly important to you?
- Does the legal form suit the size of the business?
Tip: Once you are clear what requirements the legal form of your company needs to meet, you can find the framework that suits you best. The summary below points out the most common. We recommend that you also consult a lawyer and tax adviser prior to making your final decision.
If your business operations do not require a commercially organised business establishment, and you do not wish to be entered voluntarily in the commercial register, you are a non-merchant. In this case, the German Commercial Code (HGB) does not apply to you, but rather the German Civil Code (BGB); in cases of dispute, you must, however, be able to provide evidence of your partnership. As a so-called non-merchant, you have the option of applying to be entered in the commercial register, and thus becoming a merchant. You will then be subject to the German Commercial Code (HGB) with all its rights and obligations (please see our Business registration and entry in the commercial register leaflet for more details about entry in the commercial register).
Partnership under the civil code (BGB-Gesellschaft)
As a businessman, you have the option of joining forces with one or more individuals or legal entities. If this does not result in business operations which require a commercially organised business establishment, it is not compulsory for the partnership to be entered in the commercial register and, as a so-called –BGB-Gesellschaft–, it will be governed by the German Civil Code. Should, however, business operations require a commercially organised business establishment, the company would have to be entered in the commercial register, for example in the form of a general partnership (Offene Handelsgesellschaft) or partnerships limited by shares (Kommanditgesellschaft).
Further information about civil code partnerships/ non-trading partnerships is available here. You will also find a sample contract for a partnership under the civil code here.
Anyone who has registered a business, and whose company's operations require a commercially organised business establishment (i.e. requirement for accounting and balance sheets, corporate management, commercial system of representation and responsibility) is a merchant, and as such is governed by the regulations of the German Commercial Code (HGB). Such businesses must be entered in the commercial register. You are classified as a merchant as soon as your business operations require a commercially organised business establishment, even if your entry in the commercial register is not completed.
Sole trader/registered merchant
Once successfully entered in the commercial register, sole traders must use the term 'registered merchant' (eingetragener Kaufmann), or a commonly understood abbreviation (e.K., e.Kfm., e.Kfr.) in their company name. The sole trader has unlimited liability over operating and private assets.
General partnership (Offene Handelsgesellschaft, OHG)
You may form a general partnership (OHG) with one or several partners. You and your partners have joint and several and unlimited liability with operational and private assets for the company's debts. Provided there are no special contractual agreements to the contrary, all partners are entitled to manage the company. General partnership contracts, unlike entry in the commercial register, do not need to be certified by a notary.
Partnership limited by shares (Kommanditgesellschaft, KG)
The partnership limited by shared provides a certain limit to liability in comparison with a general partnership. It has at least one partner with unlimited liability (Komplementär) and at least one limited partner (Kommanditist) whose liability is restricted to the investment he has contributed. Only partners with unlimited liability are entitled to manage the company; limited partners are prohibited from managing the company.
Limited liability company (Gesellschaft mit beschränkter Haftung, GmbH)
If you wish to reduce your own liability, and with it your personal risk, it is recommended that you form a limited liability company. The advantage here is in the exclusion from personal liability, i.e. the partners' liability is restricted to the share in the company they have contributed. Generally speaking, company creditors have no recourse to the partners' private assets. You may form a limited liability (GmbH) company alone or with other partners. The minimum equity of a GmbH is 25,000 euros. As the company is formed, equity is built up from the partners' initial investment which may consist of a fixed financial sum or of tangible assets (e.g. cars, office equipment).
Only the managing director is permitted to manage the company directly. The shareholders also have an indirect influence through the general meeting of shareholders, where individual shareholders' voting rights are calculated according to the amount of initial capital they have contributed or as a total by the number of heads.
You will find a sample contract for a limited liability company (GmbH) here (German only).
Entrepreneurial limited company/UG (limited liability)
The UG (limited liability) is an 'entry-level' model into limited companies for businesses, particularly start-ups, with a low amount of capital. The equity of a UG (limited liability) is at least –1.00€, and liability is limited (as with a GmbH) to the amount of the company's assets.
You will find more information about the UG (limited liability), e.g. about the obligation to make reserves, or about the differences between a GmbH and a UG (limited liability) in the link-section on the right hand of this document.
The formation of a UG (limited liability)/GmbH, as with the formation of an e.K or an OHG, KG or AG, must be registered in a legally certified form at the Registration Court - County Court Hamburg, Department 66, 20348 Hamburg.
Limited partnership with a limited liability company as general partner (GmbH & Co. KG)
A limited partnership with a limited liability company as general partner or GmbH & Co. KG is a limited partnership whose personally liable shareholder is a limited company (GmbH). This construction means that everyone has limited liability, although the company is fundamentally a partnership. The limited liability company (GmbH) usually has minimum capital of 25,000 euros, and generally speaking has only an administrative role.
Joint stock company (Aktiengesellschaft, AG)
A joint stock company may be founded by one or more people who acquire shares in exchange for contributions. The original capital broken down into shares must be at least 50,000 euros. The minimum value of a share is 1 euro; the issue of no-par shares is not permitted.
The liability of a joint stock company is limited to its corporate assets. Ongoing business is managed only by the board of directors which is appointed and monitored by the Supervisory Board.
The cooperative is a legal entity, whose legal framework is based on the rules of the Genossenschaftsgesetz (GenG; Cooperative Societies Act). Liability is – comparable to limited liability corporations – limited to the assets of the Cooperative. Specifics of the Cooperative are among others the minimum of members (at least three) and the registration with the Register of Cooperative Societies.
The professional partnership is a relatively new form of business in which members of the liberal professions can come together. This form of company is comparable with the general partnership (OHG). All the partners are jointly and severally liable for the partnership's debts and as a rule are also entitled to manage the company. A special partnership register was introduced for this type of partnership which the county courts maintain broadly under the same stipulations as the commercial register.
The partnership must include the name of at least one of the partners and the appendix "and Partner" or "Partnership" all well as the name of all the professions represented within the partnership. First names do not need to be added. The names of persons other than the partners may not be used.
Note: The law expressly allows the partnership to limit its liability in individual contracts for claims for damages arising from unprofessional practice to the partners who provide this professional service within the partnership.
TIP: Before registering your company in the commercial register, we recommend that you agree your company name with our Chamber of Commerce. You will also find important basic information in our leaflet "The basic rules of corporate law" (see link on the right hand).
You will find special reference books and sample contracts for all these legal forms in the Chamber of Commerce 'Commerzbibliothek' library (Opening hours: Mon to Thu from 10.00 am to 8.00 pm; Fri and Sats from 10.00 am to 3.00 pm, tel. +49(0)40 36138 377). There are sample contracts (for limited liability companies (GmbH) and companies under the civil code (BGB-Gesellschaft) on our Chamber of Commerce website at www.hk24.de .
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