How to choose the right legal form for your business in Germany

Solopreneur vs co-founder: How to choose the legal form

Your business idea is promising, and your business plan is already taking shape — but one key question remains: Which legal form should your business take? This decision should not be made lightly, as it carries significant financial, tax and legal implications.

Each legal structure offers its own advantages. For example, a sole proprietorship benefits from simplified accounting requirements, while a non-profit company can offer substantial tax advantages.

Before you begin, take the time to understand which legal structure best fits your goals and business model. Your choice will also depend on whether you plan to work independently or as part of a founding team.

Legal forms for one person

Sole proprietorships are comparatively easy to set up. Once you have obtained your tax number and your business licence, you can begin operating immediately. As a sole proprietor, you retain 100% of the profits, but you are also fully liable for all business obligations.

If a sole proprietorship aligns best with your business goals, it is worth noting that there are subcategories within this structure. For example, certain professions qualify as liberal professions, which follow different tax rules and reporting requirements. You can find more details about this subgroup below.

Legal forms for teams: Partnerships and corporations

If you are starting a business with one or more partners, a partnership structure may be the right choice. Common forms include general partnerships and similar collaborative business models. In partnerships, all founders are jointly liable with their personal assets.

This distinguishes partnerships clearly from corporations such as the GmbH or the UG, where liability is generally limited. In these structures, founders are typically liable only with the company’s assets rather than their private assets.

Most common legal forms in Germany

GbR (civil law partnership)

A GbR is a civil law partnership and is the simplest legal structure for two or more founders. It is suitable if you want to start a business together with minimal administrative effort. As in a sole proprietorship, all partners are jointly and severally liable with both business and private assets. For example, if one partner takes out a loan in the name of the GbR, the creditor may also claim repayment from the other partners.

Setting up a GbR is inexpensive and straightforward. In theory, you do not even need a written partnership agreement, although in practice it is strongly recommended. The only possible costs relate to legal advice and, if applicable, business registration. No minimum starting capital is required, and contributions may be made in cash or in kind.

If the GbR generates more than €500,000 in revenue or more than €50,000 in profit, it must be converted into a general partnership by registering as an oHG in the commercial register.

The main advantage of the GbR is its simplicity: legal requirements are limited and bookkeeping is less complex. However, the GbR has restricted legal capacity and no separate legal identity, which can be problematic because partners remain personally liable for all obligations.

GmbH (LLC)

The GmbH is one of the most popular incorporated legal forms in Germany. As a separate legal entity, it offers limited liability: shareholders are generally liable only with the company’s assets, not with their private assets. Personal liability arises only in cases of misconduct or breach of duty.

Forming a GmbH requires a minimum share capital of €25,000, of which at least €12,500 must be paid in before registration in the commercial register. Contributions may be made in cash or in kind, although contributions in kind require valuations and additional formal steps.

Even if founded by a single shareholder, a GmbH requires articles of association. Having these drafted by an experienced lawyer is strongly recommended. Incorporation and registration must be notarised, with total ancillary costs typically ranging from €400–850, depending on the amount of share capital. The notary appointment can be made online as well.

Overall, the GmbH offers strong legal protection and credibility with banks, suppliers and customers. Depending on the business model, it can also provide significant tax advantages.

UG (LLC)

The UG is often referred to as the “Mini-GmbH” and is ideal for founders who want limited liability but cannot provide the €25,000 share capital required for a GmbH. The UG can be formed with as little as €1 per shareholder, although contributions in kind are not permitted.

The UG formation procedure is similar to that of a GmbH, but the notary fees are lower. Each year, the UG must allocate 25% of its profit to a legal reserve until the share capital reaches €25,000. Once this amount has been accumulated, the UG may be converted into a GmbH. Find out more about the total formation costs here.

While the UG is attractive due to its low initial capital requirements, it has certain disadvantages. Because of its minimal capital base, it is often perceived as less stable than a “full” GmbH — especially by banks. Founders seeking loans are usually in a stronger negotiating position with a GmbH.

AG (stock company)

If your business requires a high level of capital or you are considering a future public listing, an AG 💬stock company may be the appropriate legal form. An AG can be founded by multiple stockholders or even by a single founder. Find out more about the formation process here.

As with other incorporated companies, liability is limited to the company’s assets. Stockholders’ private assets are generally protected. The required share capital, however, is relatively high at €50,000. One advantage is that this capital does not need to be raised by one person alone, as stockholders can invest without being involved in day-to-day management.

The AG has a more complex governance structure than other legal forms. Instead of a managing director, it is managed by a management board and overseen by a supervisory board. Formation and ongoing administrative costs are higher, and the company is subject to extensive transparency obligations, including the publication of annual financial statements.

On the positive side, an AG can raise capital independently of banks by issuing shares. This often conveys a strong impression of financial stability and credibility. In addition, shares can be transferred easily, and changes in ownership do not affect the company’s legal continuity.

Here is a direct comparison of the legal forms AG and GmbH.

Non-profit legal forms

For activities that pursue charitable or public-interest goals rather than commercial profit, several non-profit legal structures are available. One option is an association, which is typically financed through donations and membership contributions. Formation is inexpensive but can be time-consuming due to registration requirements.

An alternative is the non-profit GmbH, which follows the same structural requirements as a standard GmbH, including a minimum share capital of €25,000. Profits may only be used for charitable purposes, but the organisation benefits from significant tax advantages. Find out more about the gGmbH formation process here.

If you wish to dedicate a substantial amount of assets to a long-term purpose, establishing a foundation may be suitable. In this case, the founder permanently transfers assets to the foundation. The capital itself remains intact, while only income and donations are used to fulfil the foundation’s purpose.

Freiberufler

Certain professions classified as Freiberufler 💬liberal professions are not required to adopt one of the standard commercial legal forms. These activities may be carried out individually or jointly with other liberal professionals.

Liberal professionals can work as individuals or form partnerships with others in the same profession. Alternatively, it is also possible to operate through an incorporated structure, such as a Freiberufler-GmbH, if liability limitation or a corporate setup is preferred.

Other legal forms

In addition to the structures described above, German law offers several other legal forms, including limited partnerships, holdings, non-profit variants of incorporated companies, and hybrid structures that combine elements of different legal forms like the GmbH & Co. KG.

The appropriate choice depends on factors such as your business model, available capital, risk tolerance and long-term objectives. In many cases, professional legal and tax advice is recommended before making a final decision.

German legal forms at a glance

In the following table, you will find the most common legal forms for first-time founders and key aspects regarding their respective formations:

Registrations refers to entries into commercial register, trade register and transparency register.