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

updated on 13. August 2020 13 minutes reading time
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Whether you want to open a street food stand or a tech startup, you need a legal form. Only which one is right for you? We give you what you need to make an informed choice.

Your business idea is promising, the business plan is in the works, but one question remains: Which legal form should the business have? This decision cannot be taken lightly. After all, it has fundamental financial, fiscal and legal implications.

Each legal form has its advantages. For example, a sole proprietorship benefits from simplified accounting. A non-profit company enjoys a lot of tax advantages. All the more reason to educate yourself on which structure suits you and your business idea well before getting started.

Initial planning: Solo-preneur vs co-founder

Which legal forms are possible will depend on whether you want to go it alone or start your enterprise with others.

Legal forms for one-person: Sole proprietorship (Einzelunternehmen)

Sole proprietorships are comparatively easy to set up. All you need is a tax number and a trade licence and you’re ready to start executing your business idea. With this legal form, As a sole proprietor, you receive 100% of your profit, but you are also 100% liable for your business’s operations.

If being a sole proprietor best fits your business goals there are other legal forms available to you. If your business activities fall under the Katalogberufe (catalogue professions) you are officially a freelancer (Freiberufler in German). You will find more about this subgroup of sole proprietorships below.

Legal forms for teams: Partnerships and incorporated companies

If you have a business partner (or more) then a partnership could be the way to go such as a GbR or oHG. Within partnerships, all founders are jointly liable with their private assets. This is a clear point of difference to corporations such the GmbH or UG. Here, founders are not liable with their private assets but (usually) only with the company’s assets.

Want to talk to a human about legal forms in Germany? Book an initial consultation here. 

The most important legal forms

Gesellschaft bürgerlichen Rechts (GbR)

The simplest multi-person legal structure is a Gesellschaft bürgerlichen Rechts, or GbR (a partnership under civil law). It is an option if you want to set up a company together with one or more partners and would like to make as little effort as possible.

As in the case of sole proprietorships, the founders are jointly severally liable not only with business assets but also with their private assets. For example, if your partner takes out a loan in the name of the GbR, the bank can also demand repayment from you.

Establishing a GbR is very easy and inexpensive. Basically, it is a simple association, which theoretically does not even require a written contract. In practice, of course, you should definitely have one. You will only have to calculate the costs such as legal advice and, if necessary, the business registration (Gewerbeanmeldung). Mandatory starting capital is also not required. Contributions can be made in cash, or in kind.

If at any time you generate sales of more than €500,000 or make a profit of more than €50,000, the GbR must be converted into a general partnership (oHG) by entering it into the commercial register.

The advantage of the GbR lies in its simplicity. The legal or formal regulations are less strict and the bookkeeping less complicated. However, a GbR as a business form has only limited legal capacity. This can be problematic as not having a separate legal entity to take on liability leaves you exposed.

Gesellschaft mit beschränkter Haftung (GmbH)

One of the most popular incorporated legal forms is the GmbH, which translated into English means ‘company with limited liability’. This is a corporation that is an independent entity. You are therefore only liable with the business assets of the company. The private assets of the shareholders cannot (usually) be used in a liability case. You can only be held personally liable if you violate your duties as managing director or shareholder.

To form a GmbH you need at least €25,000 share capital (Stammkapital). The shareholders must contribute €12,500 of this even before the company is entered in the commercial register. Contributions can either be in cash or ‘in kind’ (ie assets other than cash). However, contributions in kind require valuations, which adds yet another step to the incorporation process.

Even if you form a GmbH as a solo founder, you need a statute, the so-called Gesellschaftsvertrag (articles of association). Depending on your business’s configurations, getting a competent lawyer to draft avoids costly legal headaches further down the track. The formation and the subsequent registration in the commercial register must be notarised by a notary. Together with the registration fees, expect ancillary costs of around €400-850, depending on the amount of the company’s share capital.

Overall the GmbH can be quite advantageous for founders. Practically, it offers a high degree of legal security and greater legitimacy with business partners, such as suppliers and customers, and, most importantly, banks. Financially, depending on the nature of your business, this legal structure can significantly reduce your tax burden.

Aktiengesellschaft (AG)

Do you have a high capital requirement and are you considering going public with your company? Then the Aktiengesellschaft (stock corporation) could be the right legal form for you. Not only as a team, but also as a solo founder, you can form your own business with an AG.

Just like other incorporated companies, the AG’s liability is also limited to the company’s assets, the private assets of the shareholders remain unaffected. The high share capital could prove to be a challenge – €50,000 is needed to get started. But, on the upside, you do not have to raise the money alone, even if you form the AG as an individual. The special thing about the AG is that shareholders can participate in the company without being co-founders of the company. This may make it easier for you to raise the €50,000 starting capital.

Having an AG legal structure makes things more complicated. The AG does not have a managing director, but a board of directors (Vorstand) with a supervisory board (Aufsichtsrat) on top of this. The formation and administrative costs are higher. A greater of level of transparency is also required, which means that competitors get to see a company’s management report and annual accounts (Jahresabschluss).

On the other hand, the AG can quickly collect money without banks and thus increase its equity capital. Thus it can give the impression of financial strength and seriousness even more than the GmbH. In addition, shares can be transferred without complications. Even a change of shareholders has no effect on the company.

Starting an AG doesn’t need to be complicated as it sounds.

Non-profit legal forms

For a non-profit endeavours that don’t need to be structured like a classical business, there are various options, such as an association (Verein) that is primarily financed by donations and contributions. The formation is relatively uncomplicated and inexpensive, but not for people in a hurry. Entry into the register of associations (Vereinsregister) can take a long time.

An alternative to the association might be the non-profit GmbH. It is subject to the same requirements as the commercial GmbH, for example a minimum share capital of €25,000. The profits may only be used for charitable purposes, but in return the non-profit GmbH enjoys tax advantages.

If you want to use a relatively large amount of assets meaningfully, the establishment of a foundation (Stiftung) could be right for you. Reducing taxes is also possible here. In doing so, you separate yourself permanently from the assets that you leave to the foundation. The foundation capital remains untouched and only interest income and donations are used for the foundation’s purpose.

Freelancer (Freiberufler)

Do you have a catalogue (Katalog) or catalogue-like profession and are therefore a freelancer? Then you do not necessarily need one of the legal forms mentioned above. How this works and which legal forms you can choose as a freelancer can be found in our article on this topic. In general, you can become a freelancer as a single person or in combination with other freelancers as a PartG, Freiberufler-GbR if you want to stay unincorporated. Or, a Freiberufler-GmbH if you want to form a company.

Other legal forms you may have not heard of

Of course, there are some other legal forms than those mentioned above, such as the Kommanditgesellschaft, or KG (limited partnership) the non-profit variant of the entrepreneurial company known as the gUG or combinations of two legal forms, for example the GmbH & Co. KG. Depending on your business idea, your available capital and your target project, very different legal forms can be on the table.

German legal forms at a glance

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

Legal form

(Rechtsform)

GmbH UG AG Sole-

trader

GbR
Number of founders 1+ 1+ 1+ 1+ 2+
Share capital

(Stammkapital)

€25,000 €1+ per shareholder €50,000 Nil Nil
Liability

(Haftung)

limited liability limited liability limited liability unlimited liability unlimited liability
Registration

(Anmeldungen)

commercial &

trade

commercial &

trade

commercial &

trade

trade trade
(usually)

NB: ‘Registration’ refers to entry into the Handelsregister (Germany’s commercial register) and to the
Gewerbeanmeldung (trade registration).

 

Thinking that incorporation is right for your company? Check out our road map to get you there.

The information published on our site is all written and checked by experts with the utmost care. Nevertheless, we cannot guarantee its accuracy, as laws and regulations are subject to constant change. For this reason, always consult a professional expert in a specific case – we will be happy to put you in touch with them.

firma.de assumes no liability for damages caused by errors in the texts.

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