The pros and cons of the GmbH: Weighing up the German limited liability company (LLC)

Take a closer look at the GmbH legal form to decide if it is the right choice for you.



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I can help you weigh up the pros and cons of the GmbH

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  • 10+ years experience

Hi, I’m Andreas, and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.


Starting your business as a GmbH

For most entrepreneurs in Germany, the GmbH is their legal form of choice. It not only has a better public perception but also clear tax benefits. However, GmbH’s organisational and financial costs are high, which means that this company form is not suitable for every endeavour.

The GmbH is comparable to a limited liability company (LLC). Due to reduced legal responsibility, especially with company assets, this is the most widespread legal form of registered companies in Germany. Find more general information on the GmbH in this article.

Limited liability is ideal for entrepreneurs who want to protect their private assets while projecting a public image of legitimacy to their customers and business partners. One or more founders can form a GmbH, as regulated by legislation known as the GmbHG.

The GmbHG allows the GmbH to have one or more shareholders that are natural persons or legal entities, i.e. an eingetragener Verein (registered association) or an AG (stock corporation). Managing directors are appointed by and must report to the shareholder or shareholder group.

There are also so-called Ein-Personen-GmbH (one-person-GmbH), in which the managing director acts simultaneously as the sole shareholder.

What’s in it for me?

The structure of a GmbH offers certain advantages and benefits to shareholders and managing directors. Here is a brief overview of the legal and practical value of registering a GmbH.

Other possibilities include converting your private residential property into a corporation as a tax optimisation strategy.


Asset protection and more: The legal advantages of a GmbH

Registering your business as a GmbH can have the following legal benefits:

  • Limited legal responsibility: Shareholders are liable solely with the assets of the company, while their private assets remain untouched
  • Opportunity to appoint an external manager (Fremdgeschäftsführer): Companies may appoint a managing director who is not a shareholder and therefore avoid diluting shares
  • Not restricted to German citizens: Foreigners may act as GmbH shareholders
  • Possibility to establish the company as a separate legal entity: The normally required deed of partnership (Gesellschaftsvertrag) is replaced by a certified unilateral declaration of intent (Willenserklärung), enabling it to act as an independent person and enter into contracts

Reputation and tax benefits: The practical advantages of the GmbH model

Aside from the legal positives, the GmbH structure can also offer practical benefits to shareholders. Not only does a company’s reputation benefit but there are also many financial privileges, including:

  • Tax benefits: Income is taxed on average between 23-33%, and MDs can declare their salaries and pensions as business expenses (Betriebsausgabe)
  • Stronger international reputation: The raising of capital and entry in the commercial register (Handelsregister). This is particularly advantageous for companies seeking a global platform
  • Published annual accounts (Jahresabschluss) in the electronic Federal Gazette (Bundesanzeiger): Potential partners gain an impression of the company because of the increased transparency that published
  • The public image of reliability and security: Forming a GmbH as your business’s legal form can create a competitive advantage for particular businesses like financial and insurance service providers
  • Greater flexibility in raising the company’s share capital (Stammkapital): Shareholders can make contributions in kind instead of cash share capital contributions, with the exception of one-person-GmbHs
  • Special tax deductions: Opportunity for GmbH managers to write off cars leased to the company as an operating expense so that a special agreement can be reached with the leasing company
  • Financial advantages from fuel tax deductions: Approximately 30 cents per kilometre when using personal vehicles for business-related travel. But the tax office expects that you always take the shortest route possible
  • Tax breaks for shareholders in family businesses: If a so-called “atypical silent partnership” (atypische stille Gesellschaft) is formed, the company will be treated like a partnership and will benefit from a tax allowance of €24,500

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How do I know if this is not for me?

As attractive as the GmbH’s legal and tax advantages are, registering as this type of company can have some downsides. Below, we explore possible disadvantages and obstacles entrepreneurs may face in establishing a GmbH.

Due diligence and negligence: The legal regulations of the GmbH

The GmbH is valued for its reliable reputation, but this does come at a price. The following are the main concerns to keep in mind:

  • Greater legal complexity: A formal, written agreement must be drafted, except in the case of a one-person-GmbH.
  • Higher start-up costs: A notary must legally certify all the formation documents, and you must pay for the privilege. Also, expert valuation reports must be commissioned and presented to the notary for Sacheinlagen (contributions in kind).
  • Additional taxation: GmbH must pay Gewerbesteuer (trade tax), which is often particularly problematic for asset managers and freelancers
  • High standards of accountability: Thorough and publicly available accounting is required, including an annual balance sheet. Also, if the Jahresabschluss (annual accounts) of the company is not published in the electronic Bundesanzeiger (federal gazette), the directors and their personal assets can be held liable
  • A supervisory board: If the GmbH employs 500 or more employees, a mandatory advisory board must be set up, and all financial expenses are then to be approved by this board
  • Some personal risk: Missing share capital contributions must be offset by private assets in the case of Insolvenz (bankruptcy); this becomes especially burdensome for one-person GmbHs


Bureaucratic and financial hurdles: The complicated GmbH formation process

In addition to potential legal issues, the practical disadvantages of the GmbH should also be taken into consideration.

A particular pressure point is the start-up phase, especially in regard to corporate governance. Before taking on a GmbH, these points should be considered by future shareholders:

Is the GmbH right for me?

Why should anyone choose to register his or her business as a GmbH? There is no straightforward answer to this question, as this type of company offers many advantages and disadvantages to both founders and shareholders. Essentially, forming a GmbH is ideal for anyone who can raise at least the minimum share capital and prioritises operating within an internationally recognisable company structure. The main advantage of a GmbH is the limited liability and the protection it offers its shareholders. Additionally, the financial benefits of the GmbH structure are not to be underestimated – the tax benefits afforded to businesses can be significant.

On the downside, there are many obstacles to overcome, like the high costs of share capital and consultancy payments and the many bureaucratic hoops that founders must jump through. For this reason, startups, especially those with low funds and little entrepreneurial experience, are advised against forming a GmbH.

The alternative choice is a Unternehmergesellschaft (UG) — an entrepreneurial company that also offers limited liability without the high startup costs associated with a GmbH. Similar in form to a GmbH, the minimum share requirement drops from €25,000 to one euro (however, the share capital can only be a cash deposit). Also, there is always the opportunity to convert into a GmbH later on if the necessary capital becomes available.

Want a road map of how to incorporate a UG or a GmbH in Germany? Check out our guide here. 


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Andreas Munck

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Got questions about setting up a business in Germany?

  • Startup expert
  • 10+ years experience

Hi, I’m Andreas, and I’ve been advising businesses in Germany for over a decade.

I’d be happy to call you and answer any questions you have in a one-on-one consultation.

Want to know more about the GmbH?

Our GmbH essential reading:

GmbH basics:

Master list:



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