It is not for nothing that most entrepreneurs in Germany choose the GmbH as the legal form for their companies. Not only does it have a better public perception but it also has clear tax benefits. However, a GmbH’s organisational and financial costs are high, which means that this company form is not suitable for every business. In this article, firma.de takes a closer look at the GmbH structure, and whether it is the right choice for your business.
The German abbreviation “GmbH” is comparable to the English concept of a limited liability company (LLC). Due to reduced legal responsibility, especially with company assets, this is the most widespread 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 a natural or legal person, i.e. a registered association (eingetragener Verein) or a stock corporation (Aktiengesellschaft). 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 in registering 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 (German article) while their private assets remain untouched
- Opportunity to appoint a third-party 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 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 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, there can be some downsides to registering as this type of company. Below we explore possible disadvantages and obstacles entrepreneurs may face in establishing a 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 contributions in kind (Sacheinlagen).
- Additional taxation: GmbH must pay trade tax (Gewerbesteuer), which is often particularly problematic for asset managers and freelancers
- High standards of accountability: Thorough and publically available accounting is required, including an annual balance sheet. Also, if the Jahresabschluss of the company is not published in the electronic Bundesanzeiger, 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 bankruptcy (Insolvenz); 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 regards to corporate governance. Before taking on a GmbH, these points should be considered by future shareholders:
- High fees for entry in the commercial register (Handelsregister), higher fees for the use of contributions in kind
- Additional fees for changing or dismissing partners or directors, including the legal requirement to notify the Handelsregister
- The preparation of the written partnership agreement can be costly in terms of time and money
- A minimum capital of €25,000 share capital must be raised, and at least half of this must be available in the business account at the time of entry into the Handelsregister
- The necessary consultant, lawyer and tax adviser fees starts to add up
- Under some circumstances, it can be more difficult to get a bank loan for a limited liability company
- Restriction on one-person-GmbHs to create capital in the form of contributions in kind, which places a high financial burden on the individual
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 be overcome like the high-costs of share capital and consultancy payments, as well as 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) — a private 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). Furthermore, there is always the opportunity to convert into a GmbH later on if the necessary capital becomes available.
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. Therefore, always consult an expert in a specific case – we will be happy to put you in touch.
firma.de does not take over any liability for damages, which resulted from errors in the texts.