The gGmbH is the company type engineered for social entrepreneurship in Germany. Attractive tax advantages and professional structures make it the perfect legal form for charitable or non-profit organisations.
However, many entrepreneurs wonder what happens to the profits that the company may generate. The gGmbH is not allowed to set aside or distribute profits because all of it must fund the purpose (Zweck) defined in the articles of association (Satzung).
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- Advantages of the gGmbH
- Disadvantages of the gGmbH
Our gGmbH essential reading:
2. The pros and cons of the gGmbH: Weighing up the non-profit limited liability company in Germany <<<
The gGmbH offers several advantages over other legal forms, including the e.V. (eingetragene Verein or registered association). The liability of the gGmbH is limited to the assets of the company. The non-profit purpose of the company is immediately recognisable to consumers and business partners by the name, as the non-profit GmbH is allowed to bear the legal form suffix “gGmbH”. In practice, this leads to the marketplace placing higher trust in the company.
The biggest advantage of the gGmbH over other legal forms is the tax savings it enjoys. The gGmbH is exempt from corporation and trade tax as well as the solidarity surcharge. Plus, the conditional issuing of invoices with no or reduced VAT is a possibility.
The gGmbH may also be exempt from inheritance or gift tax in the case of donations from gifts or inheritances.
Finally, real estate used for a gGmbH’s charitable purpose can also be real estate tax-free.
The non-profit corporation is also entitled to receive donations and issue tax-effective donation receipts to the donor. This allows other market participants, consumers and entrepreneurs to transfer monetary donations to the gGmbH and thereby reduce their taxes. This makes it attractive for businesses and consumers to transfer monetary donations to the gGmbH.
The German government grants non-profit organisations many privileges for their operations, such as the discounted use of public resources or providing staff for events or consulting.
Social entrepreneurs can choose between the e.V. (registered association) and the gGmbH.
Compared to the association, the gGmbH offers professional structures and allows quick and uncomplicated decision-making processes. The gGmbH is an option to restructure associations and foundations and is also a recognised legal form for so-called “non-profit organisations”.
The regulations of the GmbH under company law are applicable to the gGmbH. For one, liability is limited to the assets of the company.
This also applies to the formation of a gGmbH. In contrast to the gUG, the gGmbH can also be founded through so-called “contributions in kind”, for example, by contributing land or property to the company instead of money.
In contrast to the e.V. (registered association), the company can set up with just one shareholder. In this context, this is effectively a “one-person GmbH”, in which the shareholder is also the managing director. This type of partner can work as an employee in their own company and a change of partners is possible at any time without complications. External persons can also work for the company and even take over the management.
The minimum capital for the formation of a non-profit GmbH is €25,000, just as for the formation of a GmbH, at least half of which, i.e. €12,500, must be paid in at the time of formation. As with the GmbH, the gGmbH is a legal entity that owns its assets outright.
The formation process is formal and requires notarisation. Founders must enter the gGmbH into the Handelsregister (commercial register). Anyone who runs a gGmbH must be familiar with the regulations governing limited liability companies: Bookkeeping and accounting are on the agenda.
The disadvantages often lie in the formation process. Likewise, the administration of the company is more costly.
As a founder of a gGmbH, you have to pin down a non-profit and altruistic “purpose” so it’s acceptable to the Finanzamt (tax office). This is not easily changeable. Any changes to the company’s purpose require approval from the tax authorities.
As the gGmbH is a charitable organisation, there are strict rules around using its capital. Management can only use the funds of the gGmbH for the purposes set out in the articles of association, this includes any capital reserves. And, of course, any profit don’t go to its shareholders.