What legal form is right for me? An overview of the business structures in Germany

What kind of legal form (Rechtsform) is right for my business? This is a very question because how you legally structure your business will affect your personal liability and what taxes you have to pay.

If your visa doesn’t put any restrictions on you then the nature of your business determines what kind of legal form is best for your business. For example, if limited liability is a non-negotiable then incorporating a company is your only option. If you have ambitions of a big exit then a holding structure is the way to go (best to get legal/tax advice before making any life altering decisions).

1. The Ultimate Guide to Starting a Business in Germany
   

   This article is part of firma.de’s resource that gives you everything you could hope for.

   Chapter 1: Business visas, residence & work permits
   Chapter 2: Business legal forms in Germany<<<
   Chapter 3: Preparing to start a business
   Chapter 4: Forming a business in Germany
   Chapter 5: Post formation

Contents

• Questions to help guide your decision
• Types of Rechtsform (legal forms) in Germany
• Need more guidance?

 

 

Questions to help guide your decision

What legal form you select for your business should be guided by some key decisions that reveal the conditions in which you’re starting your business:

• How many founders will there be?
• Does the nature of my business mandate the limitation of liability?
• How much starting capital do I have?
• What do I want to call my company?
• What is my budget for setting up costs?
• When do I have start my business?
• What are the best tax strategy for the profits I expect to make?
• What kind of accounting obligations can I take on?
• How much control do I want over my business?
• Will there be investors involved?
• Do I want to start a non-profit business?

As you learn more about the different legal forms, it’ll become clear how the answers to these questions directly impact which legal form is right for your business. To help you make this big decision we’ve put together this guide for you. 

Types of Rechtsform (legal forms) in Germany

The main legal forms in Germany are listed below. Click on the link to get a short intro to for each type of business structure. If you want to go deeper then we’ve got articles that give in-depth definitions and explore the pros and cons of each legal form.

Major Rechtsform (legal forms) for businesses in Germany:

• Gesellschaft mit beschränkter Haftung (GmbH)
• Unternehmergesellschaft (haftungsbeschränkt) (UG)
• Aktiengesellschaft (AG)
• Einzelunternehmen (sole proprietorship)
• Gesellschaft bürgerlichen Rechts (GbR)
• gemeinnützige Gesellschaft mit beschränkter Haftung (gGmbH)

 

Not a legal form but a corporate structure

• Holding (holding company/structure)

Less common legal forms for businesses in Germany:

• GmbH & Co. KG
• Eingetragene Kaufmann als Einzelunternehmen (e. K.)
• Offene Handelsgesellschaft (OHG)
• Partnerschaftsgesellschaft (PartnG)

 

Is the GmbH right for me?

The legal form for entrepreneurs with no private liability (usually) and a better public image.

At a glance

• For entrepreneurs who want to limit their business liability
• Can offer founders significant tax advantages
• Formation formalities and bookkeeping are somewhat more time-consuming
• Simpler formation formalities possible for standard formations due to Musterprotokoll (the standardised formation protocol)
• Managing director: shareholder or “third-party” managing director
• The company is liable with all its assets
• The liability of the partners in the event of liability claims against the company is limited to their capital contribution
• Capital contribution (at least €25,000 in total)
• In the case of loans, partners are usually liable with additional private collateral.

What is the GmbH?

Here is a selection of articles to get to know the GmbH better so you can make an informed decision:

• What is a GmbH? Everything you need to know about the limited liability company in Germany
• What is the difference between the AG and the GmbH?
• Should you set up a GmbH or a UG? We lead you through the German LLC maze!

Pros and cons

After you’re on familiar terms with Germany’s limited liability company, it’s time to weigh things up:

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

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Is the UG right for me?

Te entrepreneurial GmbH variant entrepreneurial company that boasts lower share capital than its sister limited liability legal forms (GmbH or the AG).

At a glance

• For founders of small businesses who want to limit liability
• Simplified formation if you use the Musterprotokoll (model protocol)
• Liability of the shareholders is limited to their capital contribution (at least one euro in total)
• The company is liable with all its assets, but is limited to these assets.
• If the company takes out a loan then shareholders usually usually guarantee the amount of the loan with additional private collateral

What is the UG?

• What is the UG (haftungsbeschränkt)? Everything you need to know about the entrepreneurial limited liability company in Germany

Pros and cons

• The pros and cons of the UG (haftungsbeschränkt): Weighing up the entrepreneurial company in Germany

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Is the Holding right for me?

The Holding (holding company or holding structure) is not actually a legal form but still worth a special mention because it offers an attractive way to structure a business for many entrepreneurs in Germany.

At a glance

• Not a legal form but a corporate structure.
• The organisation has several companies that are structured independently and hierarchically.
• Has two levels, namely the parent company on the one hand and the legally independent subsidiaries on the other.
• A parent company manage, finances and administer its subsidiaries according to its equity holdings.
• Can be an attractive tax optimisation strategy for entrepreneurs.

What is a the Holding in Germany?

• What is a Holding? Everything you need to know about holding structures in Germany

Pros and cons

• The pros and cons of the Holding: Weighing up holding structures in Germany

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Is the AG right for me?

The alternative to the GmbH. The AG is Germany’s Mittelständler (SMEs) “heavy-weight” limited liability company .

At a glance

• For entrepreneurs who want to keep their options open for additional equity capital
• Entrepreneurs can involve further investors, for example, by issuing shares to staff or taking in customers as shareholders
• Entrepreneur can be sole shareholder and board member
• Decision-making power limited by a Aufsichtsrat (supervisory board)

What is the AG?

• What is an Aktiengesellschaft (AG)? Everything you need to know about the stock company in Germany
• What is a “kleine AG”? Everything you need to know about the stock company without a listing in Germany

Pros and cons

• The pros and cons of the AG: Weighing up the stock company in Germany

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Is the Einzelunternehmen (sole proprietorship) right for me?

As a sole proprietor/trader in Germany you get full control, but also full liability.

At a glance

• Well-suited for newbie business people
• Automatically comes into existence when business is opened
• Only one owner, no conflicts with partners
• No minimum capital
• Full liability with private assets

What is the Einzelunternehmen

• What is an Einzelunternehmen? Everything you need to know about the sole proprietorship in Germany

Pros and cons

• The pros and cons of the Einzelunternehmen (sole proprietorship): Is it better than other legal forms in Germany?

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Is the GbR right for me?

Simple union of partners in a business structure.

At a glance

• Suitable for any business partnership (small business, liberal professions, joint venture)
• Great freedom possible for partners
• No official formalities, but a written contract is useful
• No minimum capital
• Partners are liable with company assets and private assets

What is the GbR?

• What is the GbR? Everything you need to know about the civil law partnership in Germany

Pros and cons

• The pros and cons of the GbR: Weighing up the civil law partnership in Germany

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Is the gGmbH right for me?

The legal form exclusively for non-profit enterprises.

At a glance

• Has all the classic GmbH plus benefits from attractive tax advantages.
• Just like the GmbH, a smaller version – the gUG (haftungsbeschränkt) that can be formed with with as little as €1- share capital – is also an option.

What is the gGmbH?

• gGmbH: What is the German non-profit limited liability company?

Pros and cons

• The pros and cons of the gGmbH: Weighing up the non-profit limited liability company in Germany

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Need more guidance?

Then read this: How to choose the right legal form for your business in Germany

The Master list of all Company Formation articles can be found here.