Legal Forms of Businesses

The following introduced legal structures are only the most important types for the potential readers of this book. Working alone you can only choose between two different legal forms: sole proprietorship and One-Person GmbH. You have the whole varieties of corporations and personal partnerships to work with partners. The following section will give a basic description of what each legal structure needs and implicates.

What forms of organizations are there in Germany to run a business in? At home we have, e.g. limiteds and joint-stock corporations.

In Germany, we also differentiate between personal companies and corporations with totally own legal personality. Personal companies are “Gesellschaft bürgerlichen Rechts (= BGB-Gesellschaft = GbR)”, “Kommanditgesellschaft (= KG)” and Partnerschaftsgesellschaften (= PartG). The most common corporation is the “Gesellschaft mit beschränkter Haftung (limited liability corporation). Each of these companies will be separately introduced below.
§

What kind of company is the right one for me?

That is not an easy question at all. It is impossible to give a one-time answer valid forever! As your business grows, so will your expectations to your company’s appearance/structure. To help you make up your mind answer the following questions. They will not make professional advice superfluous but help structure your ideas and so reduce costs when obtaining legal consultation.
§

Do you want to operate alone or with one or more partners?

If you start a company alone then you are automatically a sole-proprietor. This goes for company and tax law. But you can also found a one-man GmbH
§§

How much formality can you cope with during founding?

Depending on the legal form, the bureaucratic expenses will be different. No matter what legal form, you always will have to register at the competent offices. The least red tape to overcome will be as a sole-entrepreneur and the most as a GmbH.
§

How exclusive is your liability to be?

The advantage of corporations is that shareholders are usually not liable with their private fortune, so that only the company’s assets will generally have to hold for the company’s debts. Sole-businesspersons and partnerships always have to pay their debts with all their assets.
§

How high is your tax burden to be?

Depending on the profit size, each legal form offers different possibilities to save taxes. Forget it, if you believe that there is the one and only tax saving scheme. Consult your attorney or tax advisor on what will be the most profitable for you. Consider also that picking a corporation as legal form, taxes like wage tax for the Geschäftsführer or managing director will also come up.
§

Does the legal form match the peculiarities of your business?

The chosen form should always match your line of business. It differs in each line of business if the proprietor is to be held liable with his private property or not. A financial consultant might choose a GmbH while a group of translators might pick up a partnership company. LLC or Ltd are becoming common in Germany.
§

Which expenses can you and do you want to operate for your accounting?

Next to tax law, commercial law also decides on the requirements for bookkeeping. This decision heads to extreme differences. It is much easier to comply with the duty to keep records than bookkeeping for balance sheets.
§§

How much may your legal formation cost?

Costs for an attorney (to draft necessary contracts, rules, to discuss tax matters), a notary public (to certificate corporations’ statutes and announce publicly), registration fees can easily sum up to € 5,000 or more on top of necessary minimal capital of € 25,000.
§§

Are you willing to disclose your company’s data?

Corporations have the statutory duty to disclose their balance sheets to the public at the competent registry court. Some people are reluctant to comply because they will be giving information to their competitors.
§§

How much funding capital do you have?

The correct legal form is especially important if you need venture capitalists. Only corporations qualify for financial input from venture capitalists. Else, if the partners have different introducing capital a corporation might secure the correct shares in co-determination and in supervision.
§§

Overview of Business Structures and their (Dis)Advantages

Company category	Representative office	Sole proprietorship	Partnerships				Corporations
Legal form	Representative office	Sole proprietorship	GbR	OHG	KG	Partnership company	GmbH	(small) AG
Mainly suitable for	initiating business and maintaining contacts	small businesses and start-ups	freelance professions, small or new companies	medium-sized and large companies	medium-sized and large companies	partnerships of members of the freelance professions.	medium-sized and large companies	Larger companies (founders: initially only a small number of shareholders)
Advantages	very low costs	no involvement of other people required no minimum capital	very easy and possible no formalities no minimum capital	all partners have a high degree of participation no minimum capital	limiting of liability for individual partners possible	simplified exemption from liability; appropriate,more flexible company law; protected name no minimum capital no corporation tax	partners are not personally liable to third parties; Limitation of the liability of the company	capital widening easily possible via share issue; Liability only with the AG assets.
Minimum number of people	One	One	Two (partners)	Two (partners)	(Two) partners	(Two) partners	One (shareholder)	One (shareholder)
Minimum capital	None	None	None	None	None	None	1 or 10,000 euros	50,000 euros
Formal costs	Usually no costs Approval only necessary in individual cases	Low (registration fees)	Low (Articles of association not necessary, but advisable to clarify rights and obligations)	Articles of association (in writing) accounting obligations more strict than for GbR	Articles of association (in writing), stating level of capital contributions	Partnership contract in writing, with certain minimum content	Company Contract (certified by notary) Registration fees	Recording by notary of: statutes appointment of the first supervisory board statutory auditor.
Entry in commercial registry required?	No	Only required if the company is a business operation set up commercially, i.e. bigger size	No	Yes	Yes	Yes	Yes	Yes
Management of the business	By representatives	By the founder alone	all partners appointment of one/several managers, also by non-partners	all partners or appointment of one/several partners, company management also by non-partner	all personally liable partners or appointment of one/several general partners, company management also by non-partner	all partners carry out their professional services in accordance with the professional law that applies to them company management otherwise by agreement or as for the OHG	partners appoint one or more managers, company management also by non-partners	the supervisory board elected by the partners appoints the board of management, which manages the business.
Liability	None, as no business activity	unrestricted liability of the owner	unrestricted liability of all partners	unrestricted liability of all partners	unrestricted liability of all unlimited partners, limited partners only up to the level of their contribution	unrestricted liability of all partners however exemption from liability in the case of professional errors for which other partners are responsible	company assets liability of partners towards GmbH only to the level of their (open) investment	company assets (basic capital)
Partners	no partners, only representatives	Only physical person	physical person and/or legal entities	physical person and/or legal entities and partnerships	physical person and/or legal entities and partnerships	only physical persons who are members of the free-professional professions.	natural physical and/or legal entities	shareholders: physical persons and/or legal entities