Choosing the right legal form for your business

Choosing the right legal form

Germany’s location in the middle of Europe, its easy access to the rest of Europe and its well-developed economy attract many investors and those willing to start their own businesses there. Whether you are a German citizen or a foreigner, the German government is open to new investments. As a citizen of the European Union, you can benefit from various programs that will help you integrate into the German job market. In many cases it is also possible to obtain free counselling through state funding.

Before you get started, consider what legal forms you can choose from. Establishing a business in Germany you will consider the following: Einzelunternehmen, GbR, OHG, KG, GmbH, and AG

Einzelunternehmen

It is the most suitable form for individual workers to enter the market and become self-employed. Probably the least bureaucratic form with few formalities, when you choose Einzelunternehmen the right to make decisions will be exclusively yours, which gives you a lot of flexibility. The minimum capital is not required, which is usually connected with its small amount. On the one hand this is a positive aspect, considering the fact that you are just entering the market with a new business, taking small steps, one by one. When developing regularly, high capital is not necessary, nevertheless, sometimes its lack may hinder possible development, and sometimes such business will reach for personal assets. If the company grows quickly, it is likely to switch to another legal form.

 In short: suitable for first market entry, no minimum capital required, high flexibility, few formalities, full liability, no registration in Handelsregister.

Personengesellschaft GbR

Another convenient option for market entry, this time for a number of business partner owners. As in the case of Einzelunternehmen, a small number of formalities are required to establish a GbR. When setting up a Personengesellschaft with your partners it is advisable to sign agreements regulating how decisions will be made. In this form every member can decide on everything, which often results in internal disagreements. The liability of the company extends not only to its capital but also to the personal assets of each of its founders, so such a business can quickly collapse if one of your partners is financially inefficient and you have no power to control it even if you don’t have any problems yourself. In Germany some law firms or institutions offer templates for agreements on personal partnerships.

 In short: suitable for first market entry, no minimum capital required, high flexibility, few formalities, full liability, no registration in Handelsregister.

Offene Handelsgesellschaft

Here, more paperwork is required. Due to a large number of state regulations the OHG is well trusted by customers and banking institutions. Like the GbR, it is a kind of Personengesellschaft, however, the OHG is required to be registered in the Handelsregister. The sooner a GbR experiences large growth the sooner it is advisable to change its legal form to an OHG whilst all expenses and income should be documented. Nevertheless, a minimum capital is still not required and all partners share the full responsibility and potential risks. The OHG as a whole can be sued, and each partner is required to actively participate in the management of the business, unless otherwise specified in the business agreement.

 

 In short: no minimum capital required, high creditworthiness, high flexibility, a decent amount of formalities, entry in Handelsregister required, full liability.

 

Gesellschaft mit beschränkter Haftung (GmbH)

 It is by far the most common form of a company. There are three main bodies in a GmbH: company assembly, managing director and supervisory board. The managing director or Geschäftsführer is the only person entitled to represent the company. He or she has many duties, the non-fulfillment of which can lead to legal consequences. In this case we are dealing with a minimum capital of 25.000 Euro, with the obvious obligation to register in the Handelsregister. The limited liability of the company gives a dubious image when it comes to creditworthiness. So if you absolutely want to set up a limited liability company and need a start-up capital, you must use compelling arguments when talking to potential investors to convince them of your product. GmbH shares cannot be listed on stock exchanges, but they can be transferred by means of specially drawn up notarial documents.

 

In short: minimum capital of 25,000 Euros, limited liability, partners must conclude an agreement, company represented by a managing director, poor creditworthiness, a lot of flexibility, a great amount paperwork, registration in Handelsregister required.

Kommanditgesellschaft KG

In KG the partnership allows one party to limit its liability. It is divided into two types of partners: 1) Der Komplementär, who runs and represents the company with full liability, also with personal assets, and 2) Der Kommandist, with limited liability, i.e. only capital in the company, has only informative rights and is excluded from running the company. It is therefore a suitable legal form for Einzelunternehmer who want to develop their business but for some reason OHG does not suit them, e.g. they do not want to share the position of director. The KG partnership has to be registered in the Handelsregister.

 

In short: minimum capital not required, high creditworthiness, high flexibility, lots of formalities, registration in Handelsregister required, liability partially full, partially limited.

Aktiengesellschaft AG

AG is most suitable for companies with high capital needs. The minimum capital you need to set up an Aktiengesellschaft is 50,000. An AG is subject to the Stock Corporation Law as a corporation with a capital divided into shares. Another requirement is to have a minimum number of members, i.e. 5, and to be registered in the Handelsregister. The partners of an AG are required to form a contract. An efficient management board (Vorstand) has the decision making rights for running the company. The Vorstand is appointed by the supervisory board (Aufsichtrat) and is therefore accountable to it. AG meetings function, meaning that the company’s shareholders have control over company policy. An AG is not suited for a first market entry and the formalities are multiple times larger and more demanding than those for setting up a GmbH. Usually an AG is a transformation of an already existing GmbH.

 

 

In short: minimum capital of 50,000 Euros, limited liability, partners must conclude a contract, company represented by Vorstand, demanding and large amount of paperwork, suitable for companies with large capital needs, registration in Handelsregister required.

Important facilities in Germany

If you want to start a business in Germany you need to be famliar with certain facilities:

Gewerbeamt – the central office for salespeople, where you report everything that happens in your company.

 

Gewerbeaufsichtamt – is a supervisory authority that monitors legal norms. It monitors compliance with health and safety regulations as well as product safety, imposes sanctions and issues permits.

 

Industrie und Handelskammer – the association of trading businesses. As soon as you start your company, you are automatically registered as a member. Not applicable for freelancers.

 

Arbeitsamt – this is where you can apply for your Betriebsnummer, which you will need if you employ at least one person or if you take over an existing business. This is also the place for foreigners to apply for a work permit.

 

Sozialversicherungstrager – regardless of how much you earn, every employee should have health as well as unemployment insurance.

 

Finanzamt – here you can take care of everything related to taxes.

 

Once you’ve decided on a legal form and chosen a unique company name, it’s time to prepare contracts, fill out applications and deposit the required capital into a bank account. Once you are approved and receive your certificate of incorporation, register your business for tax and insurance purposes. If you need help, there are many consulting companies available to help you take your first steps in the market, as well as prepare a good business plan to continue growing your company. Programmes offered by the Federal Republic of Germany can help with the financing of consultancy costs. If you are an EU citizen, you have the same rights to funding as a German citizen.

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