Overview of German legal forms for your business formation
1. Choosing the right legal form
Germany's location in Central Europe, easy access to other European countries, and its well-developed economy attract many investors and founders. Whether you are a German citizen or a foreign national, the German government is open to new investments. As a citizen of the European Union, you can benefit from various programs that help you integrate into the German labor market. In many cases, it is also possible to take advantage of free consulting services through government funding.
Before you start, you should be clear about which legal forms are available. When founding a company in Germany, you can choose from the following legal forms, among others: sole proprietorship, GbR, OHG, KG, GmbH, and AG.
Sole proprietorship
This legal form is best suited for sole proprietors who want to enter the market and become self-employed. It is probably the least bureaucratic form, with few formalities. If you decide on a sole proprietorship, the right of decision lies exclusively with you, which provides a great deal of flexibility. No minimum capital is required, which is often related to the small scale of the business. On the one hand, this is a positive aspect, since you are just entering the market with a new business and taking small steps one after another. With regular growth, high capital is not strictly necessary. However, a lack of capital can sometimes make further development difficult, and personal assets are sometimes drawn upon in such a business. If the company grows quickly, it is likely advisable to switch to a different legal form.
In short: Suitable for market entry, no minimum capital required, high flexibility, few formalities, full liability, no entry in the commercial register necessary.
GbR civil-law partnership
Another suitable option for market entry, this time for multiple managing partners. As with the sole proprietorship, only a few formalities are required to form a GbR. When setting up a partnership with your partners, it is advisable to conclude contracts that govern how decisions are made. In this form, every member can decide on everything, which often leads to internal disagreements. The liability of the company extends not only to the company's capital but also to the personal assets of each founder. This means that such a business can fail quickly if one of your partners is financially inefficient and you have no way of monitoring this, even if you yourself have no financial problems. In Germany, some law firms or institutions offer contract templates for partnerships.
In short: Suitable for market entry, no minimum capital required, high flexibility, few formalities, full liability, no entry in the commercial register necessary.
General partnership (OHG)
More paperwork is required here. Due to a multitude of government regulations, the OHG enjoys great confidence among customers and banks. Like the GbR, the OHG is also a type of partnership; however, registration in the commercial register is mandatory. The sooner a GbR experiences strong growth, the sooner it is advisable to change its legal form to an OHG, whereby all expenses and income must be documented. However, no minimum capital is still required, and all partners bear full responsibility and the potential risks. The OHG as a whole can be sued, and each partner is obliged to actively participate in management unless otherwise stipulated in the partnership agreement.
In short: No minimum capital required, high creditworthiness, high flexibility, some formalities, entry in the commercial register required, full liability.
Limited liability company (GmbH)
The GmbH is by far the most common type of company. In a GmbH, there are three main bodies: the shareholders' meeting, the managing director, and the supervisory board. The managing director is the only person authorized to represent the company. They have numerous duties, the non-fulfillment of which can result in legal consequences. For this legal form, a minimum capital of 25,000 euros is required, combined with mandatory entry in the commercial register. The limited liability of the company can have a negative impact on creditworthiness. If you absolutely want to start a GmbH and need start-up capital, you must present convincing arguments in discussions with potential investors to persuade them of your product. GmbH shares cannot be traded on the stock exchange, but they can be transferred using specially drafted notarial documents.
In short: Minimum capital of 25,000 euros, limited liability, shareholders must conclude a contract, the company is represented by the managing director, low creditworthiness, high flexibility, extensive paperwork, entry in the commercial register required.
Limited partnership (KG)
In a KG partnership, one party can limit its liability. There are two types of partners: 1) The general partner, who runs the company and is liable without restriction, including with their personal assets, and 2) The limited partner, who is liable only on a limited basis, i.e., only with their capital in the company, has only information rights, and is excluded from management. The KG is therefore a suitable legal form for sole proprietors who want to expand their business but for whom the OHG is not an option for certain reasons, e.g., because they do not want to share the position of managing director. The KG partnership must be entered in the commercial register.
In short: No minimum capital required, high creditworthiness, high flexibility, many formalities, entry in the commercial register required, liability partly full, partly limited.
Stock corporation (AG)
The AG is best suited for companies with high capital requirements. The minimum capital for establishing a stock corporation is 50,000 euros. An AG is subject to the German Stock Corporation Act and is a corporation with capital divided into shares. Another requirement is a minimum number of five members and entry in the commercial register. The partners of an AG must conclude a contract. The management board, the central decision-making body, runs the company. It is appointed by the supervisory board and is accountable to it. AG meetings give shareholders the opportunity to influence company policy. An AG is unsuitable for initial market entry, and the formalities are considerably more extensive and demanding than when founding a GmbH. Often, an AG is created through the conversion of an already existing GmbH.
In short: Minimum capital of 50,000 euros, limited liability, partners must conclude a contract, the company is represented by the management board, extensive and demanding paperwork, suitable for companies with high capital requirements, entry in the commercial register required.
| Legal form | Minimum capital | Liability | Partners/founders | Suitable for | Advantages | Disadvantages |
|---|---|---|---|---|---|---|
| Sole proprietorship | No minimum capital | Unlimited, with personal assets | 1 person | Sole proprietors, self-employed | Easy to set up, no special formalities | Unlimited liability, high personal risk |
| Civil law partnership (GbR) | No minimum capital | Unlimited, with personal assets | At least 2 persons | Small businesses, projects | Easy to set up, flexible organization | Partners liable with personal assets |
| General partnership (OHG) | No minimum capital | Unlimited, with personal assets | At least 2 persons | Trading companies | Strong creditworthiness, simple tax structure | All partners liable, personal risk |
| Limited partnership (KG) | No minimum capital | General partner: unlimited; limited partner: up to contribution | At least 2 persons (general and limited partner) | Family businesses, investor models | Shared liability, easier capital raising via limited partners | Unlimited liability of general partner |
| Limited liability company (GmbH) | €25,000 (of which €12,500 at formation) | Limited to company assets | At least 1 person | Small to medium-sized businesses | Limited liability, high flexibility | Complex formation, accounting obligation |
| Entrepreneurial company (UG, limited liability) | From €1 | Limited to company assets | At least 1 person | Start-ups, small businesses | Low founding capital, limited liability | Mandatory reserves until €25,000, limited creditworthiness |
| Stock corporation (AG) | €50,000 | Limited to company assets | At least 1 person | Large companies, IPO | Capital raising via shares, limited liability | High administrative burden, strict regulations |
| Partnership limited by shares (KGaA) | €50,000 | General partner: unlimited; shareholders: up to contribution | At least 2 persons (general partner and shareholders) | Large companies, family-led models | Mix of liability types, capital raising via shares | Unlimited liability of general partner, complex structure |
| Professional partnership (PartG) | No minimum capital | Unlimited, but restricted to partner's own activity | At least 2 liberal professionals | Liberal professions (doctors, lawyers) | Liability limited to individual professional activity | Personal liability, only for liberal professionals |
| Registered cooperative (eG) | No minimum capital | Typically no personal liability of members | At least 3 persons | Cooperations, housing projects | Member benefits, joint organization | Administrative burden, limited flexibility |
2. Important institutions in Germany
If you want to start a business in Germany, you should be familiar with certain institutions:
- Trade office (Gewerbeamt) – the central office for business owners where you register all changes in your company.
- Trade supervisory office (Gewerbeaufsichtsamt) – a supervisory authority that monitors compliance with legal regulations. It ensures occupational health, safety and product safety, imposes sanctions and grants permits.
- Chamber of Industry and Commerce (IHK) – the association of commercial businesses. As soon as you start your company, you automatically become a member. For freelancers, however, this is not required.
- Employment Agency (Arbeitsamt) – here you can apply for your company number, which you need if you employ at least one person or take over an existing business. Foreigners can also apply for a work permit here.
- Social security providers – regardless of income, every employee should have health and unemployment insurance.
- Tax office (Finanzamt) – here you handle everything related to taxes.
Once you have decided on a legal form and chosen a unique company name, it is time to prepare contracts, fill out applications and deposit the required capital into a bank account. After approval and receipt of your certificate of incorporation, you register your business for tax and insurance purposes. If you need support, numerous consulting firms are available to help you with your first steps in the market and to draw up a solid business plan to grow the company further. Programs of the Federal Republic of Germany can help finance consulting costs. As an EU citizen, you have the same funding rights as German citizens.
