Legal form in Germany

Choosing the appropriate legal form is one of the most crucial steps entrepreneurs should take before setting up their business in Germany. Establishing any company in Germany requires defining a legal form. The legal form of a company defines the legal framework of the activity, the ownership structures, and the distribution of liability and risk in the company. In the article from Wise Business Group, we will explain the types of legal forms in Germany.

What is the appropriate legal form for your business in Germany?

Before any action regarding choosing the legal form, you should know that there is a fundamental difference between the legal forms for setting up a company in Germany. Generally, legal forms are divided into three categories:

• Corporations like GmbH, UG, AG and Ltd.
• Partnerships like GbR, OHG, and KG.
• Sole proprietorships like sole traders, freelancers, and small business owners.

According to reports and findings from the Federal Statistical Office, founders in Germany continue to favor the GmbH legal form to start a business. However, other legal forms have their advantages as well.

Important questions when choosing a legal form in Germany

Since there are many legal forms in Germany, it is necessary to answer the following questions before choosing the legal form and starting your business:

• Do you want to establish your own company alone or as a team with several partners?
• Is the purpose of your activity to make a profit?
• Are you ready to accept the liability with your private assets?
• Can you pay the required share capital?
• Do you plan to be self-employed long-term, or first should try something?
• How much time and money you have available to start a business?
• Are you planning to operate independently, or, for example, are you ready to add investors to your business as shareholders?
• Do you want to act freely in choosing your company name?

The most common legal forms for establishing a company in Germany

After answering the above questions, you can choose the appropriate legal form for establishing your company. Here, we will look at the advantages and disadvantages of the most common legal forms for starting a business in Germany. You can also use mixed legal forms to register your company.

As mentioned earlier, the three general categories for legal forms in Germany are:

Corporations, Partnerships, and Sole Proprietorships.

In the following, we will explain in detail about these three categories and the types of legal forms that belong to them.

Corporations in Germany

You can choose the following legal forms when setting up your business as a corporation in Germany:

1. Limited Liability Company (GmbH)
2. Company with limited liability and limited partnership (GmbH & Co. KG)
3. Entrepreneurial Company (UG)
4. Public joint stock company (AG)
5. Private limited company based on shares (Ltd.)

Limited liability company (GmbH) in Germany

The limited liability company or GmbH is Germany’s popular legal form. Founders must deposit their share capital into a business account before starting with the legal form of GmbH.

Advantages of the GmbH legal form in Germany

• In this legal form, there is no liability with the private assets of the shareholders. They are only liable with their business assets.
• Forming a GmbH is also possible as an individual. Also, it is possible to choose the CEO from among the shareholders.
• This legal form can have many advantages when selling and inheriting. 
• It is possible to make personal transactions in this legal form. For example, we can mention the purchase of shares in other companies.

Disadvantages of the GmbH legal form in Germany

• The share capital required to establish this company is 25,000 euros. It is necessary to deposit this amount or at least half of it, i.e., 12,500 euros, as share capital before establishment.
• By choosing this legal form, the notary will require you to draw up a partnership agreement. In addition, you must register any change in a notary and pay for it.
• Full accounting, bookkeeping, and annual financial statement filing requirements can be costly. It is also necessary to consider the balance sheet.
• If you want to dissolve a GmbH company, there will be a complicated process.
• Entry into the commercial register is required for the legal form GmbH in Germany.

Setting up a legal form GmbH in Germany

To set up a GmbH in Germany, you must do the following:

1. Setting up the partnership agreement

First, you need to draw up a partnership agreement. It is necessary to specify the business purpose and the role of each shareholder, if there are several, in this contract. It is best to ask a lawyer to review the contract you have drawn up. If the number of founders of your GmbH in Germany is a maximum of three people and you do not plan to add more shareholders soon, you can use a so-called model protocol.

2. Confirmation of partnership agreement by a notary office

The GmbH partnership agreement must be certified by a notary office in Germany. For this, you have to pay at least 300 euros. After notarization, registration, and approval of the partnership agreement, your GmbH is “in establishment” and is legally allowed to do business.

3. Depositing the company’s share capital to a business account

Deposit the company’s share capital to a business account at this step. Provide the bank with a shareholder agreement already approved by a notary office to open a business account for your GmbH in Germany. Also, all shareholders must be present in person to sign.

A minimum share capital of € 12,500 is required for a GmbH in Germany. Each shareholder usually pays a part of this amount according to the amount of their shares in the company.

4. Entering the commercial register

After the payment of the share capital, you must provide proof of payment to the notary office. Then, the notary can transfer the GmbH registration to the local court and take the necessary steps to enter the commercial register in Germany.

Tip: The setting up process and activating a business account in some banks in Germany can take several weeks. Therefore, you should consider enough time for this step before starting your business. In addition, it may take several weeks to enter the commercial register.

5. Obtaining a tax number

Immediately after entering the commercial register, the tax office will contact you and send you a tax registration questionnaire. Complete this questionnaire with a tax consultant because its information is very influential, and you cannot explain that alone. Then, to receive a tax number, return this questionnaire to the tax office with the excerpt from the commercial register and other documents, if needed. The tax number is crucial in Germany. Without it, you cannot, for example, write an invoice.

6. Registering the business in the local trade office

Now is the time to register your business in Germany at the local trade office. In some cases, you can also do this online. Then, other institutions such as the Chamber of Commerce and Industry (IHK), the Chamber of Crafts (HWK), or professional associations will automatically be notified of your business registration at the Trade Office.

If you have any questions or doubts about registering and setting up a GmbH in Germany, you can contact us via email or WhatsApp. Our consultants will answer your questions in this regard as soon as possible.

Company with limited liability and limited partnership (GmbH & Co. KG) in Germany

A limited liability and limited partnership company (GmbH & Co. KG) is a particular form of a limited partnership (KG). Therefore, it is a type of partnership. However, unlike a typical KG in Germany, the general partner in this legal form is not a person but a GmbH.

Advantages of the legal form GmbH & Co. KG in Germany

• It has a foreign third-party body of partnership.
• In this legal form, the GmbH is placed as a partner liable with private assets. Therefore, the liability of the GmbH shareholders is limited to their capital share in the general partner (GmbH) or limited partner (KG). 

Disadvantages of the legal form GmbH & Co. KG in Germany

• This legal form requires a great effort to manage accounting affairs because both KG and GmbH companies in Germany have to keep books and accounts. However, you can significantly reduce the accounting efforts by designing effective accounting methods.
• From the bank’s point of view, the legal form GmbH & Co. KG has little collateral. Hence, it has limited validity.

Entrepreneurial company (UG) in Germany

The legal form of the Entrepreneurial Company (UG) in Germany is also colloquially known as the mini-GmbH. Founders who intend to choose a GmbH legal form for their business in Germany but are unable or unwilling to pay the initial capital of € 25,000 start their activity by establishing a UG company.

Advantages of the UG legal form in Germany

• The share capital required to start this company is only one euro.
• Establishing a company with the UG legal form is also possible individually. Any of your partners in this company can take on the CEO role.
• If you save capital of €25,000 from the company’s profits, you can convert it into share capital and change the legal form of UG to GmbH. However, this change does not occur automatically.
• Except as otherwise noted, shareholders in a UG are not liable with their private assets.

Disadvantages of the UG legal form in Germany

• The profit from the company’s activity may not be distributed immediately. At least 25% of the annual surplus (deducting losses carried forward, if any) should be retained in the company as equity reserves. Therefore, the shareholders must create a legal reserve.
• There are requirements from the notary office to prepare the partnership agreement. So, you must register all changes in a notarized form and pay the corresponding fees.
• This legal form is known as a mini-GmbH. Therefore, it is a company that is being established. Consequently, it still has little credit with banks and suppliers.

Setting up a legal form UG in Germany

To set up a UG company in Germany, you must do the following:

1. Setting up the shareholders’ agreement

First, you need to set up the shareholders’ agreement. To prepare this agreement, you can also use the templates available on the web. However, we recommend that you have a lawyer review the final version of your agreement. It is especially essential when several partners are involved in starting the company from the beginning. If there is only one founder to establish your UG (Limited Liability) company in Germany, you can use the so-called model protocol.

2. Approval of the shareholders’ agreement by the notary office

At this point, a notary office in Germany must approve the agreement you have drawn up. The notary fees are at least 300 euros. Your UG company is incorporated after setting the notary appointment and approving the shareholders’ agreement. However, until you officially enter the name of the shareholders of the company in the commercial register, they will continue to be liable with their private assets.

3. Depositing the company’s share capital to a business account

Another step to establishing a UG in Germany is depositing the company’s share capital into a business account. To open a business account for a UG (Limited Liability), you must submit a notarized partnership agreement to the bank. Also, all shareholders must be present to sign.

4. Entering the commercial register

After paying the share capital, the notary can transfer the registration of a UG (limited liability) company to the local court and take the necessary steps to enter the commercial register in Germany.

Tip: When planning to set up a company in Germany, it is necessary to allow several weeks to open a business account and enter the commercial register.

5. Registering the business in the local trade office

At this stage, you need to go to the local trade office in Germany and complete the form for obtaining a business license. Then, other institutions such as the Chamber of Commerce and Industry (IHK), the Chamber of Crafts (HWK), and the relevant professional associations will automatically be notified of your business registration.

6. Obtaining a tax number

The last step in setting up a UG company in Germany is to go to the tax office. By visiting this office, you must complete your tax registration and receive a tax number for your UG (limited liability) company.

Our team can also help you successfully and optimally go through the process of setting up your business in Germany. Just contact us. We will accompany you in matters such as opening a business account, entering the commercial register, obtaining a business license, and doing tax affairs in Germany.

Public joint stock company (AG) in Germany

Large companies with a charter capital of 50,000 euros often use the legal form of a public joint stock company (AG) in Germany. Therefore, it is not a good option for business founders.

Advantages of the AG legal form in Germany

• By dividing the share capital into single shares, it is also possible to participate in this company in small amounts.
• AG’s legal form has limited financial risk when issuing shares. At the same time, it provides a promising opportunity to increase equity.
• Liability in this legal form is limited to the company’s assets.
• Since the existence of this company is independent of its owners, it can exist for a long time.
• Access to the stock exchange is possible for this legal form.
• By choosing it, family businesses can ensure a lasting influence through equity capital.

Disadvantages of the AG legal form in Germany

• Planning, financing, establishing, and organizing this legal form is difficult.
• The minimum capital required to start this company is 50,000 euros.
• At least three founders are required for its establishment.
• It has a high legal content, and therefore, the scope of entrepreneurship is too limited.

Private limited company based on shares (Ltd.)

A private limited company based on shares (Ltd.) is a legal form commonly used in Great Britain. Many territories and states that were part of the British Commonwealth of Nations still select this legal form to set up their business in Germany. A limited liability company (Ltd.) is one of the most common corporate forms worldwide. To use Ltd, you must first register a business in Germany and enter its second branch in the commercial register.

Advantages of the Ltd legal form in Germany

• The shareholders and managing directors of this company have limited liability. This legal form is comparable to a GmbH in Germany.
• Establishing such a company is possible within a few days.
• The minimum share capital required to establish this company is too low. Having only one share with any nominal value and the currency type is enough.

Disadvantages of the Ltd legal form in Germany

• This legal form incurs some administrative costs due to the registered office in England.
• When using English law, obtaining legal advice for the company can be costly.
• You must use English and German laws to set up and manage it. If a limited liability company (Ltd.) is based in Germany, it should generally use German laws in its foreign relations and English laws in its internal relations.

Partnerships in Germany

When setting up your business as a partnership in Germany, you can choose from the following legal forms:

1. Civil Law Partnership (GbR)
2. General partnership (OHG)
3. Limited partnership (KG)

Civil law partnership (GbR) in Germany

Civil law partnership (GbR) is Germany’s third most popular legal form. Usually, merchants and freelancers choose the GbR legal form for their business. A GbR is automatically formed whenever there are two or more partners to set up a business in Germany.

Advantages of the GbR legal form in Germany

• It has a simple setup process and does not require particular formalities.
• Its setup cost is few.
• A verbal agreement between GbR business partners is sufficient. However, we recommend that you draw up a written agreement.
• No minimum capital is required for establishing this legal form.
• GbR partners, as shareholders liable with their private assets for the company’s debts, have high recognition from, for example, the banks.

Disadvantages of the GbR legal form in Germany

• This legal form is not suitable for projects that have commercial purposes and operate exclusively in the commercial sector. If a GbR company with commercial activity expands beyond a specific limit, it will automatically become an OHG.
• Liability of all shareholders in this legal form is personal and unlimited. Therefore, there is a possibility of using their corporate and private assets. Any deviation from the regulations must also be recorded in the contract.
• It is impossible to enter the commercial register for this legal form.
• Only small businesses with an annual turnover of less than € 250,000 can use the GbR legal form.

Establishing a company with the legal form GbR in Germany

To establish a civil law partnership (GbR) in Germany, unlike the legal forms UG or GmbH (Limited Liability), at least two natural or legal persons are required. In other words, using the GbR legal form is impossible for sole founders or aspiring entrepreneurs.

Many freelancers in Germany, such as designers, photographers, and lawyers, choose GbR as their legal form if they want to join forces in a company.

Procedures for setting up a company with the legal form GbR in Germany

To set up your company with the GbR legal form in Germany, you must go through the following steps:

1. Setting up the shareholders’ agreement

In theory, an oral agreement between the GbR shareholders is sufficient. However, drawing up a shareholder agreement for the GbR can be helpful. Then, have a lawyer review it if necessary.

You must include the following in the partnership agreement of a GbR in Germany:

• The number and names of the shareholders
• Company objectives
• Financial, in-kind, or work contributions that partners must undertake in business operations.
• CEO and vice president of the company
• How to distribute liability, profit, and loss, which, for example, can be similar to the amount of people’s shares in the company.
• Provisions related to vacation days and absences due to illness.

It is not necessary to have a notarized certificate for the partnership agreement of a GbR in Germany. Therefore, you can save on notary fees.

2. Registering a business in the trade and tax office

Register your GbR company at the German Trade and Tax office to start your business. Each partner must complete the business license form individually and submit it to the local trade office. Also, you must receive a tax registration questionnaire from the tax office. Then, fill and return it to the tax office to receive a tax number.

3. Opening a business account

At this stage, open a business account for your GbR in Germany. Opening this business account is essential, even if the sales and expenses are limited at first. Never process business payments flow through personal accounts.

Drawing up the partnership agreement, registering with the Trade and Tax Offices, and opening a business account are all the necessary steps to establish a GbR in Germany. As a result, you can start your business.

Our business consultants and lawyers at Wise Business Group are ready to answer your questions about starting a business, choosing a legal form, obtaining the necessary permits, and registering a company in Germany. We will help you go through the winding path of self-employment in Germany.

General Partnership (OHG) in Germany

The legal form of a general partnership or open trading company (OHG or oHG) in Germany is often used when conducting a commercial business.

Advantages of the OHG legal form in Germany

• In this legal form, no minimum capital is required.
• A general partnership or OHG has more credit and acceptance than a sole proprietorship with credit institutions.

Disadvantages of the OHG legal form in Germany

• The shareholders in this company are personally and unlimitedly liable with their private assets.
• After a shareholder leaves the company, they will be liable for five years to pay the company debts up to their exit point.
• Entering the commercial register is required for the legal form OHG.
• There is no need to prepare a written partnership agreement in this legal form.
• Shareholders of an OHG cannot hold shares in similar companies simultaneously.

Limited partnership (KG) in Germany

The legal form of a limited partnership, or limited liability partnership (KG), is a specific form of a general partnership (OHG) in Germany. The rate of choice of this legal form by the founders in Germany is also the same as OHG and equal to 0.8%. Setting up a business with the legal form KG in Germany requires two types of partners: Limited and general partners.

Advantages of the KG legal form in Germany

• Limited partners in a KG are liable only with their paid-up equity share in the company. Therefore, there is no liability towards their private assets.
• No minimum capital is required to start this legal form.
• It is possible to increase equity through limited acceptance of more partners.

Disadvantages of the KG legal form in Germany

• The general partners in a KG are liable unlimitedly and, if necessary, with their private assets.

Sole proprietorships in Germany

You can also use the sole proprietorship legal form to start your business in Germany. An individual can always establish a sole proprietorship in Germany. The person can be a sole proprietor, merchant, freelancer, or small business owner.

Advantages of the sole proprietorship legal form in Germany

• The business setup process for this legal form is simple and inexpensive.
• No share capital is required for its establishment.
• In a sole proprietorship, there is no requirement to draw up a partnership agreement.
• The profit from the company’s activity belongs entirely to the entrepreneur.
• An entrepreneur can make decisions independently at any time. Unlike most legal forms, decision-making in a sole proprietorship does not require coordination with other shareholders.
• This type of company has no obligation to publish or, for example, disclose financial statements.
• Taxpayers can compensate their losses from a business operation in a sole proprietorship with income from other activities and have the effect of reducing taxes.
• Due to the owner’s private liability, this legal form has a favorable reputation with credit institutions.

Disadvantages of the sole proprietorship legal form in Germany

• The entrepreneur in a sole proprietorship is fully liable with their private assets. 
• The founder must make decisions about all matters alone. Because there is no other owner or partner to run the company.
• The owner of a sole proprietorship must manage the expansion of the company’s equity capital alone.
• Adding more shareholders is not possible in any way. You can add other shareholders to your business only after changing the legal form.
• Choosing the name of a sole proprietorship comes with limitations, as the owner’s name must also appear in the company name.
• Registered merchants must keep books and accounts and have double-entry bookkeeping.

Setting up a sole proprietorship legal form in Germany

To set up a sole proprietorship in Germany, you must go through the following steps:

1. Registering a business in the Trade Office

First, you must register your sole proprietorship in the Trade Office. All you need to do to register your business in Germany is to fill out a business license form. Sometimes, you can fill out this form online as well.

2. Obtaining a tax number

Immediately after registering your business in Germany, you should contact the tax office and receive the so-called tax registration questionnaire. Then, complete and submit it to the tax office to obtain a tax number.

Tip: Freelancers are not required to register their business in Germany. For example, freelancers include lawyers, programmers, graphic designers, consultants, and trainers. They can directly contact the tax office and apply for a tax number. To do so, they only need to complete and submit the tax registration questionnaire to the tax office.

As you can see, the number of founders, required initial capital, liability, and accounting requirements vary for each legal form. Therefore, it is necessary to choose the appropriate legal form according to the needs and objectives of your business in Germany. We recommend that you consult with experts to ensure the chosen legal form matches your business objectives in Germany. Our consultants can also provide you with the required information.

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A brief overview of legal form types in Germany

The legal form of a company specifies the ownership structures and the distribution of risk and liability in that company. Therefore, choosing it before starting a business is especially important.

Legal forms in Germany are divided into three categories: corporations, partnerships, and sole proprietorships. Each of them also has different subsets as follows:

Corporations in Germany

• Limited Liability Company (GmbH)
• Company with limited liability and limited partnership (GmbH & Co. KG)
• Entrepreneurial Company (UG)
• Public joint stock company (AG)
• Private limited company based on shares (Ltd.)

Partnerships in Germany

• Civil Law Partnership (GbR)
• General partnership (OHG)
• Limited Partnership (KG)

Sole proprietorships in Germany

• Sole proprietors
• Sole merchants
• Freelancers
• Small business owners

To choose an appropriate legal form for your business in Germany, you should pay attention to the number of founders, required share capital, start-up process and costs, liability, and accounting requirements. You can also consult experts in this field.

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Choosing the appropriate legal form for setting up a business in Germany

If you want to become self-employed and need advice on choosing a suitable legal form for your business in Germany, you can contact us. Our consultants at Wise Business Group will guide you with years of successful experience in setting up and registering a company in Germany. Also, if you are an entrepreneur and plan to change your company’s legal form in Germany, you can benefit from our consulting sessions. Just contact us via email and WhatsApp. We will be happy to review your needs for starting and running a business in Germany and provide you with the necessary information.

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