Legal forms for company foundation: These are the options

Anyone wishing to found their own company, branch office or start-up must think carefully about which legal form they choose. As each legal form has different prerequisites, consequences, advantages and disadvantages in the course of business. We provide an overview of which legal forms are appropriate when founding a company here.

Fundamental differences: Corporation and partnership


In Germany there are two basic legal forms for all companies and start-ups. These are either partnerships or corporations. The most important difference between the two is liability. In a partnership (“Personengesellschaft”), at least one person is liable with their private assets. In the case of corporations (“Kapitalgesellschaften”), on the other hand, the capital brought into the company is liable instead of private assets. So in order to not risk your own home or private savings, a corporation has to be formed. Anyone who wants a legal form for their company formation where no private person is liable can choose between three types:

1.    The entrepreneurial company with limited liability (UG)
2.    The limited liability company (GmbH)
3.    The public limited company (AG)

UG, GmbH, AG: What is the difference between the legal forms?


A UG has the greatest difficulty in obtaining additional financial resources. It is the easiest corporation to set up and the required share capital is just one euro. Due to the low effort and costs involved, credit institutions are often hesitant when it comes to granting loans or subsidies to UGs.
In the case of an AG, on the other hand, banks are very accommodating. Hardly surprising as the foundation of an AG gobbles up thousands of euros in notary and legal fees and the necessary share capital alone amounts to 50,000 euros. The collateral that a potential investor sees is correspondingly high, which is why financial injections are easy to obtain for a public limited company.
The GmbH is a healthy middle ground: the administrative effort corresponds to that of a UG but the share capital has to be 25,000 euros. This relieves the founders as they do not have to familiarise themselves with complex legal issues and reassures potential investors as high capital is available.

How does founding a GmbH work?


A few simple steps are necessary and requirements must be met to found a limited liability company. They are structured as follows:

1.    The articles of association and partnership agreement
First of all you need a shareholder agreement and/or articles of association. This regulates the basic principles of the GmbH to be founded. For example, the address, the name, what the company's main field of activity will be and which shareholders are involved with which capital contributions. A lawyer should be contacted to adapt this contract ideally to your own business model and individual structures. Ideally, the lawyer will also be familiar with the market environment in which the GmbH intends to operate in the future. If you are looking for a specialist lawyer for your start-up, Invest in Bavaria will be happy to help you.

2.    The notary appointment
Once the articles of association are in place, the next step is to go to the notary. They will review the contract with the parties involved and personally notarize the signing. From this moment on a GmbH i. G. has been established: a limited liability company in formation.

3.    The bank account
The notary certifies in writing that the GmbH i. G. exists and with this certificate you head to the bank to open a business account there. The shareholders pay the share capital of at least 12,500 euros into this account. To make it easier to reach the full 25,000 euros of share capital, the legislator has made some simplifications that we will look at later.

4.    The Commercial Register
The bank receipt confirming the payment of the registered capital to the business account is now sent to the notary. As soon as they receive this receipt, they arrange for the GmbH to be entered in the commercial register. With the entry in the commercial register, the foundation of the GmbH is then also completed.

5.    Commencement of business
Before the limited liability company commences its activities, it should submit a business registration to the Trade Licensing Office at its registered office immediately after establishment. Otherwise there may be a risk of fines.

EUR 25,000: where does the share capital come from


Anyone who has the necessary money at their disposal to set up a company in the legal form of a GmbH can set up immediately with the full amount in cash without much effort. However, a non-cash or mixed foundation can also be carried out. In this process, tangible assets are brought into the company to be founded either exclusively or partially. The assets can be buildings, land, cars, patents and many other things. However, as soon as tangible assets are to be invested in a business start-up, they have to be estimated by an externally appointed expert first. There are additional costs for this, which is why cash formation is preferable, if possible.

The GmbH summed up


It is not surprising that many companies prefer the GmbH as their legal form. It offers little bureaucratic effort, low start-up costs and is known and appreciated by both national and international business partners. From a prestige point of view, only the AG is even more prestigious, but it also involves much higher costs. Both the formation and the procedures are much more strictly regulated with an AG and most business transactions are significantly more cost-intensive than with a GmbH. The UG, on the other hand, is less well known than the AG or GmbH and the low level of collateral deters some potential cooperation partners. If you do not want to establish a corporation, there is still the possibility of a partnership.

Partnerships


Partnerships are one of the following four legal forms:

1.    Partnership under civil law (GbR)
2.    General partnership (OHG)
3.    Limited partnership (KG)
4.    Partner company (PartG)

The latter is a special case and is only available to certain professional groups such as doctors, which is why we will not go into it in detail. What all these companies have in common is that participating partners are personally liable with their private assets. So if debts arise from business operations, the shareholders’ private property can be seized.
The simplest legal form by far is the GbR. It is so easy to establish that many people do not even notice when they establish one. It arises as soon as at least two people join together to pursue a common goal. This already includes the agreement that in a restaurant one person pays for the meal for themselves and their company. It can only arise through verbal agreement and requires neither a notary appointment nor a written contract. But it only has legal capacity if all partners are present at once, which makes it very unattractive as a legal form for a company (apart from personal liability).
The OHG and KG are also based on this basic form. Both have to be recorded in the contract. In the case of an OHG, all partners are liable with their full private assets, in the case of a KG, liability can be shared: at least one partner must be personally liable, others may be limited partners. Partnerships are not as clearly structured legally as corporations, which makes them less suitable for most start-up projects.

Conclusion


Statistics also show that corporations are the most suitable and most popular legal form of companies in Germany. In 2017, there were about 371,000 companies in this country with 10 or more employees. About 200,000 of these companies were incorporated. The second largest group was that of partnerships, with around 69,000. The other approximately 102,000 companies were either sole proprietors (66,000) or other legal forms (36,000), such as foreign companies.

Company foundation in Bavaria made easy


Invest in Bavaria supports companies in every phase. We provide contacts to investors, networks, clusters and industry experts. If you want to settle in Bavaria, you will find a step-by-step guide in our Guide to founding a company.