Before going to start a business in Germany, one of the initial steps you will be taking include choosing a legal form for your newly created business or enterprise. In legal forms (Rechtsformen), there are several options to choose from pertaining to different types of business in Germany. The three main types can be grouped as:
- Sole Proprietorship (Einzelunternehmen)
- Partnership (Personengesellschaft)
- Corporation (Kapitalgesellschaft)
The kind of business you are involved and will be setting up can help decide which legal form you should opt for. For example, an entrepreneur will opt for a different legal form as compared to a freelancer.
Below is the overview of the major business forms available in Germany. Please note that it is legally required for a business in Germany to identify their legal form as OHG, GmbH or AG. This will help an observer to instantly recognize the liability of the company.
1. Sole Proprietorship (Einzelunternehmen)
Mostly opted by people who are willing to start their own business. Referred to as Gewerbe is a business run by a sole trader. Small businesses (Kleinunternehmer) can take benefit from less bureaucracy if earnings are less than 22,000 euros and 50,000 euros for the 1st and 2nd year of a business and it can be continued as a small business. Although, sole proprietors are in all ways liable to the business action and debts.
2. Business Partnership (Personengesellschaft)
When two or three people or companies as a sole proprietorship works together, they form a business partnership. Different business partnerships include, a civil law partnership, an OHG (offene Handelsgesellschaft), GbR (Gesellschaft burgerlichen Rechts), a KG (Kommanditgesellschaft) or a general commercial partnership and limited partnership. Apart from KG, partners are totally liable for all business debts.
Offene Handelsgesellschaft, OHG
OHG, also known as general partnership consists of two partners at least. There is no set limit on liability for each partner. OHG can also include legal entities as members, in spite of them being established in the umbrella of German or foreign law.
The representation rights of the OHG, general partnership has to be carried out in individual capacity by all the partners. On the other hand, the memorandum of association can specify the below mentioned instances:
- Joint representation of partnership by few partners
- Exclusion of individual partners from representation of partnership
The letterhead including all other business correspondences should state the legal form, firm and the partnership location, as well as court of registry and registration number.
If in case all the OHG partners are legal entities, the liability of everyone of them will get automatically limited. After that, there has to be a reference made with help of appropriate supplement in the name of company (for example GmbH and Co. OHG-). Along with that, for partnership of this type, all business correspondences must have the business names of partners (Firma) and court of registration too. It should also contain the number of firm that is listed in Commercial Register.
Civil Law Partnership (GbR)
This type of company is defined as an association of business or individuals coming together to achieve a unified contractual purpose. This is purely suited for startups to launch their company or business in cooperation.
Forming a GbR is a simple task. There shall be at least 2 partners. The only necessary requirement is their agreement to the company establishment. Both parties are jointly liable for the actions and debts that may incur by them.
If the company or business is being considered as a small startup, then registration with Office of Trade is required. If the business starts exceeding a certain level of turnover, number of employees, capital resources or commercial accounting, the business will already be required to get registered in the Commercial Register. This will automatically turn the company into an OHG.
Limited Partnership (KG)
This type of business is related to an OHG. In this type, there is an option to limit the liability of some partners. This is suitable for such small-scaled companies who are seeking capital but prefer to limit liability on individual level. In this scenario, two partners are required at least. One will be general partner i.e., individual with no liability limitation and the limited partner i.e., individual with limited liability.
Limited Partnership for Shares (KGaA)
This is not a very common type of company. It is a combination of limited company (AG) and limited partnership company (KG). Because of this, the company type is referred as stock corporation having individual shareholders rather than board of directors.
The number of shareholders in KGaA can be unlimited having limited liability for their respective capital contribution. The minimum requirement for this company type is:
- 50,000 euros minimum capital
- Two partners minimum
- General partner
- Limited shareholders
The business shall be recorded in Trade Register and in local Commercial Office as well.
3. Corporation (Kapitalgesellschaft)
Usually, the most favorite legal entity preferred by most start-ups and funded companies. One of the most common corporations in Germany is GmbH (Gesellschaft mit beschrankter Haftung) which is a limited liability company. Since it’s a limited company, it protects your private finances but requires a 25,000 euros capital. On the contrary Mini-GmbH also known as UG (Unternehmergesellschaft) requires 1 euro as an initial capital and is a convenient option for those who don’t have much capital to start a GmbH.
Private Company with Limited Liability (GmbH)
This company type is most commonly used business form when starting a business in Germany. GmbH has high flexibility along with very little obligations relatively. The procedure of establishing a GmbH company is very simple. A single founding member is required only. The capital amount of minimum 25,000 euros is required. Both cash and other contributions can be paid. When registering the company, half amount which in our case is 12,500 euros should be present in the bank account.
The company name should come from the purpose for which company is created followed by GmbH. The name can also be related to shareholder name followed by again, GmbH. An executive director has to be hired, he/she doesn’t need to be a shareholder or a resident of Germany. The other shareholders can have their say in management.
In this company type, actions are not transferred publicly and also registration on stock exchange is not possible. On the other hand, transfer is possible with the help of their own documents from notary.
To remain valid, this company type is recorded in Business Register. The constitution deeds and bylaws must be personally signed by the managing directors. The presence of notary is compulsory.
Entrepreneurial Company with Limited Liability (Mini GmbH)
This type is not considered as a legal form. It is a private company with limited liability but is taken as a subtype. That is why, this is referred as Mini GmbH. This company type requires a minimum capital of 1 euro which makes this legal form quite flexible as compared to others. This lack of initial capital has to be compensated later. The company will have to retain quarter amount of the profit generated annually until and unless the minimum capital of GmbH has been accumulated i.e., 25,000 euros. Under the German law, Mini GmbH as same duties and rights just like a GmbH.
Joint Stock Company (AG)
An individual can establish this type of company with a capital of around 50,000 euros at minimum. Along with that, according to the constitution, company should be certified from notary. The company name is in most cases associated with enterprise type. It must contain the term “Aktiengesellschaft” or its AG, its abbreviation.
The founding shareholders have to appoint the auditor and a fiscal council which will be recognized at registry. Subsequently, they will name the board of directors. The board of directors are responsible for managing the AG. They have to make decisions regarding operations of company including management decisions.
The company comes into being after the process of commercial registration. All the founding shareholders and members of administrative council have to sign the application while the notary being present. After this, the company will get recorded in the Office of Trade.
Non-profit Companies in Germany
Foreign residents and German citizens can also start a non-profit company (Gemeinnutzige GmbH – gGmbH) when planning to start a business in Germany. Although in terms of registrations, requirements and capital it is almost same as a GmbH. However, the principal difference is the objective of the company, as the purpose of a non-profit company is to serve social or charitable welfare of the society. Also, the finance which is made from these companies have to be invested in again in the company for the fulfillment of the purpose.
Business taxes do not apply on non-profit companies like trade tax or corporate tax. These companies are usually found paying reduced VAT. But on the other hand, they require approval from the tax office regarding charitable objectives.
Non-profit organizations have two other types as well. Mentioned below are:
- Association (Verein): This type of organization is similar to non-profit organizations. They require a committee or management board along with articles of association. This type of company needs 7 founding members and then become part of Register of Associations (Vereinsregister) instead of Commercial Register.
- Foundation (Stiftung): foundations are considered as a charitable organization to provide assets or money. They are formed on a specific set of purposes defined by the founder. The minimum investment required is 50,000 euros.
If any business person is intending to get engaged in any sort of commercial activity in Germany, it is strongly advised that they establish their own company. This practice can help protect them from a large amount of inconveniences and trouble with different authorities.