The foundation of a company in Germany is generally a straight forward process. Foreign investors are also entitled to found a company in the legal form of their choice. At the same time, a variety of different company forms exists in Germany and each of them has its advantages and disadvantages, depending on the size and future prospects of the company. Because the company form has to be in line with the corporate objectives, it is advisable to request professional assistance in order to avoid future strategic difficulties.
Influence Factors of the Legal Form Choice
This article provides the most important company forms in Germany at a glance. It can be grouped broadly into partnerships and capital companies. Both company forms are common in Germany but they have different characteristics regarding their structure and the liability risks.
An important exception from this categorization is individual enterprise. This is due to the fact that in this case the proprietor, whether he is a private person or a merchant, is authorized to decide autonomously. The company itself does not have a legal personality and therefore the proprietor bears the unlimited liability and all taxes of the company. As a consequence of its simplicity, the individual enterprise is the predominant company form in Germany. However, it should only be chosen for freelancers and very small companies.
The GbR is a group of at least two individuals or companies and has no legal personality. It is only formed for a particular company purpose and expires after its achievement. During this time, it cannot be considered as a company in the narrow sense because the registration at the trade authorities is not compulsory. The GbR is a common company form for cooperation between freelancers or small companies. Larger companies make only use of it for temporary cooperation and joint ventures.
The OHG is a general partnership between several shareholders. The allocation of capital, as well as gains and losses, are defined by contract. All shareholders are entitled to operate in the name of the company but they also bear the unlimited liability. The OHG is the simplest form of commercial companies in Germany but it also bears substantial risks for the shareholders. A major advantage of the OHG is the absence of a minimum initial capital requirement which makes it easy accessible for proprietors with a low capital endowment.
The KG consists of several shareholders of which not all participate in the operational business. Only those shareholders in a management position, the general partners, have to bear unlimited liability whereas the remaining shareholders (limited partners) only have to bear the liability equal to their capital contribution. Compared to the OHG, this company form reduces the risks for the limited partners but at the same time transfers this risk to the general partners.
The German AG is a public limited company. Its advantages are the easy transferability of the shares and the option to finance the company not only by debt but also by equity. Shares of an AG can either be listed on the stock exchange or transferred by contract. In contrast to a partnership, the AG is managed by an executive board, which is controlled by the supervisory board. The minimum capital is 50.000 € and the foundation process involves high costs. Therefore, mostly larger companies choose this company form.
The SE is a European company with a largely uniform legal basis in all member countries of the European Union. It must be established in a member state of the EU and the foundation requires a minimum nominal capital of 120.000 €. The SE allows European companies to establish and run a cross-border legal entity, to consolidate the business into a holding company and to establish and operate subsidiaries in various EU member states on a uniform legal basis. This legal form also facilitates cross-border M&A transactions. The SE is regularly used for cross-border mergers and foundations of subsidiaries in an EU member state different from where the headquarters are located.
By far the most common form of capital companies in Germany is the GmbH, or limited liability company. This is due to the limitation of the liability of the shareholders. The minimum capital requirement is 25.000€ and it can be contributed in cash or in physical assets. Therefore, the GmbH is the preferred company form of medium sized companies and branches of foreign companies. In contrast to the AG, there is no obligation for a supervisory board and thus, the CEO can operate independently when authorized by the shareholders.
The GmbH & Co. KG is a construction between GmbH and KG and is a company form that only exists in Germany. It is applied in order to reduce the liability risk of a KG. This happens by appointing a GmbH as an executive of the KG instead of an individual. The liability of the shareholders is reduced consequently because the GmbH which has a limited liability bears the unlimited liability of the KG.
Branch vs. Subsidiary Company
Like mentioned above, branches of foreign companies are usually registered as GmbHs. This is because the GmbH is separated from the actual company which means that it can operate independently. The liability of the GmbH is additionally limited which means that the company does not have to bear for costs caused by the GmbH. In contrast, a subsidiary is considered as part of the foreign company. The operational business of the subsidiary always requires the authorization of the parental company which is responsible for all operations of the subsidiary. This poses an additional risk in terms of liability and limits the ability of the subsidiary to operate independently.
ECOVIS provides guidance for the entire process of company foundation. Choosing the right company form is essential for achieving the short and the long-term business objectives. The experienced professionals of ECOVIS work out the right company form in line with your business strategy. This allows tax optimization and the minimization of liability risks. If you need more information or support, please contact us: email@example.com
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: firstname.lastname@example.org
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