Thinking about setting up a corporation in Germany? There are several key decisions you will want to consider, including how you want your company to be organized, what type of liability you are comfortable with, as well as how much and what kind of investments you anticipate. This article covers three of the most basic German corporate forms: the GmbH, UG (or “Mini-GmbH”), and AG, and some of the key differences that you will want to keep in mind.
Why A Corporation?
Corporations are not the only types of company you can have in Germany. There are also sole proprietorships – where one person effectively is the company, and a number of partnership models with varying complexities and benefits. Generally, these types of companies are called Personengesellschaften.
The main difference between these types of companies and the corporate forms discussed below are liability, taxes, and organization.
In corporations, there is a legal barrier between the assets of the corporation and the personal assets of the people involved with the corporation (e.g. the managers, board members, and shareholders). If the corporation owes money or gets sued for damages, other parties can go after the assets of the corporation, but are legally not allowed to go after the personal assets of the people involved with the company. This protection has limitations (to be discussed later in a post on “piercing the corporate veil”), but is generally speaking a huge advantage over non-corporate business forms.
One should consider the different tax outcomes for the varying business forms. (More specifics of various tax requirements will be covered in a later post). Generally speaking however, while Personengesellschaften and corporations will both pay certain business taxes, corporations will also pay corporate income taxes. The overall corporate tax rate in Germany is currently around 30%, depending on local taxes and other factors. Additionally, if the corporation pays dividends on its shares, capital gains taxes will come into play.
In terms of organization, a sole proprietorship offers absolute control over the company to one person. Partnerships will share control among partners depending on how the partnership is set up, for example two general partners sharing all control and liability equally, or one partner having more control and the other having less liability.
Corporations have different organizational control depending on the form (discussed more below), but generally are managed by a group of individuals entrusted with making the company’s decisions. With corporations, there is also a system of rules for allowing shareholders to exercise some amount of control depending on a number of factors. What an entrepreneur loses in control by using a corporate form is balanced by the increased respectability of the company and attraction for investors. Shareholders are more willing to invest in a company when they know (A) that they are protected from personal liability if something goes wrong, and (B) have at least some limited say in what the company does.
What Type Of Corporation?
So you’ve decided to set up a corporation, now what type do you want? There are three main corporate forms in Germany: GmbH, UG (or “Mini-GmbH”), and AG.
Gesellschaft mit beschränkter Haftung – GmbH
The most common corporate form in Germany is the Gesellschaft mit beschränkter Haftung or “GmbH”. A GmbH protects the people involved in the company from personal liability, pays corporate income taxes, and has a straightforward organizational model.
Setting up a GmbH is relatively simple, however it does require an up front investment of at least 25,000 Euro (which may include “in kind” assets), half of which must be put in a bank account in the name of the company.
The actual formation of a GmbH requires a notarized deed of formation and notarized articles of association. Notaries in Germany operate slightly differently than notaries in other countries, so be sure to research the process and plan the necessary time and required information.
Once the deed of formation and articles of association have been notarized, the company is registered with the Handelsregister at which point it becomes a legal entity. After that, the company must also be registered with the local trade office (Gewerbeamt or Ordnungsamt).
A GmbH is managed by the managing directors. There has to be at least one managing director who does not need to have shares in the company and does not need to be German. Shareholders of a GmbH may exercise some level of control depending on a number of factors.
Unternehmergesellschaft (haftungsbeschränkt) – UG
An Unternehmergesellschaft (haftungsbeschränkt) or “UG”, commonly referred to as a “Mini-GmbH” is the same as a GmbH with the key difference that in order to found a UG you only need one Euro of investment capital instead of 25,000 (this has led to the nickname “One Euro GmbH”). In exchange for the low initial investment amount, UGs are required to put aside 25% of their annual profits in a “corporate reserve” until the reserve reaches the level of 25,000 Euro, at which point the UG may chose to convert into a regular GmbH (there are other methods of conversion as well).
Because of the low investment capital requirement for UGs, this corporate form is ideal for entrepreneurs and startups.
Aktiengesellschaft – AG
Many of Germany’s largest and most prestigious companies are organized as Aktiengesellschaft or “AG”. These are shareholder corporations, and are especially well suited for large companies who sell their stock to the public. AGs are more difficult to set up both because the process is more complicated and work intensive, and because they are required to have a capital investment of at least 50,000 Euro. AGs are managed by a management board called the Vorstand. However, shareholders may also exercise some level of control in a number of ways, and a supervisory board called the Aufsichtsrat is meant to monitor the management board as well.
For advice or assistance with setting up a company in Germany, Budding Legal offers a full range of legal services ranging from initial consultation to final formation and everything in between. We also provide a full range of legal services for your company, from contracts and agreements to employment and immigration, we are dedicated to helping you succeed. Give us a call today.
***NOTE, this article is meant as a general informational outline and is NOT legal advice.***