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Germany is one of the best-performing economies in the European Union. Factors such as a strong economy, ease of business funding, liberalised labour market, multicultural society and access to extensive manufacturing companies has made Germany one of the most sought-after destinations to set up a business. This article explains the types of business entities in Germany that investors can employ to start their businesses.
Broadly, there are three types of business entities in Germany. These business entities can be further divided into different entities based on the capital contributions by members, the extent of liability of members/partners, the structure of the management etc.
Following are the types of corporations in Germany:
A sole proprietorship is a type of business where one person owns the company and usually invests all the capital. The sole proprietor personally enjoys all the rights and bears all the responsibilities of the sole proprietorship.
A partnership is an entity that is entered into with a minimum of two persons, companies or organisations. Based on the type of partnership incorporated, the partners shall bear either unlimited liability or liabilities limited to the extent of their capital contributions in the partnership.
Following are the different types of business entities in Germany:
A joint Stock company/ Public Limited Company or AG is a public company that any individual can open with a minimum capital requirement of €50,000, to which the shareholders must fully subscribe. A joint stock company can be opened with one shareholder also, and there are no restrictions on the number of shareholders that can be appointed.
The company should affix the abbreviation “AG” with its name and appoint its first auditor. The AG is managed by a Board of Directors responsible for all the operational aspects of the company.
An AG is incorporated after signing the application and registration by founding shareholders in the presence of a notary at the Register of Companies. The company’s constitution/ incorporation articles must be certified in the presence of a notary. The shares of these companies can be listed and traded freely on the stock exchange.
A limited liability company or GmbH is Germany’s most common business entity. It requires only one founder for its formation, and such a founder can also be its shareholder. The nature of the business or the shareholder’s name has to be affixed with the business’s name followed by “GmbH”.
The minimum capital required to open a Limited Liability Company is €25,000, and half of this amount, i.e. €12,500, must be deposited in the company’s bank account at the time of registration. The shares of these companies are not publicly transferable and cannot be traded on the stock exchange.
The company is bound to appoint at least one executive director who may or may not be a shareholder or a German resident. All the company’s managing directors need to personally sign the company’s constitution and its bylaws in the presence of a notary. A company needs to be recorded in Germany’s Business Register to be incorporated.
The mini-GmbH is not a different form of a business but a sub-type of the limited liability company. This is the reason it has been referred to as mini-GmbH. This sub-type was first introduced in 2008 to enable individuals and groups to ease doing business.
This sub-type requires the start-up capital of only €1. However, these companies need to register themselves as mini-GmbH, and the shareholders are required to put aside at least a quarter of their turnover by the time the turnover until it reaches the share value of €25,000, which is converted into share capital, and the mini- GmbH becomes a full-blown GmbH.
The law has simplified the incorporation procedure for these types of companies by offering standardised articles of incorporation, which have to be notarised by a public notary. A mini GmbH is subject to the same rights and duties as a regular Limited Liability Company.
As the name suggests, a non-profit limited company or gGmbH is an organisation that is meant to pursue social and charitable goals through the company’s activities. For any entity to qualify as a non-profit limited company, it should follow a non-commercial, beneficent purpose such as education, science and research, art and culture, environment, healthcare etc.
The non-profit charitable purpose must be laid down in the articles of association, and approval for the same must be obtained from the competent tax office before the registration of the company in the commercial register. Additionally, the share capital required is €25,000 and half of this amount, i.e. €12,500, should be deposited in the bank account.
A gGmbH is managed by a managing director. The company can receive directions from the annual shareholder’s meeting, and in case the company has more than 500 employees, from a supervisory committee. The company is exempted from paying corporation tax, trade tax and solidarity surcharge. The services offered by gGmbH can be partially or fully exempt from VAT payment.
There is no prescribed limit for minimum capital requirement to start a general commercial partnership or OHG. At least 2 associate partners are required to create a general commercial partnership where each partner has unlimited liability. Every general commercial partnership must affix the abbreviation “OHG” after its name.
A general commercial partnership is jointly managed by the partners or per the partnership agreement’s terms. A benefit that a general partnership enjoys is that here the accounting procedure is straightforward compared to the other types of legal entities in Germany. Every General partnership is required to be registered at the Trade register.
A partnership limited by shares is a combination of a stock corporation and a limited partnership where limited liability shareholders raise the capital of the partnership. Its shares can be freely traded and listed on the stock exchange, similar to that of a stock corporation. However, the listing is not mandatory. The structure of a KgaA is preferred by family-owned or privately owned businesses, which is a flexible tool adopted in succession planning.
There is great flexibility in designing the internal statutes of a KgaA, and they can be adapted according to individual needs. The supervisory board of the KgaA monitors the management of the business, but it has no personnel sovereignty and cannot influence the appointment of the management. The partnership limited by shares is managed by the general partner with unlimited liability along with the managing directors or the members of the Management/executive board members. This general partner may or may not be a natural person. Even a corporation can also act as a general partner.
A limited partnership or KG is a partnership structure run by at least 2 partners with one general partner who has unlimited liability against all the obligations of the partnership. There is at least one limited partner whose liability is restricted to its contribution. The limited partner only provides investment and does not participate in the company’s day-to-day functions.
It is the general partner that represents the KG in its day-to-day dealings. The articles of a KG are supposed to be registered in the commercial register. There is no minimum prescribed capital required to set up a KG. A KG must double-entry bookkeeping, preserve records for at least 10 years and publish annual accounts.
A limited partnership with LLC as the only member with unlimited liability is a hybrid form of legal organisation between a limited partnership and a company where the general partner is a GmbH. This makes the fully liable partner of GmbH & Co. KG a limited liability company. No partner has unlimited liability here, and only the GmbH has unlimited liability.
Although there is no minimum prescribed capital required for establishing a GmbH & Co. KG, there should either be a GmbH already registered with the commercial register, or a new GmbH is registered before GmbH & Co. KG can come into being. The founders also need to register with the tax office, trade office and chamber of commerce.
Here the general partner, i.e. the GmbH, solely manages the governance of the GmbH & Co. KG, which means the managing director of the GmbH, who may or may not be a shareholder of the GmbH manages GmbH & Co. KG. The main difference between a KG and GmbH & Co. KG is that in the latter, the role of the general partner is taken over by the GmbH. The GmbH is also obligated to submit its annual financial statements.
A civil law partnership or GbR also comprise a minimum of 2 partners with unlimited liability against the partnership’s obligations. Again, there is no minimum capital requirement to start a civil law partnership. The GbR doesn’t need to register itself in the trade register until it reaches the annual turnover of €25,000, after which it is converted into a general commercial partnership and registered.
The name of a civil law partnership must bear the names of the partners and must be added with the abbreviation “GbR”.The company’s management depends on the terms incorporated in the agreement. This form of business arrangement is very common among freelancers. The income tax is levied on the profits made by the partnership. However, it will be paid from the personal accounts of the partners.
Where 2 or more freelancers want to come together in a partnership, they can form a partnership company or PartG. It can only be founded by liberal professionals such as writers, accountants, doctors, tax consultants etc. There is no minimum prescribed capital requirement to form PartG, registered with the Partnerships registry. The founders of this business need to be registered at the tax and employment offices.
All the partners of PartG are joint debtors of all its liabilities. However, if a loss has been incurred due to professional error, the partner at fault would be liable. The business name of every PartG must include the name of at least one of the partners, along with the professional titles. Each partner is allowed to represent the partnership outside unless decided otherwise.
The different types of business entities in Germany must affix their legal identity in their business name to convey to the reader the legal status of the business is dealing with. Further, affixing the business name also conveys the extent of liability of the business entity to the person dealing with such business entity. The Transparency Register (Transparenz register) is the online repository of all the information relating to the legal status of the business entity and its beneficial owners. To know which type of business entity would be ideal for your business needs, get the consultation offered by global incorporation experts at Enterslice.
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