The legal form is the legal framework for your company. There are different legal forms, each with its advantages and disadvantages. You should decide for yourself what legal form is best for you. Please check carefully what legal form suits your business idea and your personal wishes and goals. You can also change the legal form later, but this may be associated with lots of effort and expenses. If you are not 100% sure, get legal advice.
In Germany, almost all legal forms can be sorted into three categories: sole proprietorship, partnership and company. On this page, we have listed the most important legal forms and the associated advantages and disadvantages. In addition, we explain the corporate company as a special case of the company.
Sole proprietors are freelancers, small business owners or trading merchants. You are the owner, manager and boss. You can therefore decide for yourself what you wish to do. However, there are differences during establishment: freelancers only need the tax number from the tax authorities. Small business owners or self-employed trading merchants have to register with the trades licensing office. Trading merchants also have to register in the commercial register. The name has to be your first and family name, sometimes you can also name the industry. Only trading merchants can freely select a made-up name. You are free to determine the amount of your starting capital. But you also need to repay debts from your private assets. You keep 100% of the profits. After establishment, you are exempted from book-keeping up to a certain turnover; however, this does not apply if you are registered in the commercial register.
Partnerships are always founded by at least two people. These are then the shareholders and equally authorised directors. An exception to this is the limited partnership (Kommanditgesellschaft, KG), which has only one director (general partner). For the name, you have to use your first and family name, and you have to add “GbR” if you are establishing a so-called civil law partnership. For a normal partnership (Offene Handelsgesellschaft, OHG) or a limited partnership (Kommanditgesellschaft) you can choose the name freely, but it has to end with “OHG” or “KG”. The starting/share capital can be freely determined, and you can also contribute assets in kind. However, debts have to be covered from your private assets. But after the establishment, tax law and accounting are simpler for all forms than for a joint-stock company.
You establish a GbR when you want to be independent in a trade or a freelance profession together with at least one other founder. The registration is for a small business, but then you may not exceed a certain annual turnover (in 2021, no more than 22,000 euros). With a GbR you are not obligated to keep accounts, and you also do not require written articles of association. These can be drawn up verbally and do not need to follow any legal specifications.
You establish an OHG if you want to operate a commercial business together with at least one other founder. You can earn as much money each year as you want. But you need to register in the commercial register (Handelsregister) and you have to keep accounts. As with a GbR, the articles of association can be made verbally and do not have to be fixed in writing. In addition, content and form do not have to follow any legal rules. But because you make all important decisions together, articles of association are highly recommended.
You establish a KG if you want to be your own boss but need partners for additional capital. You can earn as much money each year as you want. But you need to register in the commercial register and you have to keep accounts. The articles of association can be drafted verbally and do not have to follow any legal requirements.
A joint-stock company can be founded alone or with others (shareholders). The shareholders then appoint the manager. These can choose the name freely, but it must be followed by “GmbH” or “AG”. The starting/share capital must be at least 25,000 euros for a “GmbH” and at least 50,000 for an “AG”. You and the other shareholders pay in the starting capital and receive a share of the company based on the amount of your paid-in capital. The company’s assets only cover debts. You receive your profits on a pro rata basis or decide on a distribution with the other shareholders. You have to register the company in the commercial register at its establishment and it also needs articles of association; the formalities are, therefore, very complicated. After establishment, the tax laws and accounting are also very complicated.
The articles of association
...regulate the tasks and duties of management and shareholders, determine management representation and the payment and distribution of profits. In the case of a corporation, some content is required by law and a notary must authenticate it. It is best to consult an attorney beforehand if you need articles of association.
In brief: You establish it alone or with others; you or someone else is appointed boss; you have to pay at least 25,000 euros in starting capital; your profits are on a pro rata basis; debts are covered by the company’s assets; registration requires much work; tax and accounting obligations after establishment are high.
You can establish a GmbH alone or with others. You can also be the manager if you are appointed. For the establishment, you have to provide a starting capital of at least 25,000 euros, half of which (12,5000 euros) has to be paid in immediately. But you can also pay in kind, e.g. with machines. For the establishment, you need articles of association certified by a notary, and you have to register the GmbH in the commercial register. You must keep accounts and have to file annual financial statements.
An AG always has to be founded with other people. For an AG, you need three supervisory board members; for the establishment, you need starting capital of 50,000 euros. All the other rules in the Corporations Law (Aktiengesetz, AktG) are also very complicated. That is why an incorporated company is only suitable for initial establishments in very rare cases, and other legal forms are recommended.
The UG is a special case. You can start up a UG alone or with others (shareholders). You have the same rights as with a GmbH, so you do not need to cover debts with your own assets. You only require a starting capital of 1 euro. You keep 100% of the profits. But you always have to pay a share of your profits into the starting capital until you reach 25,000 euros. There is a template for establishment Template.
In brief: You can found it alone; you can be your own boss; the starting capital is at least 1 euro; you keep 100% of the profits; you have to put some of the profits aside until you reach 25,000 euros; debts are covered by the company assets; the formalities are relatively simple, and you can use templates; tax and accounting obligations after establishment.
You want to establish a Kapitalgesellschaft (joint-stock company) or a Kommanditgesellschaft (limited partnership) so that you do not need to cover any debts with your own assets. You are already working, and ordering materials or furnishings before the company is entered into the commercial register. You have to cover any debts with your personal assets. You should therefore wait until your company is entered into the commercial register before starting work and spending money.
You want to establish a Kapitalgesellschaft (joint-stock company) and have already spent the money for your company before entry into the commercial register. But you still need to pay in the starting capital, and that money is now lacking. You now need to find more money, or you cannot establish the company. You should therefore wait until your company is entered into the commercial register and you have paid in the starting capital before spending money.
You want to establish a GbR or an OHG with another person, and you have already started working without having articles of association. Now the complex rules of the German Civil Code (Bürgerliches Gesetzbuch, BGB) apply, all decisions must be unanimous, and profits can only be paid out once per year. It is, therefore, important to draft articles of association.