Choosing the right legal form is a crucial step when setting up a business in Germany. In this article, we look at different legal forms, their unique features, the taxes associated with them and who they are best suited for. This will ultimately help you choose the right legal form.
Sole proprietorship
- Characteristics: A sole proprietorship is run by a single person. The owner is personally liable for all debts.
- Taxes: Income tax on profits.
- Who it’s for: Small businesses and self-employed people who want full control over their business.
- Formation: Setting up a sole proprietorship is comparatively uncomplicated and involves low costs.
- Capital requirements: There are no minimum capital requirements for the formation of a sole proprietorship.
- Legal obligations: Sole proprietors are obliged to report their income to the tax office and pay taxes.
Limited liability company (GmbH)
- Characteristics: The GmbH is a legal entity and is liable with its assets. Minimum capital requirements apply.
- Taxes: Corporation tax on profits and trade tax.
- Who is it suitable for? Companies with several shareholders and higher capital requirements.
- Formation: The formation of a GmbH requires the payment of a minimum capital and the drafting of articles of association, which must be notarized (this can take up to 3 months)
- Capital requirements: Minimum capital requirements apply, usually EUR 25,000.
- Legal obligations: The GmbH has extensive legal obligations, including bookkeeping and accounting (high administrative effort)
Entrepreneurial company (UG)
- Characteristics: The UG is a mini-GmbH with a low minimum capital. It is liable with its assets.
- Taxes: Corporation tax on profits and trade tax.
- For whom suitable: Startups and small businesses.
- Formation: The formation of a UG requires a minimum capital, which is lower than that of a GmbH (you can start with 1 euro), and a notarized articles of association.
- Capital requirements: Minimum capital requirements apply, usually €1, but has a savings requirement of up to €25,000; UG has the obligation to save a quarter of the annual profit until the share capital of €25,000 is saved, as with a GmbH.
- Legal obligations: UGs have similar legal obligations to GmbHs, including bookkeeping and accounting.
General partnership (OHG)
- Characteristics: The OHG is a partnership in which the partners have unlimited liability.
- Taxes: Income tax on profits.
- For whom suitable: Small businesses and partnerships.
- Formation: The formation of an OHG does not require a minimum amount of capital, but does require a partnership agreement.
- Capital requirements: No specific capital requirements.
- Legal obligations: OHG partners are obliged to share profits and losses.
Limited partnership (KG)
- Characteristics: The KG combines personally liable partners (general partners) and limited partners (limited partners).
- Taxes: Income tax on the profit of the limited partners.
- For whom suitable: Companies in which investors are involved.
- Formation: The formation of a KG does not require a minimum amount of capital and a partnership agreement.
- Capital requirements: No specific capital requirements.
- Legal obligations: General partners have unlimited liability, limited partners are only liable up to the amount of their contributions.
Public limited company (AG)
- Characteristics: The AG is a listed company in which shares are issued. The liability of shareholders is limited to their contributions.
- Taxes: Corporation tax on profits and trade tax.
- Who is it suitable for: Larger companies that want to raise capital from the public.
- Formation: The formation of an AG requires a minimum capital, a notarized articles of association and a supervisory board.
- Capital requirements: Minimum capital requirements apply, usually 50,000 euros.
- Legal obligations: AGs have extensive compliance requirements and must publish balance sheets.
Distinction between partnerships and corporations
- Partnerships: Here, the partners have unlimited personal liability for the debts of the company. Examples are sole proprietorships, OHGs and KGs.
- Corporations: These companies are liable with their assets and the liability of the shareholders is generally limited to their contributions. Examples are GmbHs, AGs and UGs.
Conclusion: If you want to choose the right legal form, you should consider all the points mentioned, as it is of crucial importance as it affects the liability, taxation and structure of your company. It is advisable to seek legal and tax advice before deciding on a legal form.
Concluding remarks: We hope that this detailed overview of the different legal forms in Germany has been helpful in your decision. Choosing the right legal form depends on many factors, including your business goals and financing options. If you need any further information or assistance, please do not hesitate to contact us.
