Legal Forms of Businesses
The following introduced legal structures are only the most important types for the potential readers of this website. Working alone you can only choose between two different legal forms: sole proprietorship and one-person GmbH. You have the whole varieties of corporations and personal partnerships to work with partners. The following section will give a basic description of what each legal structure needs and implicates. All corporations have their legal representative, the director or in German Geschäftsführer. This person will be described in a special category!
What forms of organizations are there in Germany to run a business in? At home we have, e.g. limiteds and joint-stock corporations.
In Germany, we also differentiate between personal companies and corporations with totally own legal personality. Personal companies are
- “Gesellschaft bürgerlichen Rechts (= BGB-Gesellschaft = GbR)” or private partnerships,
- “Kommanditgesellschaft (= KG)”
- Partnerschaftsgesellschaften (= PartG)
The most common corporations are the
- Aktiengesellschaft (joint-stock corporation),
- Gesellschaft mit beschränkter Haftung (limited liability corporation)
- Unternehmergesellschaft (haftungsbeschränkt) or mini-GmbH or € 1-GmbH.
Further to be mentioned is the
Each of these companies / structures will be introduced separately.
What kind of company is the right one for me?
That is not an easy question at all. It is impossible to give a one-time answer valid forever! As your business grows, so will your expectations to your company’s appearance/structure. To help you make up your mind answer the following questions. They will not make professional advice superfluous but help structure your ideas and so reduce costs when obtaining legal consultation.
Do you want to operate alone or with one or more partners?
If you start a company alone then you are automatically a sole-proprietor. This goes for company and tax law. But you can also found a one-man GmbH.
How much formality can you cope with during founding?
Depending on the legal form, the bureaucratic expenses will be different. No matter what legal form, you always will have to register at the competent offices. The least red tape to overcome will be as a sole-entrepreneur and the most as a GmbH.
How exclusive is your liability to be?
The advantage of corporations is that shareholders are usually not liable with their private fortune, so that only the company’s assets will generally have to hold for the company’s debts. Solo businesspersons and partnerships always have to pay their debts with all their assets.
How high is your tax burden to be?
Depending on the profit size, each legal form offers different possibilities to save taxes. Forget it, if you believe that there is the one and only tax saving scheme. Consult your attorney or tax adviser on what will be the most profitable for you. Consider also that picking a corporation as legal form, taxes like wage tax for the director or Geschäftsführer will also come up.
Does the legal form match the peculiarities of your business?
The chosen form should always match your line of business. It differs in each line of business if the proprietor is to be held liable with his private property or not. A financial consultant might choose a GmbH while a group of translators might pick up a partnership company.
Which expenses can you and do you want to operate for your accounting?
Next to tax law, commercial law also decides on the requirements for bookkeeping. This decision heads to extreme differences. It is much easier to comply with the duty to keep records than bookkeeping for balance sheets.
How much may your legal formation cost?
Costs for an attorney (to draft necessary contracts, rules, to discuss tax matters), a notary public (to certificate corporations’ statutes and announce publicly), registration fees can easily sum up to € 5,000 or more on top of necessary minimal capital of € 25,000. But this is all a matter of negotiation with your consultants.
Are you willing to disclose your company’s financial data?
Corporations have the statutory duty to disclose their balance sheets to the public at the competent registry court. Some people are reluctant to comply because they will be giving information to their competitors.
How much funding capital do you have?
The correct legal form is especially important if you need venture capitalists. Only corporations qualify for financial input from venture capitalists. Otherwise, the funds would be in the private pocket of an individual. Having share in a corporation might secure the correct participation in co-determination and in supervision.
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