Limited liability company GmbH – After the AG, the limited liability company (GmbH) is the best-known form of corporation. It is particularly suitable for entrepreneurs who want to limit their responsibility and liability. In Germany, the limited liability company is the most common form of business.

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Limited liability company GmbH: We have compiled everything you need to know about the GmbH and its special features for you below.

Table of contents

  1. GmbH – Explanation of terms
  2. GmbH & Co. KG
  3. Formation of a limited liability company GmbH
  4. Entry in the Commercial Register
  5. GmbH: Organs and management
  6. Liability and responsibilities
  7. Accounting in a limited liability company GmbH
  8. Distribution of profits and losses
  9. Limited liability companies and their taxation
  10. Advantages and disadvantages of a limited liability company
  11. GmbH – Lawyer for company law

What does the abbreviation “GmbH” mean?

The term “Gesellschaft mit beschränkter Haftung” is abbreviated as “GmbH”. The very name of this German corporate form reveals that its main feature is that of limited liability. Many entrepreneurs take exactly this factor into account when deciding whether or not to establish such a legal form.

What exactly is a GmbH? Definition

Both as a one-person GmbH or as a multi-person GmbH, the structure of this form of company functions independently. The owner or owners of a limited liability company are called partners. In a limited liability company, the partners are not liable with their private assets.

Since the GmbH stands for creditworthiness, it is one of the most common legal forms in Germany. Like many other forms of business, it is entered in the commercial register when it is founded. Everyone thus has access to the essential information about the company, such as the names of the shareholders, the company’s registered office, the share capital paid, etc. The management of the GmbH is either carried out by a dedicated management board or by a private company.

The management of the GmbH is assumed either by a managing director hired specifically for this position, or by one of the shareholders.

According to German law, with reference to the HGB, the limited liability company is considered both a corporation and a legal entity. It is a widespread and popular legal form, especially among medium-sized companies, due to the limited liability of the shareholders.

“Limited liability Company GmbH” – what exactly does that mean?

Limited liability means that the GmbH – as a corporation – is liable with its total corporate assets. Not, however, with the private assets of the shareholder.

Why is this so important? Quite simply, it makes it relatively easy to quantify the economic and financial risk that the founders take. If a case of liability damage occurs, the private assets are untouchable. No matter whether and to what extent the partners have assets such as private real estate, private vehicles, capital investments or the like.

In summary: The liability sum therefore only includes the partners’ shares in the GmbH. These are explicitly stipulated in the articles of association when the company is founded.

In its legal status, the limited liability company is an independent legal entity. This entails duties, responsibilities and rights. At the same time, it is a commercial company in the understanding of the Commercial Code (HGB).

GmbH & Co. KG

GmbH & Co. KG is the abbreviation for Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft. In Germany, this legal form is a limited partnership (KG). In our neighbouring country Austria, however, it is considered a partnership, as it is a special form of limited partnership.

Formation of a limited liability company

The formation of a limited liability company must be carried out by at least one person. In this case, one speaks of a one-person GmbH. Only after it has been entered in the commercial register is the limited liability company a legal entity.

The cornerstone of the formation of a limited liability company GmbH is a partnership agreement signed by the partners. This must be certified by a notary. Furthermore, it must contain certain specified information:

  • Naming of the partners
  • Amount of the capital contribution and its distribution among the partners
  • Name of the company
  • Location/registered office

What does it cost to set up a GmbH?

We have now answered your question “What is a GmbH? But surely you are now asking yourself how much capital is needed to found such a legal form.

Unfortunately, there is no general answer to this question. However, the share capital that you have to provide is in fact the largest part of the formation costs. The additional costs for the notary, commercial register, tax advisor and court vary.

How much is the share capital of a GmbH?

The share capital for the GmbH company form is 25,000 euros in total. In the case of the formation of a multi-person GmbH, the total amount is divided among all shareholders. The shares can be quite unequal:

  • Founder A, for example, can contribute 20,000 euros (80 %) to the share capital,
  • while founder B contributes 5,000 euros (20 %).

It is also possible to found a company with initially only half of the required capital. So even if you do not have the entire share capital, it is not impossible for you to found a GmbH. You only need to be able to raise at least half of the normally required share capital, i.e. 12,500 euros, at the time of formation. However, the remaining amount should be paid as soon as possible. After all, it is owed by the company founders.

But what does this possibility mean for limited liability? The amount of the obligation remains the same! This means: If the GmbH becomes overindebted, the partners are personally liable for the outstanding total amount of the share capital.

It is also possible to establish a limited liability company in the form of contributions in kind. Donations of vehicles, machinery or similar assets are quite recognised.

By the way: If a person wants to found an entrepreneurial company (UG), the required share capital is only 1 euro. The UG is a legally independent form of limited liability company.

When must the capital contribution be paid in and where must it be paid in?

Anyone who wants to establish a GmbH must go to a notary. The formation documents are then certified by the notary. Then it’s about the money: According to the articles of association, the share capital must be paid into the GmbH’s business account. The notary must then be presented with the deposit slip. Only then may a business registration take place.

Limited liability company GmbH: Entry in the commercial register

The model procedure or articles of association must be certified by a notary. The notary sends the contract on to the commercial register. Now the founder has until the GmbH is entered in the commercial register to pay in the share capital.

Donations can be made in the form of cash, contributions in kind or a combination of both (cash and contributions in kind). Before the company can be incorporated, the contributions in kind must be made.

Before the company can be established, at least 12,500 euros – i.e. half of the share capital – must be raised in addition to the contributions in kind.

GmbH – Documents for entry in the commercial register

A large number of documents must be submitted to the commercial register. A signed list of shareholders with:

  1. Shareholders: dates of birth and places of residence
  2. Full name
  3. the amount of the capital contribution of the individual partners, in the case of contributions in kind the model protocol or articles of association
  4. the legitimation of the managing directors, unless they are already named in the articles of association.

In the application, a declaration must be made that the stipulated minimum amounts have been paid, that these are available to the managing director and that there are no reasons under criminal law that contradict the appointment as managing director (§ 6 para. 2 GmbHG).

The name of the limited liability company

The name of the limited liability company is the company name. It is entered in the commercial register and appears in business transactions under this name. The name can be a fancy name like Plus-Minus-GmbH, a factual name like “Obst- und Gemüsehandel GmbH”, the name of the shareholder or a mixture of all these things.

If the activity of the company is actually connected with the place indicated, a geographical name is also conceivable.

The addition “limited liability company” or “GmbH” must always be present in the name.

To avoid misunderstandings with other companies, you should talk to your local Chamber of Industry and Commerce or Chamber of Crafts beforehand.

Organs and management – Limited liability company GmbH

The legislator stipulates that every GmbH must have at least one managing director – however, several managing directors are also possible. Their duty is to represent the GmbH externally. The managing director(s) can also be shareholders at the same time, but they do not have to be.
The shareholders’ meeting is the decision-making body alongside the management.

The shareholders’ meeting is where the decisions of the shareholders (partners) are made.

GmbHs that have more than 500 employees must also appoint a supervisory board, which acts as the management body.

The internal organs of the GmbH

The GmbH is composed of 3 parts:

  1. The managing director: The GmbH must have at least one managing director who manages the company’s business and represents it externally. The managing director may, but need not, be identical with the shareholder.
  2. The shareholders’ meeting of a one-person GmbH consists of only one shareholder, who is usually also the managing director. Tasks: Approval of the annual accounts and passing resolutions on the use of funds, etc.
  3. Supervisory board: This body supervises the management, but is only required if the company has more than 500 employees.

Limited liability company GmbH: Management – Requirements

The GmbH is a legally recognised company. This means that in business transactions it is not the owners but the company that acts as a merchant. This means that the GmbH concludes contracts, owns assets and must pay taxes, for example.

It needs a managing director who is charged by it with the administration of these and all other business matters.

The founder or a managing director chosen by the founder may act as managing director. The managing director must be a natural, person who has unlimited legal capacity.

Persons who have been convicted of a bankruptcy offence, misrepresentation, deception, wilful default in insolvency, or general corporate offences are disqualified from acting as a director for a period of five years. Specifically mentioned here are embezzlement and fraud.

GmbH: Liability & Responsibilities

The limited liability of the GmbH already follows from its name: The liability of the GmbH always relates to the company’s assets. In the case of partnerships, the shareholders are also liable with their private assets – but not in the case of the GmbH. Here the private assets remain untouched.

In most cases, liability towards creditors is limited to their business assets. If the managing director violates the “due diligence of a prudent businessman” § 347 HGB in his function, he must compensate the company for the damage.

He is then personally liable to the company. Although there are exceptions, the partners themselves are not liable with their own assets.

Examples: In the case of personal loans or guarantees, they are also liable with their own assets. They are also personally liable if they violate the strict regulations on the control of the GmbH’s capital, as well as in the case of the pass-through liability.

Especially as a potential managing director of a GmbH, you should be aware of the liability issues involved.

Limited Liability Company – Accounting Duties

The GmbH has a duty of disclosure like a corporation. This means the obligation to publish the annual accounts in the electronic Federal Gazette. This may also include the accounting of profits and losses.

The GmbH is subject to the provisions of the German Commercial Code (HGB). It is obliged to keep statutory accounts (double-entry bookkeeping with annual balance sheet).

Distribution of profits & losses

Profits and losses are distributed according to the shareholders’ shares, as is usual for companies. The larger a shareholder’s share in the profits, the more shares he holds in the GmbH.

The general meeting of shareholders determines how profits are distributed and allocated. In most cases, parts of the profit are placed in a reserve instead of being distributed.

Limited liability company GmbHs and their taxation

The GmbH is responsible for paying corporation tax, trade tax and the solidarity surcharge. Profit distributions to the shareholders are subject to capital gains tax.

It is not the shareholders as individuals who are taxed, but the GmbH as a company. Taxes of the following categories are incurred:

  • Income tax for corporations: The corporate income tax for is the same as the income tax for partnerships.
  • Capital gains tax is levied on profits; the GmbH distributes these to its shareholders as dividends.
  • Trade tax: As a formal merchant, the GmbH is liable to trade tax under the German Commercial Code (HGB). Partnerships and also sole proprietorships benefit from tax concessions – but not the GmbH.
  • Turnover tax: The GmbH, like all other companies, is subject to turnover tax.

Pros and cons of a GmbH

The GmbH is a widespread form of business, especially among medium-sized companies. Some advantages of the legal form are listed below:

  • Liability is limited to the assets of the company.
  • Personal legal capacity
  • Shareholders can be changed without difficulty
  • Corporate tax rates are low.

The following are some disadvantages of the GmbH:

  • Articles of association must be notarised.
  • Balance sheets must be prepared according to the German Commercial Code (HGB).
  • 25,000 € is a high capital commitment.

Limited liability company GmbH – Lawyer for company law

Which legal form is best for you depends on several factors.

Do you need legal advice on setting up a company, do you have questions about liability and taxation or would you like support in deciding on the right legal form for your company formation?

Our lawyers at the Herfurtner law firm can advise you on corporate law issues throughout the German-speaking world. Please feel free to contact us and arrange a consultation.