What types of companies are there in Germany?

What types of companies are there in Germany, what advantages and disadvantages do they have and which type of company is right for me? A guide from lawyer Carsten Lexa.

If you are thinking about starting a company in Germany, you will quickly realize that one of the first and most important decisions is choosing the right type of company.

This decision has far-reaching consequences, for example for your liability, the amount of start-up capital required or the formal requirements for founding a company.

In this article I will give you an overview of the most important types of companies in Germany, explain what you should pay attention to when choosing, and show you what practical considerations you should make when making your choice.

Types of companies in Germany: partnership or corporation

In Germany, a basic distinction is made between two groups of company forms: partnerships such as the OHG or KG and the capital companies such as the GmbH or the UG. These bring with them significant differences, for example in terms of founding capital, founding formalities and liability.

• Founding capital: For partnerships, there are generally no fixed minimum requirements for founding capital. This means that you can theoretically set up a partnership without capital. Corporations, on the other hand, require a certain minimum capital when they are founded, for example 25,000 euros for a GmbH.
• Formation formalities: Setting up a partnership is relatively uncomplicated and often only requires an agreement between the partners and a few subsequent registrations and registrations with the authorities. Notarial certifications, on the other hand, are generally not necessary. Capital companies, on the other hand, have stricter founding formalities. The notarial certification of the partnership agreement and entry in the commercial register are mandatory here. In addition, the founding capital must be proven.
• Liability: In partnerships, the partners are personally liable with all of their private assets. The liability risk can therefore be high, especially if the company stumbles economically. In the case of corporations, however, liability is limited to the company’s assets. This means that as a founder you are not liable with your private assets, but only lose the capital you have contributed.

The most important types of companies in Germany at a glance

Now that you know the main differences between partnerships and corporations, let’s take a look at the most important corporate forms that are possible for founders in Germany.

General partnership (OHG)

The OHG is a partnership that requires at least two partners and a common purpose. Nothing more is needed, not even a written partnership agreement (although one is of course useful for evidentiary reasons). However, all shareholders are personally, unlimitedly and jointly liable for the company’s debts, which of course represents a not insignificant risk.

However, no minimum capital is required to found a general partnership. However, registration in the commercial register is mandatory, but does not require notarization. The company’s profits are usually divided equally between the partners, unless otherwise agreed in the partnership agreement.

Limited partnership (KG)

The KG is another form of partnership that has two different types of partners: the general partner and the limited partner. The general partner is personally and unlimitedly liable with his entire assets, the limited partner only with his investment. If the contribution was made by the limited partner, i.e. paid to the company, further liability is generally excluded.

And as with the OHG, there is no minimum capital required for the KG. However, the partners must specify in the partnership agreement what contribution the limited partner must make, which will be listed in the commercial register; this is at least one euro.

The profits of a KG are distributed either according to the regulation in the partnership agreement or according to the law, and here basically according to the ratio of the contributions. If necessary, compensation for the general partner as well as the 4 percent compensation on the shareholders’ contribution must be taken into account.

GmbH & Co. KG

The GmbH & Co. KG is a special form of the KG. As a partnership, it combines the elements of a KG with the limitation of liability for the general partner through the use of a limited liability GmbH. In this constellation, a GmbH takes on the role of general partner. This limits the liability of the personally liable partner to the company assets of the GmbH.

Both the GmbH and the KG are required to form the company, which makes the founding process a little more complex. A minimum capital is not required for the KG (but the limited partner requires a minimum deposit of one euro), but the GmbH requires a share capital of at least 25,000 euros.

The GmbH & Co. KG is often chosen in practice in order to combine the limited liability of the GmbH with the flexibility and allowances of the KG or its shareholders.

Limited Liability Company (GmbH)

The GmbH is the most popular legal form for corporations in Germany, which is due to the relatively simple way it is founded and certainly due to the limitation of liability. Liability is limited to the company’s assets, so that the private assets of the partners remain protected.

To found a GmbH, a minimum capital of 25,000 euros is required. In addition, the partnership agreement must be notarized and the company must be entered in the commercial register. The profit is distributed according to the shareholders’ shares in the share capital.

Entrepreneurial company (limited liability) – UG (limited liability)

The UG (the official spelling requires the “limited liability” in brackets) is a special form of the GmbH and is often referred to as a “mini-GmbH”. It is particularly popular with founders who want to start with little capital, and like a GmbH, liability is limited to the company’s assets.

In contrast to a GmbH, no minimum capital is required to found a UG, although a minimum amount of one euro is required for entry in the commercial register.

However, as part of its business activities, the UG must create annual reserves amounting to 25 percent of profits in order to gradually build up the minimum capital of a GmbH of 25,000 euros. However, a UG can be founded without a partnership agreement using the so-called “model protocol”, which greatly reduces the founding costs.

The UG therefore offers the advantage that it offers a simple and cost-effective way to set up a corporation without requiring a large amount of start-up capital.

stock corporation (AG)

Finally, the AG is a corporation that is particularly suitable for larger companies because it has the highest minimum capital requirements and also has certain requirements with regard to the articles of association and articles of association. However, it offers the advantage of placing shares on the stock exchange and thus carrying out financing.

As with GmbH and UG, the liability of the partners, the shareholders, is limited to the respective contributions.
The establishment of an AG requires a minimum capital of 50,000 euros.

In addition, the founding process is more complex, more people are required – not only is a board of directors, comparable to the managing director of a GmbH, required, but three people are also needed for the supervisory board – and as with the GmbH and the UG, the notarization of the Articles of association and registration of the company in the commercial register are mandatory.

Excursus: European forms of society

In addition to the classic German corporate forms, there is also the possibility in Germany to use corporate forms from other EU countries, for example the “Società a Responsabilità Limitata” (Srl) from Italy or the “Société à responsabilité limitée” (SARL) from France.

These corporate forms can be interesting for founders who want to operate internationally. However, the legal and tax treatment of these companies in Germany is often complex, as requirements of the respective country from which the company form comes and of the Germany where the company operates must be taken into account.

I’ll spare you the details here; If you are of the opinion that this option is interesting or useful for you, then we would be happy to discuss it separately.

Germany: How do I choose the right type of company?

Choosing the right type of company is one of the most important decisions you have to make as a founder. Which specific option should be in your case depends on a number of factors. I would like to warn you about this, prematurely choosing a GmbH.

Even though this form of company brings many advantages and is therefore regularly – rightly – chosen by founders, there are sometimes good reasons for choosing a different form of company. Questions of liability, taxation, founding capital, handling and information obligations play a role in this context.

To give you at least initial clues for deciding on a specific type of company, you can consider the following examples:

• How high is the risk in your industry or with regard to your specific company purpose? If you operate in an industry with a high liability risk, or if your specific business purpose involves a high level of risk, it makes sense to choose a corporation to protect your private assets.
• How much capital do you need to start and run your business? If you need little start-up capital, the UG or a partnership could be an option for you. However, if you’re going to be making larger investments right from the start, a GmbH or even an AG may be more suitable.
• Do you want to remain flexible, for example with regard to withdrawals or the distribution of profits? In this case, a partnership could make more sense than a corporation, as their handling is often regulated with less strict requirements than with corporations.

Conclusion: Types of companies in Germany

In this article you have received an overview of the different types of companies in Germany. You now know the main differences between partnerships and corporations, especially with regard to founding capital, liability and formation formalities. And we discussed the most important German company forms and their special features.

Choosing the right type of business is not a decision you should make lightly. In practice, the individual requirements and goals of your company, such as the risk profile or the desired flexibility, play a decisive role in the decision.

Therefore, take the time to weigh up the various options and, if necessary, consult experts to find the right type of company for your project. Ultimately, the corporate form you choose should fit your goals and plans and help you put your company on a solid basis.

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