Legal forms

GmbH, UG, GbR, OHG or the mini-GmbH? Which legal form is the right one for your start-up?

Here you will find an overview of the most important legal forms and their advantages and disadvantages.

The choice of legal form is one of the most important decisions for the company at the start of its foundation. This will have personal, financial, tax and legal consequences later on. But which is the right one?

First of all, a distinction must be made between legal forms for sole traders, partnerships and corporations.

Sole traders can be freelancers, small traders or businessmen. For example, insurance brokers, kiosk owners or people who practise liberal professions such as doctors or lawyers.

In the broadest sense, a sole proprietorship is any independent activity of a natural person.

Possible legal forms of sole traders are

• Freelancer
• Small trader
• Merchant e.K.

Sole traders are not obliged to be entered in the commercial register unless they are actual traders in accordance with § 1 Para. 1 HGB, i.e. they operate a commercial business in accordance with § 1 Para. 2 HGB, i.e. a business set up in a commercial manner in terms of type and scope, e.g. with a turnover of € 600,000 or more or more than 5 employees. Anyone who is not an actual merchant can voluntarily register in the commercial register. By registering in the commercial register, sole traders automatically become merchants, with all the associated rights and obligations.

The law does not stipulate a minimum capital contribution for sole traders. The liability of the sole proprietor relates to all of his assets; no distinction is made between his private assets and business assets.

The liability of partnerships is similar.

These include the:

• Civil law partnership (GbR)
• General partnership (OHG)
• Limited partnership (KG)
• GmbH & Co. KG

A partnership is an association of at least two persons for the realization of a specific purpose, i.e. for the operation of a joint business. In legal terms, a partnership differs from a corporation in that it is not a legal entity. The partners are also managing directors and are jointly liable - even with their private assets. Partnerships are not subject to corporation tax, but their profits are subject to the income tax of the respective partners when they are distributed.

Corporations, on the other hand, are legally considered a legal entity and there is a separation between shareholders and managing directors. As a rule, the shareholders give money to the company but are not involved in the company management. It is not possible to participate in a corporation without a capital contribution, but personal involvement by the shareholders is not required. Liability is limited to the company capital and the shareholders are not liable with their personal assets.

Possible forms of corporations are

• Limited liability company (GmbH)
• Entrepreneurial company (UG) - also known as a mini-GmbH
• PUBLIC LIMITED COMPANY
• Societas Europaea (SE)

Based on the number of existing companies in Germany, the legal form of sole proprietorship is the most popular in Germany. According to Statista, there were around 2 million sole proprietors in Germany in 2019, followed by just under 76,000 corporations and around 40,000 partnerships. Within the corporations, the GmbH is one of the most popular legal forms, with around 77,000 new GmbHs founded in 2020 alone. In comparison: around 25,000 UGs and 501 AGs were founded.