Limited liability company (GmbH)

The limited liability company (abbreviation: GmbH) is the most widespread legal form for companies in Germany. Like the AG and the Kommanditgesellschaft (KG), it is a corporation and is therefore legally considered a legal entity. There is a separation between the shareholders and the managing directors. The most important distinction between corporations and partnerships is liability.

You can find an overview of the different legal forms in Germany here: Legal forms

Legal bases

In business transactions, the GmbH acts as a legal entity and, as a company, concludes contracts, owns assets and pays taxes. This happens independently of the shareholders involved in the company. The management of the GmbH can be transferred to one of the shareholders (i.e. one of the founders) or an external managing director can be employed.

From a legal point of view, the GmbH is considered a commercial company within the meaning of the German Commercial Code (HGB); all legal bases for this can be found in the GmbHG.

Liability

The liability of a corporation is limited to the share capital.

The shareholders are therefore not liable with their private assets, but only with their share capital contributions, which they specify at the beginning in the articles of association. This is also the case with a GmbH, where the share capital is limited to €25,000. In the event of damage, the GmbH as such is liable with its entire company assets (equity, company building, money). For the shareholders, however, liability is limited to their share of the share capital contribution that they made at the beginning; their private assets are not taken into account in the liability.

Share capital

As already mentioned, the share capital of a GmbH is € 25,000. This must be contributed jointly by all shareholders of the GmbH. It does not matter how high the respective contributions are, they only have to be at least €1. However, it is important that the full €25,000 is not yet due at the time of formation. When the company is founded, it is initially sufficient to make a deposit of €12,500.

But caution is advised here:

In this case, the shareholders are personally jointly and severally liable until the full €25,000 has been paid. This means that all shareholders are jointly responsible for the loss and are also liable for the difference (€12,500) with their private assets. The initial contribution can be made in cash, in kind (machinery, real estate, etc.) or as a mixed contribution (cash or in kind).

Formation of a GmbH

1.

Draw up articles of association or model minutes

The formation of the GmbH begins with the drafting of the articles of association. Whether the model protocol or a partnership agreement is right for you depends on whether you are founding alone or have several founders. If you are founding alone, the standard template (sample protocol) is often sufficient. If there are several founders, an individually adapted articles of association, in which, for example, the sale of shares or inheritance are regulated, is recommended.

Contents of the articles of association

The content of the articles of association includes

• the name of the company

The company name can be chosen as desired. The only important thing here is that the designation "Gesellschaft mit beschränkter Haftung" or the abbreviation "GmbH" appears in the company name. The requirements of §§ 18, 30 HGB must be met and the name must not already be registered.

• The registered office
• The object of the company

The business purpose of the GmbH is described here.

• The amount of the share capital

The minimum share capital for a GmbH is € 25,000. For the Mini GmbH (UG) it is 1 euro.

• The amount of shares

The articles of association regulate how many shares each shareholder receives according to their share capital

• Further individual adjustments, e.g. the relationship between the shareholders, regulations when a shareholder leaves the company or when shares are inherited.

For comprehensive articles of association, it is advisable to draw them up together with a lawyer.

You can find templates for the statutory sample protocol here: https://www.musterprotokoll.de/download/

2.

Notarization

Together with your co-founders, you must now have the articles of association notarized by a notary. Important: bring a valid identity card with you. Once it has been notarized, you are now a GmbH in formation.

However, this may change soon, as it will be possible to form a GmbH online in the future (without a personal appointment with the notary). You can find out more about this here: /news/gmbh-anmeldung-ist-bald-online-moeglich/

3.

Opening a business account

The next step is to open a business account in the name of the GmbH and pay in the share capital.

4.

Transfer of the share capital

The minimum contribution of €12,500 must now be paid into the business account and each shareholder must transfer their share of the share capital. Particularly important: Keep the transfer receipt!

5.

GmbH registration

The transfer receipt must now be presented to the notary so that he can register your GmbH. To do this, he needs the certificate of incorporation, legitimation of the shareholders, list of shareholders, articles of association and proof of payment of the share capital. The entry in the commercial register is then made at the register court of the district court in whose district the registered office of the GmbH is located. The entry is made in section B of the commercial register. It now takes approx. 1-3 weeks until the entry in the commercial register is completed and you are officially a GmbH.

6.

Registration with the trade office

The next step is to register with the local trade office.

7.

IHK/HWK registration

After your GmbH has been entered in the commercial register, you will receive a letter from the Chamber of Industry and Commerce or the Chamber of Crafts. You will be asked to provide further information and you are now officially a member with your GmbH. This membership is compulsory and subject to a fee. The costs are based on the profit, whereby you have to pay a fee of €128 plus a basic amount (regardless of the profit) if your profit is between €50,000 and €100,000.

8.

Registration with the tax office

And last but not least, registration with the tax office in the form of a tax registration questionnaire. Here you already have to declare future sales. It therefore makes sense to think in advance about what turnover you expect for the coming financial year. The advance tax payments to the tax office are also calculated on this basis. At the end, you will receive a tax number with which you can write your first invoices and start your business activities as a GmbH.

Formation costs

The costs of founding a GmbH are made up of the share capital for the individual shareholders and the total costs of founding the GmbH. This includes around €600 for a notary, €170 for the commercial register application and €150 for the commercial register entry. Depending on the scope and necessity of the articles of association, which must be drawn up by a lawyer, there may be additional legal fees. The total costs of founding a company therefore amount to around €1000-2000. The share capital that must be deposited at the beginning of the formation is €12,500. This results in costs of at least €13,500 for the formation of the GmbH, which must be borne jointly.

Pre-GmbH liability

If you are already conducting business before the articles of association are drawn up, the various legal forms must be taken into account. Before your articles of association have been notarized by a notary, your GmbH is still considered a GbR. This is particularly important in terms of liability. The founders are personally and jointly and severally liable - i.e. with their private assets - for any liabilities that arise before the articles of association are notarized. After notarization until the official entry in the commercial register, your GmbH is still in the process of being founded. The official title is: GmbH i.G. The liability of the shareholders in a pre-GmbH is legally the same as in a GbR or OHG, the shareholders are personally and unlimitedly liable until the entry in the commercial register has been completed and the limitation of liability occurs.

The organs of a GmbH

A GmbH consists of the respective shareholders and one or more managing directors, who may or may not also be shareholders. In the case of a one-person GmbH, the managing director corresponds to the shareholder; this does not have to be the case if there are several shareholders.

Shareholder

A GmbH consists of one (one-person GmbH) or more shareholders. The shareholders jointly conclude a partnership agreement and make a contribution to the share capital of the GmbH. They receive shares in the GmbH based on the amount of their capital contribution, which are also defined in the articles of association.

Managing director

The managing director of a GmbH can be employed externally or be a shareholder of the GmbH. A GmbH must have one or more managing directors (§ 6 Para. 1 GmbHG). In accordance with §35 Para. 1 GmbHG, the managing director represents the company in and out of court. If a company does not have a managing director, the company is represented by the shareholders in the event that declarations of intent are made or documents are served on the company.

Shareholders' meeting

The shareholders' meeting represents the shareholders of the GmbH as a whole and is responsible for all matters relating to the GmbH that are not the responsibility of the management. The resolutions of the shareholders are passed jointly at the shareholders' meeting (§ 48 Para. 1 GmbHG).

Supervisory board

The formation of a supervisory board is not mandatory for a GmbH. A supervisory board can be formed if this is stipulated in the articles of association. However, as soon as a GmbH has more than 500 employees, it must form a supervisory board. The task of the supervisory board is then to monitor the management.

Rights and obligations of the shareholders

Rights

The shareholders of a GmbH have property rights on the one hand and control rights on the other. The most important property right of a shareholder is the right to the GmbH's annual surplus. The shareholders can decide whether the profits are to be distributed or retained in the company. In the event of a profit distribution, each shareholder receives a portion of the profit. In addition, the shareholders have a subscription right to newly issued shares in the GmbH in the event of a capital increase as well as the right to the liquidation proceeds of the GmbH.

A shareholder's control rights include the right to information. This means that the shareholder can demand at any time that the managing directors provide him with information about the affairs of the GmbH without delay and allow him to inspect the books(§ 51a Para. 1 GmbHG).

In addition, the administrative rights of the shareholders authorize them to participate in the shareholders' meeting and to vote at the meeting.

Duties

The main obligation of a shareholder is to fulfill his capital contribution and to pay his share of the share capital into the company (§19 Para. 1 GmbHG).

Unless otherwise stipulated in the articles of association, shareholders may freely dispose of their share. Depending on the provisions of the articles of association, a shareholder's share can also be sold, inherited or given away.

In addition to the obligation to pay the share capital contribution, the shareholder has a duty of loyalty to the company. In concrete terms, this means safeguarding the interests of the company and refraining from actions that damage the company.

Taxes

The taxation of a limited liability company includes corporation tax and trade tax. On average, this results in a tax rate of around 30% on the company's profits. In addition, sales tax and capital gains tax may also be incurred when profits are distributed.

Corporation tax

The income of the GmbH is subject to corporation tax at a rate of 15% plus a 5.5% solidarity surcharge on the corporation tax, so that the total tax share is 15.825% of the taxable income.

Trade tax

According to the German Commercial Code (HGB), a GmbH is considered a trading company (Section 13 (3) GmbHG) and is therefore also subject to trade tax. In contrast to a GbR, OHG or KG, there is no tax allowance for trade tax for a GmbH. The trade tax to be paid is calculated from the company's profit (trade income) multiplied by the flat rate of 3.5% and the trade tax multiplier, which differs depending on the municipality. On average, 400% can be calculated here. This results in an average trade tax rate of 14%.

Turnover tax

In addition, sales tax of 19% or 7% must be paid on sales that are made. However, this is borne by the end customer in the form of VAT. If the GmbH itself purchases services or products, it must also pay VAT as the end consumer, but can reclaim this from the tax office as it is an entrepreneur. In this case, this is referred to as input tax deduction.

Capital gains tax

When profits are distributed to the shareholders of a GmbH, they must be taxed at a rate of 25% in accordance with the capital gains tax plus the solidarity surcharge.

Tax tips for GmbHs

As already mentioned, the profits paid out to the shareholders of a GmbH must be taxed at the capital gains tax rate of 25% plus solidarity surcharge.

However, there is another way to pay tax on these profits, namely with the income tax of the respective shareholders. In principle, however, income tax is higher than capital gains tax, averaging around 42%. However, there is the option of using the partial income method (Section 32d (2) No. 3 EStG). The partial income method means that only 60% of the income received must be taxed at the income tax rate, the remaining 40% is tax-free. With an income tax rate of 42 %, the total tax burden is 25.2 %, so it is not much different from capital gains tax.

However, the situation is different if the shareholder has a lower income tax rate, as the tax burden is then less than 25% and therefore less than the capital gains tax.

Depending on the income tax rate, shareholders of a GmbH should therefore consider whether they want to apply for the partial income procedure or whether they want to pay tax on their profits as usual with capital gains tax.

Bookkeeping

According to HGB §238 and tax law §140 of the German Fiscal Code, corporations, including GmbHs, are obliged to keep double-entry accounts.

Special forms of the GmbH

Dissolution of the GmbH

According to § 60 GmbHG, a GmbH is dissolved, among other things

• by expiry of the period specified in the articles of association
• by resolution of the shareholders (more than 3/4 of the shareholders' meeting)
• by a court judgment
• by the opening of insolvency proceedings

Liquidation of the GmbH

The liquidation of a GmbH takes place after its dissolution. According to § 71 GmbHG, the liquidation must be stated on the company's business letters. This can be recognized by the abbreviation GmbH i.L.. The shareholders are entitled to the liquidation proceeds.

Advantages and disadvantages of the GmbH

Advantages of a GmbH

+ Liability is limited to company assets

+ Taxation of profits around 30%, individual tax rate may be higher

+ Favorable for formation with several shareholders, agreements are set out in the articles of association

+Looks more reputable due to entry in the commercial register

+Formation is also possible for one person (one-person GmbH)

Disadvantages of a GmbH

-Minimum capital is € 25,000

-Notary and possibly legal fees are incurred for the formation

-Strict regulations apply with regard to bookkeeping, accounting and publication

GmbH and other legal forms in comparison

❓FAQ-GmbH

What is a GmbH?

The abbreviation GmbH stands for Gesellschaft mit beschränkter Haftung (limited liability company). A GmbH is one of the legal forms of a corporation, which means that it is a legal entity and, unlike partnerships, its liability is limited. With the legal form of a GmbH, the company is liable with all of its assets. However, the liability of the shareholders is also limited to the company's assets; they are not liable with their private assets, only with their share of the share capital contribution of €25,000.

Who is liable for a GmbH?

In the case of a GmbH, the GmbH as such is liable as a corporation. Liability is limited to the company's assets (money in company accounts, machinery, buildings). The shareholders involved in the GmbH are therefore only liable with their share capital contribution to the GmbH, but not with their private assets.

Why set up a GmbH?

Setting up a GmbH can make sense for various reasons. The most common reason, however, is the limited liability of the GmbH. Compared to partnerships such as the GbR, liability is limited to the company's assets. The shareholders of the GmbH are therefore not personally liable with their private assets, which reduces the risk for them. In addition, the GmbH is the most widespread legal form in Germany and therefore has a high reputation. The high share capital contribution of €25,000 suggests to investors and creditors that the company is liquid and creditworthy. Confidence in a GmbH is therefore high. In addition, a GmbH often offers a tax advantage, as the tax rate on profits within the company is around 30%. The individual tax rate for private individuals, as applied in partnerships, can often be higher. As a result, setting up a GmbH can also have tax advantages.

Why set up a GmbH & Co. KG be founded?

A GmbH & Co. KG is a special form of KG. It is therefore one of the partnerships. The difference to the KG, however, is that the general partner, i.e. the personally liable partner, is not a natural person, but a GmbH. The limited partner, i.e. the partner who contributes the capital to the company, is a natural person. The advantage of a GmbH& Co. KG is to combine the advantages of a KG in raising capital with the advantages of the limited liability of a GmbH.

When does a GmbH make sense?

A GmbH is particularly useful if the necessary share capital of €25,000 or €12,500 is available when the company is founded. This legal form is primarily suitable for products and services that are more risky, as liability is limited to the company's assets. In addition, the GmbH legal form has a good reputation and therefore makes it easier to take out loans and scale the company.

When are shareholders of a GmbH liable?

In principle, the GmbH is liable for obligations to creditors with its company assets, but not the shareholders. In individual cases of culpable breaches by the managing director, the managing director is liable to the GmbH. In some exceptional cases, shareholders may also be personally liable with their private assets. This is the case, for example, if the capital contributed by a shareholder at the beginning was provided in the form of a contribution in kind that loses its value. In this case, the shareholder is obliged to compensate for the loss in value with their private assets. Furthermore, the shareholders are obliged to maintain the company's share capital and not to pay it out to the shareholders. If a shareholder is not in a position to pay his share to maintain the capital, the co-shareholders are liable to the GmbH with their private assets. A further exception in which the shareholders are liable with their private assets arises in the case of criminal offenses committed by the shareholders within the scope of the GmbH's responsibility, e.g. embezzlement, bribery, fraud, in which case personal and unlimited liability arises.

When is a GmbH overindebted?

A GmbH is deemed to be over-indebted in accordance with Section 19 (2) of the Insolvency Code if its debts exceed its assets. As a result, the company must file for insolvency within three weeks. You can read what happens if this is not done in our article on delaying insolvency.

Why a GmbH and not a UG?

The main advantage of a GmbH over a UG is that it is more likely to receive loans and trust from customers and creditors due to its higher share capital. In addition, it is possible to distribute the profits of a GmbH annually, whereas in a UG, 25% of the profits must be retained as a legal reserve in order to achieve a share capital of €25,000 in the long term. Another disadvantage of the UG is the obligation to contribute the share capital in cash. While a GmbH can also make contributions in kind, a UG can only make a contribution in cash.

Why a GmbH instead of an OHG?

The biggest advantage of a GmbH compared to an OHG is the limited liability of the GmbH. Liability is limited to the company's assets and the shareholders are not personally liable - this is not the case with an OHG. Another advantage is the potentially lower tax rate for a GmbH. As a corporation, only corporation tax and trade tax are levied on the profits of a GmbH. Overall, this results in an approximate tax rate of 30%. In the case of a partnership such as an OHG, the individual partners are liable for income tax. The top rate for this is 45%.

Why GmbH and not AG?

One of the biggest differences between these two corporations is the share capital. While a GmbH requires €25,000, an AG requires €50,000. The GmbH is therefore more suitable for founders who do not have such a large starting sum. Another advantage of a GmbH over an AG is that it takes less time and money to set up. This is due to the fact that the stock market laws must be complied with in the case of an AG. Founding a GmbH is therefore much less complicated and is therefore more suitable for start-ups.

Which commercial register is the right one for a GmbH?

A GmbH is entered in the commercial register at the register court of the district court in whose district the GmbH is based. The entry is made in section B of the commercial register.

What is a mini-GmbH?

A mini-GmbH is the colloquial term for a UG. The mini-GmbH is a sub-form of the GmbH and differs primarily from the GmbH in the amount of the share capital contribution. This is only 1 euro for the Mini-GmbH. You can find out more about this legal form in the detailed article on the Unternehmergesellschaft (UG).

How much can a GmbH managing director earn?

In principle, there is no upper limit for the earnings of a managing director. However, it is important to ensure that the managing director's remuneration is legally compliant, i.e. it should not be too high in order to avoid the suspicion of a hidden profit distribution. As a guide, the average GmbH managing director earns €137,500. Another rule of thumb is that a managing director's salary may correspond to approximately 2.5 times the salary of the second highest-paid employee. This rule of thumb applies according to BFH case law and is referred to as an internal salary comparison. In general, it should be noted that there is a clear distinction within the managing director agreement between the remuneration as managing director and the withdrawal of profits as a shareholder.

How long does it take to set up a GmbH?

The duration of a GmbH formation depends on various factors. For example, whether the necessary share capital is already available at the start or a loan has to be taken out, how quickly a notary appointment is available and whether all the important documents are already available. Ideally, all formalities can be completed within two weeks. In reality, however, setting up a company takes an average of six months due to long-term planning and loan applications, etc.

What is an asset-managing GmbH?

An asset-managing GmbH is a GmbH which, as the name suggests, is used for asset management. For example, private individuals can use it to invest in real estate, shares or securities. This results in significant tax savings. For example, profits from securities must be taxed as a private individual at a rate of 25% capital gains tax. In the case of profits from investments within a GmbH, it is only necessary to pay tax on 5% of the total profits at a tax rate of 30% (made up of corporation tax and trade tax). You can find out more about the reasons for and advantages of an asset-managing GmbH here: Asset-managing GmbH

What is a gGmbH?

A gGmbH is a GmbH whose corporate purpose is charitable. Due to its non-profit status, a gGmbH is exempt from corporation tax and trade tax, for example. However, profits may not be paid out to the gGmbH's shareholders. Common examples of gGmbHs are schools, daycare centers, hospitals and museums. You can find out more about gGmbHs here: Non-profit limited liability company (gGmbH)

Can a GbR be converted into a GmbH?

If the business activities and objectives change or expand, it is perfectly possible to convert a GbR into a GmbH.

There are various options for this:

1) Transformation through the Transformation Act

To do this, the GbR must first be entered in the commercial register. With the entry in the commercial register, the GbR automatically becomes an OHG, which can now be easily converted into a GmbH by means of the Transformation Act.

2) GbR as a contribution in kind

The second option is to contribute the GbR to the GmbH as a contribution in kind. The share capital of the newly founded GmbH then consists of the existing GbR.

3) GbR as a share in the share capital

The last option consists of founding a GmbH in cash. The share capital of the GmbH is thus largely provided in cash, while the GbR is only contributed on a pro rata basis. This results in a split of the high-risk and low-risk parts of the company. All low-risk parts of the company remain in the GbR, while the high-risk parts of the company are transferred to the GmbH. The main advantage of this method is that rights of use can be retained as private assets. The disadvantage is the administrative effort.

How can you check whether a GmbH really exists?

The easiest way is to check the company register in the Federal Gazette. All commercial register entries are displayed here. However, the complete extract from the commercial register cannot be viewed here. This is subject to a fee and can be found on the website: www.handelsregister.de.