These legal forms are possible for a start-up

Fancy starting a business, or changing legal forms? A look at the advantages and disadvantages.

A good idea is far from enough for a good start-up. Even before the start, founders should think about the legal form of their future company - even if the subsequent change is relatively simple. Because it depends not only on how investors assess the start-up, but also whether you are liable with your private assets.

Each legal form has its own advantages and disadvantages. An overview of which legal forms come into question and which founders should rather keep their hands off:

Caution with GbR and sole proprietorship

Both the partnership under civil law (GbR) and the sole proprietorship are partnerships. With a GbR there are several partners, with a sole proprietorship accordingly only one. For both legal forms it applies that founders do not have to spend a share capital - they are liable in return, however, also with her private fortune. If the own enterprise becomes indebted, founders must fall back on their savings or even their private property, in order to pay off the debts.

"A partnership therefore almost never makes sense if you want to found a start-up," says Thilo Winkeler of law firm K&L Gates. Also for investors it is not attractive to take part in it. Because as soon as they get involved, they are also liable with their private assets. "Hardly any investor will do that to themselves," says Thilo Winkeler's partner Alexander Kollmorgen. "I myself am therefore also not aware of any technology-driven start-up that was founded as a GbR."

A partnership thus comes into question, if at all, only for founders who do not want to bring an investor on board and whose business is associated with few risks. Often, for example, foresters or freelancers register a sole proprietorship. A GbR is possible for bands, joint medical practices or for a marketing agency.

First set up a UG and then convert to a GmbH

All other legal forms that come into question are corporations. Alexander Kollmorgen advises founders who do not have any start-up capital to opt for a so-called Unternehmergesellschaft (UG) for the beginning. "In a way, it is the German answer to the Limited (Ltd.), which is widely used in the English-speaking world," he says. With a UG, founders are no longer liable with their private assets. They can determine the amount of the deposited share capital themselves. The amount of the deposit determines their share in the company accordingly. "Thus, it is very easy to divide who should have what share in the company," says Alexander Kollmorgen.

However, the UG has the peculiarity that after each fiscal year, 25 percent of the annual net profit is retained. "Ideally, founders should leave their start-up as a UG until they have 25,000 euros together, then they can convert it into a full-fledged GmbH by means of a capital increase," says Thilo Winkeler. "However, the share capital can also consist of tangible assets, such as a car, machines, computers or similar," says Alexander Kollmorgen. In that case, founders must call in an appraiser to determine the value of the individual items. "In addition, the amount of share capital should not scare you, it can be used for the purposes of the company," says Thilo Winkeler.

According to the current start-up report of the state development bank KfW, a good fifth of all founders wanted to resort to venture capital last year. Especially for them, the GmbH is the most sensible legal form, says Winkeler. Because in a GmbH investors can also have a say, as they usually take over part of the company shares.

Only choose the public limited company if an IPO is imminent

Some founders also choose the German stock corporation (AG) or the European variant (SE) as their legal form. Thilo Winkeler advises to choose such a legal form only if going public is planned. "You can make many more legal mistakes in a stock corporation," says Alexander Kollmorgen. Founders are, for example, much more limited in the design of their articles of association. In addition, a supervisory board is mandatory. In a GmbH, it is still voluntary. Another hurdle is the start-up capital: An SE requires 120,000 euros, an AG needs a share capital of 50,000 euros. Because of all the hurdles, these two legal forms are therefore generally not the right choice for a start-up, says Thilo Winkeler.