A GmbH offers many advantages. It can be set up quickly, can be used flexibly and offers every shareholder protection from liability with their own assets. The GmbH is therefore the most common type of company in Germany. If you want to set up a company or want to convert an existing company into a GmbH, you should know the advantages, risks and requirements. As a lawyer and specialist lawyer for commercial and corporate law and specialist lawyer for international business law, we would be happy to advise you on all of these questions and points:
- What are the advantages of a GmbH?
- What provisions must the articles of association contain?
- What are the risks of starting a business?
- What is the process of founding a GmbH?
- What are the special features of the one-man GmbH?
- What special features apply to start-ups?
- Is the UG a sensible alternative?
What are the advantages of a GmbH?
Limitation of liability, flexibility, easy formation - this is how the advantages of a GmbH can be summarized.
The limitation of liability is particularly important. Only the assets of the limited liability company are liable. The private assets of the partners are protected. In this way, the GmbH shareholders avoid a major disadvantage of other forms of company. In order to effectively limit one's own liability under GmbH law, the share capital must be at least EUR 25,000. This protects the creditors and the contractual partners of the GmbH. The creditors can only access the assets of the shareholders in very rare exceptional cases. The strict separation of the asset spheres of GmbH and its shareholders is therefore a basic requirement. As your lawyer, I would be happy to advise you on risks and exceptional cases in which individual liability is an option and, as with the founding of a company, avoid the corresponding risks in the GmbH statutes. The founders of a GmbH are the shareholders and thus have special liability protection.
However, the GmbH managing director is personally liable for breaches of duty. He must act with the diligence of a prudent businessman in the management of the company. If he makes a mistake and violates his duty of care, he must compensate for the damage incurred. "Limited liability" therefore only applies to the GmbH shareholders, not to the GmbH managing directors. The managing directors are only subject to the instructions of the shareholders. Of course they are bound by law and order. However, they otherwise have a wide entrepreneurial discretion. Legal advice on the limits of this entrepreneurial discretion is recommended if the managing director can choose between different decisions. Where he does not have his own expertise, he is required to seek professional advice, for example from a lawyer. Risk management should be a top priority for every CEO.
A GmbH is also very flexible. If it is effectively founded, the shareholders can act largely free of form and choose an individual articles of association. Here it offers a further advantage over a stock corporation or AG for short, in which the shareholders also have no personal liability risk; However, complex legal regulations apply to the AG, which must not be deviated from. Only in a few cases is a notarial certification of the decisions of the shareholders required. This is the case, for example, when changing the articles of association. Forming a GmbH is easy and usually quick. In large cities like Munich, it only takes one to two weeks between the notarization and the required entry in the commercial register. The prerequisite, however, is that the share capital is paid in quickly.
What provisions must the articles of association contain?
The GmbH law stipulates that the articles of association must contain provisions on the following points:
The name and place of business of the company: The company needs a name and a place where it is established. The management does not have to be based in the same place. The administrative headquarters may therefore be elsewhere, even abroad.
The object of the company: The GmbH articles of association must regulate the business areas in which the GmbH is active. This is important for the powers of the GmbH managing director and non-competition clauses for shareholders and managing directors.
The amount of the share capital: when the GmbH is founded, the shareholders must agree on how much capital contributions the GmbH should have when it is founded. The minimum share capital or the minimum of the joint capital contributions of a GmbH is EUR 25,000. This money may not be repaid directly or indirectly to the shareholders.
The shares: The prerequisite is that the articles of association must state the number and nominal amounts of the GmbH shares. The minimum amount is 1 EUR. The nominal amount is also the amount that the shareholder has to pay to the company so that he can take over the share. This contribution to the share capital is called a capital contribution. The respective capital contribution must be paid in and available for management to use.
The founders: Both natural persons and legal persons such as corporations can found a company. The latter can be interesting for tax reasons, in particular because of profit taxation. The legal form is irrelevant for shareholder status.
Another requirement for the GmbH shareholders when founding a GmbH is that the following points are also regulated in the articles of association:
- Sole representation or joint representation of the managing directors
- Obligation of directors to obtain shareholder approval for certain transactions
- Invitation to shareholders' meetings
- Resolutions of the shareholders and required majority of votes
- Approval of the shareholders' meeting for the transfer of GmbH shares
- Opportunities for Termination
- Reasons for the exclusion of shareholders, in particular in the event of breaches of duty
- Compensation regulations in the event of the departure of shareholders (good leaver, early leaver, bad leaver)
- Regulations on marriage contracts and inheritance regulations. Such regulations are not necessary if only corporations are provided with limited liability for founders or shareholders of the company
- formation costs
What are the risks of starting a business?
However, incorporating a limited liability company also comes with some risks that those incorporating it should be aware of. Incidentally, these risks also apply to a one-person GmbH.
First of all, it is important that every GmbH formation requires the notarial certification of the founding document and the articles of association. Without such a notarial certification, the participants automatically found a partnership, for example in the form of a general partnership (OHG). As a result, the founders are all liable with their personal capital. You will then not benefit from the benefit of limited liability. Even with a notarial certification, it is also necessary for the GmbH to be entered in the commercial register. Until then, there is only a so-called Vor-GmbH. Until registration, the founders are personally liable for the company's liabilities. This is especially relevant when renting business premises.
A major risk area is the payment of the deposit. A distinction is made between foundations in cash and foundations in kind. Cash incorporation means that the capital of the company is deposited in cash into the company's account. When founding a company in kind, the founders provide their contribution in kind in the form of objects, such as the transfer of ownership of material resources or the contribution of companies, rights or claims. When founding a company in kind, special formal requirements must be observed. In addition, complex evaluations are required, which the commercial register checks and often objects to. Founders are therefore tempted to first pay in money and then sell the material or the claim to the company. The law does not accept this. This is what is known as a hidden contribution in kind, but it does not apply. The founder is treated as if he never made the cash contribution. Insolvency administrators, in particular, pay attention to this and then demand that the cash deposit be paid in again years later. A contribution in kind should therefore be avoided at all costs. Contributions in kind are contributions of material goods such as buildings, machines, etc. The notary and the lawyer also regularly point this out when the GmbH is founded.
What are the steps involved in founding a GmbH?
The founders must first agree on the legal form. The GmbH is often the right legal form, but not always. There are also other legal entities that can represent interesting alternatives. The founders then have to agree on the company, the purpose of the company, the amount of the share capital, the respective participation, the managing directors, the registered office of the company and the structure of the articles of association. The advice of a lawyer is recommended.
Before notarization, a company-law inquiry should be made with the Chamber of Industry and Commerce. This serves to clarify whether there is already a company at the planned headquarters of the GmbH that is a similar object of the company and a similar company. In this case there is a risk of confusion, which may prevent registration.
After the incorporation of the GmbH is notarized, the founding partners must open a bank account in the name of the company. To do this, they must submit the notarial deeds to the bank. The cash deposits can only be paid in after the account has been opened. Payments made in cash prior to notarisation, on the other hand, have no effect. The founders have to present the deposit slip to the notary, because he can only register with the commercial register once the deposit has been proven. Incidentally, the share capital does not have to be transferred in full immediately, but can also be paid in in stages if this is permitted in the articles of association.
In addition, the managing directors and shareholder managing directors must register their business and apply for a tax number. Finally, employment contracts should be concluded with the managing directors for tax reasons. This applies in particular to managing directors who want to pay a bonus. Hidden profit distributions must be avoided here.
What are the special features of the one-man GmbH?
It is also possible to set up a one-person GmbH. There is only one shareholder here. Often the founder takes over the management and is then shareholder-managing director. The above aspects of founding a GmbH also apply to founding a one-person GmbH: The founding documents must be signed at the notary and the capital contribution to the shares must be paid. However, it is important for her that shareholder resolutions must be recorded. There is therefore a greater effort after founding.
What special features apply to start-ups?
There are no special requirements for start-ups. The success of the company often depends on the founders. These successes should be kept in the company. In these cases, it is advisable to found a GmbH with provisions in the articles of association according to which the founders have to earn the shares step by step. The longer a founder has been with the company, the higher his severance pay when he leaves, for example when he is dismissed. This is also known as vesting.
If the founders want to contribute a patent, software or similar to the GmbH to be founded, they must do so by making a contribution in kind. However, as explained above, the factual justification is complicated. It is therefore advisable to carry out a cash foundation properly and to bring the software into the GmbH by way of a non-cash transaction. It is then not a contribution in kind, nor is it offset against the share capital. The commercial register will regularly accept such a path when founding a company if it is set up correctly. This is where a lawyer should be able to provide advice.
Is the UG a sensible alternative?
The UG or, more precisely, the entrepreneurial company (limited liability) is a special form of the GmbH because essentially all the regulations of the GmbH Act apply to it, but it does not have to have a share capital of at least EUR 25,000. On the one hand, this is an advantage because the shareholders can conserve their own liquidity when founding a UG. On the other hand, it is known in business transactions that the UG usually does not have any significant equity, which often makes no impression. The UG must reinvest 25% of its profits, i.e. keep them until EUR 25,000 is reached; then it is a fully-fledged GmbH. The transition from the sole proprietorship to the GmbH via the UG can therefore make sense in individual cases.
There are sample founding documents for the UG. The founders can use these and contact a lawyer directly for the incorporation.
To ensure that the formation of a GmbH runs smoothly, the individual steps should be completed in sequence. Once the founders have identified the legal form of the GmbH as the right one, the founding shareholders must agree on the company, the object of the company, the share capital and the managing directors. If you then pay attention to the correct order when paying in the capital contributions, the GmbH foundation can be completed in just two weeks.