EVERYTHING YOU NEED TO KNOW TO ENTER THE GERMAN AND EUROPEAN MARKET
The German law provides various legal forms for doing business, namely the three categories corporations, partnerships and branch offices (to learn more about the various legal forms for doing business in Germany please check out our article on this subject here). The GmbH (in German: Gesellschaft mit beschränkter Haftung; abbreviated: GmbH) is a Limited Liability Company and thus a form of corporation - and by far the most widely used one. The name of the legal form GmbH emphasizes the fact that the shareholder(s) of the entity are not personally liable for the company's debts.
Although the basic structure of all company forms is stipulated by law which provides for predictability and legal certainty, the GmbH is a very flexible legal form (especially compared to it’s bigger sister, the German AG (Stock Company)), meaning that the structure of the company can be extensively adapted to the business’ and shareholder(s) needs.
In the following we would like to explain the basic structure of a GmbH if no further amendments are made. Additionally some possible regulation possibilities shall be explained that commonly meet a founders and the company’s business requirements.
Separate Legal Entity
A GmbH is a legal entity, meaning that the holder of rights and obligations is not the individual shareholder, but the company itself. The GmbH itself concludes contracts, holds assets and is liable for taxation.
Share Capital and Shareholder(s)
The GmbH requires a minimum share capital compensating the limited personal liability of the shareholder(s). The minimum share capital required to establish a GmbH is EUR 25,000 which can can be made up of cash or of contributions in kind such as property, patents or other assets. At the time of registration, at least half of the minimum capital (i.e. EUR 12,500) must be actually and verifiably contributed to the company for which the managing director(s) must guarantee. In case a contribution in cash is required the company generally requires a German bank account to which the money is to be contributed. Thanks to the Internet the founder(s) and managing director(s) of a GmbH don’t have to be personally present for opening a German bank account, since some German banks offer the account opening online from abroad.
A GmbH can be established by any number of different shareholders - one minimum. Shareholders can be natural persons as well as other corporations or partnerships. Irrespective of nationality or place of residence, anyone can establish a GmbH in Germany. The same legal conditions apply for foreign and local entrepreneurs. There is no specific investment legislation in Germany, nor is there a minimum percentage of German shareholdings required for foreign entrepreneurs.
Limitation of Liability
After the registration of the GmbH with the commercial register (more about the registration procedure hereafter) the liability of the GmbH is limited to the company’s business assets, including share capital. Whereas the liability of the shareholder(s) is limited to the share capital invested. The latter is one of the main reasons founders choose the legal form of a GmbH, since this way the risk of an investment in Germany can be reduced to the amount of the share capital (plus the formation- and setup-costs).
A GmbH is managed and legally represented by its managing director(s). There must be at least one managing director. Other then with partnership entities the managing director(s) do not have to be shareholders of the company but can be external managers. Further managing director(s) do not have to be German residents.
If the company has only one managing director he or she has sole power of representation. In case the GmbH has two or more managing directors the company is generally represented by two of them. This default regulation can be amended so that one or all managing directors can represent the company alone or the GmbH is represented by a managing director together with a authorized signatory.
By issuing binding instructions or directions to the managing directors, the shareholders may exercise direct influence on the management of the GmbH. To achieve this, corresponding regulations regarding a shareholder approval for specific management measures can be implemented e.g. in the Articles of Association as well as in the managing director’s employment contracts. Further the shareholders have a general right to instruct the managing directors through shareholder resolution.
Articles of Association
The legal regulations of the GmbH-Gesetz (German Limited Liability Companies Act) outlines a minimum content of the Articles of Association. According to this the Articles must include the name and registered office of the company, the object of the company, the amount of the share capital and the number and nominal amounts of the shares, which each shareholder undertakes to contribute to the share capital (capital contribution).
However it is quite common to have a wide range of additional regulations in the Articles to amend the company structure to the founders and the company’s business requirements. Such amendments for example include regulations concerning the transferability of the shares which can for example be restricted to the approval of the majority or all of the shareholders. Non-competition clauses are popular as well. In case you would like to learn more about different regulation possibilities please see our article on this topic here.
Right after the formation and registration of the GmbH it has to be registered with the Financial Authorities. The GmbH is liable to corporate income tax, trade tax and solidarity surcharge. In most cases VAT has to be paid as well. The average tax burden of a GmbH is less than 30 percent. In some regions, due to a locally variable rate of trade tax, it is under 24 percent (Source: German Federal Ministry of Finance, 2014).
Further a GmbH has to fulfill certain advanced accounting and publication obligations. The extent of these obligations mainly depend on the size of the corporation.
In case you would like to learn more about the taxation of a GmbH and it’s accounting obligations please see our article on this topic here.
Setting up a GmbH and registering it with the commercial register is is a straight forward process.
For the formation of a GmbH the founder(s) must generally visit a German notary, since the formation deed and Articles of Association have to be signed in the presence of a notary. However at the notarial formation process the shareholder(s) do not have to be personally present but can give power of attorney to a third person such as a lawyer. However that power of Attorney has to be signed before a foreign notary at the shareholder’s place of residence (depending on the country of residence an Apostle or Legalization might be required as well).
In order to be valid, the GmbH must be registered with the commercial register. Once registered in the commercial register, the GmbH becomes a legal entity. The commercial register application for the registration of the new GmbH has to be signed by all new managing director(s) before a notary in person. However the signature of that application can as well be made before a foreign notary at the managing director’s place of residence (depending on the country of residence an Apostle or Legalization might be required as well).
The commercial register provides information about the GmbH including Company name, object of company, managing directors and authorized signatories. Further the Articles of Association as well as a list of shareholders are registered and can be inspected as well. The named information is public and can be viewed by other interested parties and companies. Since founders of a GmbH in some cases do not want the public to have to much insight into company matters such as Articles of Association and list of shareholders, structuring measures can be taken in order to prevent certain information from public notice.
Ideally, the time period required for the formation of a GmbH is two to three weeks. The estimated total costs for the notarization of the formation and the registration with the commercial register are approximately EUR 650. After the registration with the commercial register the new GmbH must be registered at the local trade office as well. The costs for that registration are approximately EUR 50.