The right corporate form for german startups
Founding a startup in Germany - but how?
In german business practice, a handful of different company forms can be found. Depending on the goals of the shareholders and the form of the company, each company requires an individually tailored shareholders' agreement. For founders of young start-ups, there are very special factors to consider in german practice.
As a german commercial law firm with offices in Hamburg, Berlin, Frankfurt, Munich and Cologne, our lawyers and certified specialists for german corporate law and tax law advise founders and entrepreneurs on the choice of the most suitable corporate form for them - from a legal and tax perspective. In addition, we accompany startups from their foundation and financing to the management of the company and a possible sale.
You can find an overview of our services for startups here: Startup & Foundation Germany
For a non-binding inquiry, please contact one of our contact persons directly by phone or e-mail or use the contact form at the bottom of this page.
Overview of the possible company forms in Germany
A basic distinction must be made between the types of companies: They are divided into partnerships and corporations.
- Partnership under civil law (GbR)
- General partnership (OHG)
- Limited partnership (KG)
- Mixed forms, e.g. the GmbH & Co. KG
- Limited liability company (GmbH)
- Entrepreneurial company with limited liability (UG)
- Stock corporation (AG)
Criteria for the choice of the appropriate company form in Germany
The following criteria play a fundamentally important role in the choice of the appropriate company form:
- Limitation of liability risks, in particular for the private assets of the partners
- Limitation of the tax burden
- Protection of trade secrets, the know-how used and all industrial property rights
- Clarity and legal certainty in the relationship between the shareholder groups, e.g. the operationally active shareholders and pure investors
If one asks what the most important criteria for the optimal choice of legal form are, in addition to the aspects mentioned above, the following questions always play a role:
- Acceptance in legal relations
- Obligation to publish annual financial statements (transparency vis-à-vis competitors)
- Publicity in the commercial register (transparency with regard to the management and the group of shareholders)
- Authority of shareholders to issue instructions to management
- Scope of shareholders' information rights vis-à-vis management
- Freedom of form for share transfers (relevant e.g. for frequent employee shareholdings)
- Restricted use of some legal forms
Corporation or partnership?
The differences between a partnership and a corporation are enormous, so that a fundamental distinction must be made between the corporation (GmbH and AG) and the partnership (KG, GbR, dormant partnership) in Germany. While the corporation represents an independent legal entity (so-called legal person) and its capital participation is in the foreground, the partnership is characterized by the persons participating in it. This fundamental distinction affects the position of the partners among themselves, the relationship of the partners to the company, liability issues and the taxation of the company and partners under german law.
For the sake of clarity, we have summarized the decisive differences in german practice in the following table:
in principle every shareholder
Management via committees
Tax burdens for corporations and partnerships in Germany
Experience shows that for many german entrepreneurs the tax dimension of the respective corporate form is particularly relevant. Therefore, the essential difference in the income taxation of the german companies should be pointed out.
The GmbH and AG as corporations are subject to the income tax separation principle in german practice. This means that the corporation itself is subject to corporate income tax and its profits are taxed (KSt). In addition, the profits distributed by the GmbH or AG to its shareholders are taxed "separately". In principle, german corporations are subject to a tax burden of approx. 30%, of which the corporate income tax is subject to a tax rate of 15% and the trade tax to a tax rate of 15-20% - depending on the assessment rate. Thus the form of the corporation is recommended above all if the intention and expectation of high profit retention and reinvestment exists. It is also important to avoid the taxation of so-called hidden profit distributions in the case of corporations. In simplified terms, these are payments made by the german company to a shareholder which a prudent and conscientious manager would not have made to a person who is not a shareholder, and which (are intended to) transfer profit appropriations that are irrelevant for tax purposes into tax-effective operating expenses.
Partnerships, on the other hand, are in principle not subjects of german income tax (but this is different in the case of trade tax and VAT). The tax transparency principle applies to german partnerships. Every partnership (KG, GbR or silent partnership) is "transparent" for income tax purposes in german practice. Income tax is not incurred at the company level, but at the partner level. The partner as a co-entrepreneur for tax purposes is liable for income tax. In the case of partnerships, each partner has to pay tax on the partnership profit on the basis of his individual income tax (up to a maximum rate of 45%) after distribution of the result, whereby the trade tax to be paid is to be credited against the income tax.
Special features for startups in Germany
In the case of startups, there are special criteria that often distinguish them from other german company formations: If a company is to be established for which it is foreseeable that it will be sold in the foreseeable future (often the case with FinTechs or other startups), a corporation will usually be chosen as the corporate form in order to be able to achieve a privileged treatment with regard to purchase price taxation. The GmbH also makes sense from a liability point of view in german practice.
If, as is usually favored by young entrepreneurs in the modern age, the activity is not only to take place in Germany, but if goods or services are to be offered on the european market in any case, special features of foreign countries must also be taken into account: In particular, foreign investors and strategic company buyers usually favor the GmbH as a familiar german corporate form.
For startups with financing problems at the beginning, the UG, the little sister of the GmbH, can be an option for german founders. It can be founded with only 1 EUR. However, its reputation on the market is low due to the low share capital. In addition, there is a reserve requirement for the participants, which can be a hindrance in the start-up phase. Depending on the individual case, it may therefore make more sense to take out a loan.
More information on financing startups can be found here: Financing Startups in Germany
Simplified formation with the one-person GmbH in Germany
As an alternative to the classic GmbH and UG formation, the german legislator allows a formation in the so-called simplified procedure. A sample protocol is provided for this purpose. However, the sample protocol may only be used if the german company is founded in cash, has no more than three shareholders and no more than one managing director is to be appointed.
Caution: Important topics to be regulated that belong in every partnership agreement (e.g. termination and exclusion of partners, succession, settlement amount in the event of withdrawal) are not taken into account in the sample protocol and can lead to legal uncertainty and later to disputes among the partners. The use of the standard protocol is therefore only recommended for single-member limited liability companies or limited liability company limited by shares. If the founder in question is not legally experienced, it is nevertheless essential to obtain advice on german company and tax law beforehand, as extensive obligations already arise upon formation.
Conversion: Change the german legal form later?
The legal form of a german company can be changed like a dress according to the german conversion law in order to react to changing developments (e.g. changed german tax laws). Nevertheless, it makes sense to find the best legal form for the shareholders already at the time of founding the company in Germany. This saves subsequent financial burdens associated with a corporate transformation (legal fees, notary fees and, above all, taxes).
If founders of german startups already have a business plan that envisages a certain course of action in the foreseeable future (e.g. participation of several investors, sale of the company, or similar), we therefore strongly recommend discussing these plans with a certified specialist for german corporate law in advance and choosing the appropriate legal form tailored to the entrepreneurial goals right from the start.
The holding and group structure for a german start-up
Particularly in the case of larger and more diverse business activities in Germany, the creation of an association of several independent companies in a group structure is often an option. In the case of a german holding company, the parent company controls the subsidiaries and, if applicable, sub-subsidiaries. However, even in the case of smaller structures or those still in the process of being established, the establishment of a group structure can already make sense.
While in the SME sector the holding company is organized both as a partnership and as a corporation, the holding structures in the younger startup environment are dominated by corporations. Here, the german company founders hold their stakes in the operationally active startup in the form of a low-cost UG. Such a holding company is intended to reduce the tax burden after a successful exit (so-called "Schachtelprivileg") and to facilitate reinvestment in new startup businesses.