The suitable company form in Germany
AG, GmbH, GmbH & Co. KG, GbR, UG etc.
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. If the main goals of the investors and shareholders change in the course of time, it may also be necessary to change the legal form of the company.
We advise founders, investors and entrepreneurs on the choice of the most suitable corporate form for a foundation or in the context of transformation measures in Germany. Our advice is always provided from a legal and tax perspective.
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Overview of the most common company forms in Germany
The most common corporate forms for commercial ventures are the following:
- GmbH: limited liability company; UG (limited liability): the entrepreneurial company is the little sister of the GmbH
- AG: stock corporation
- GmbH & Co. KG: limited partnership with a general partner GmbH; if the general partner is a UG, it is called UG & Co. KG
- GbR or also BGB-Gesellschaft: partnership under civil law
- Silent partnership: there are two types of silent partnership: typical and atypical; the silent partnership is a financing tool.
The agony of choice
The choice of the right form of company in Germany can be very complex. If, for example, high start-up losses are pre-programmed, which the shareholders want to offset against other profits for tax reasons, the corporations, such as an AG or GmbH, are ruled out. If, on the other hand, a company is to be built up for which it is foreseeable that it will be sold in the foreseeable future (often the case, for example, with FinTechs or other startups), a corporation will usually be chosen as the corporate form in order to be able to achieve privileged treatment with regard to purchase price taxation. In particular, foreign investors and strategic corporate buyers usually favor the limited liability company (GmbH) as a familiar german corporate form.
The explanations show that a fundamental distinction must be made between the corporation (GmbH and AG) and the partnership (KG, GbR, dormant partnership). 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, the taxation of the company and partners, and the transparency of the relationships through the commercial register in Germany.
Criteria for choosing the appropriate corporate form in Germany
Regardless of whether the partners organize themselves in a corporation or a partnership in Germany, they will strive to achieve the following goals:
- Limitation of liability risks, especially 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 operating 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)
- Mandatory supervisory board
- Shareholders' authority 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)
- Limited scope of use for some legal forms
Tax burdens for corporations and partnerships in Germany
Experience shows that for many entrepreneurs the tax dimension of the corporate form is particularly relevant. Therefore, the essential difference in the income taxation of the companies should be pointed out. The GmbH and AG as corporations are subject to the income tax separation principle. This means that the corporatio in Germany 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".
Partnerships, on the other hand, are generally not subjects of income tax in Germany (but this is different for trade tax and VAT). Income tax is not incurred at the company level, but at the shareholder level. The partner as a co-entrepreneur for tax purposes is liable to income tax. The tax transparency principle applies to partnerships. Every partnership (KG, GbR or silent partnership) in Germany is "transparent" for income tax purposes. The only subject of income tax is the partner.
The legal form of a partnership can be changed like a dress according to the Transformation Act (" UmwG") in order to react to changing developments (e.g. changed tax laws). Nevertheless, it makes sense to find the best legal form for the shareholders already at the time the company is founded. This saves later financial burdens associated with a company transformation (lawyer's fees, notary's fees and, above all, taxes).
The tax dimension is very important for almost all companies in Germany. The articles of association are of decisive importance in this respect. In addition to the typical commercial companies, however, corporate taxation plays a decisive role in particular for the companies listed below:
- Family pool
- Asset-managing company, asset-managing real estate company
- Family foundation
- Freelance company
- Ownership and operating company