Gesellschaft mit beschränkter Haftung – GmbH (Private Limited Company)
incl. UG (haftungsbeschränkt) (Entrepreneurial Company with limited liability)

Update:

In order to meet the needs of founders who, at the start, only have low nominal capital, the MoMiG has introduced the Entrepreneurial Company with limited liability – UG (haftungsbeschränkt), § 5a GmbHG (GmbH Act). This is not a new legal form but a GmbH which may be set up without a specific minimum nominal capital.

The law governing the GmbH and the UG (with limited liability) is based on the "Law concerning private limited companies" (GmbH Act). The following statements include both general provisions for the GmbH and the UG (with limited liability) and special provisions governing the UG (with limited liability).

I. Essential features

1. Corporation

The GmbH is a trading partnership with a corporation structure and its own legal personality. Unlike partnerships the focus is not on an association of persons but the contribution of capital. It may be set up for any admissible purpose. It has a nominal capital which is determined by the memorandum and articles of association and corresponds to the original capital contributions to be made by the shareholders. As far as company debts are concerned, only the company is liable vis a vis the creditors.

The GmbH Act does not contain a summarising definition of this kind. It is assumed by the Act.

For founders who have and need only low nominal capital (e.g. in the services sector), it is now possible to set up a GmbH without a specified minimum nominal capital, the Entrepreneurial Company with limited liability.

The GmbH is the simplest form of a corporation. One major advantage of this legal form is its flexibility. There is far-reaching freedom concerning the drafting of the shareholders agreement. The GmbH is equally suitable for small companies, medium-sized family businesses and large companies.

Compared to the public limited company, some of the provisions regarding the GmbH are less stringent. The setting up is less formalised and, therefore, simpler and less expensive. A one-person founding is likewise admissible. In most cases a supervisory board is not necessary for a GmbH.

On the other hand the GmbH is not a publicly held corporation. The unrestrictedly possible sale and transfer of shareholdings must be notarised. The memorandum and articles of association may, however, make the transferability of shares dependent on other conditions such as the consent of the other shareholders.

2. Constitution, bodies

The GmbH is an independent legal entity. It is organised as a corporation, independent of memberships and has an organisation with at least two independent bodies, the managing director(s) and the meeting of shareholders. The appointment of a supervisory board is admissible but not necessary in every case.

3. Legal status of the shareholders, liability

The shareholders themselves are not merchants. The liability of the shareholders vis a vis creditors is restricted to the nominal capital of the company. This is explained by the addition "mit beschränkter Haftung (with limited liability)" or “haftungsbeschänkt” (limited liability). The shareholders are not personally liable vis a vis creditors if the original capital contribution has been fully paid. If the original capital contribution has not yet been paid, the shareholders will be liable up to the amount of the original capital contribution.

Two areas of risk involved in personal liability need to be pointed out here:

a. The GmbH is only constituted upon the entry in the commercial register. Only then does it carry its own rights and obligations. For transactions which are entered into before the entry in the commercial register, both the shareholders and also those acting can be liable. They are only exempted from liability as a matter of principle upon the entry in the commercial register.

b. Another risk exists in the event of financial difficulties. If a shareholder has granted the company a loan at a time when ordinary merchants would have contributed equity, he has a claim to repayment of the loan in the event of insolvency in respect of the assets of the company. The company loans may not, however, be repaid without restriction since the managing director and the management board are liable if they make payments to shareholders which would lead to the insolvency of the company. Furthermore, shareholder loans are settled with a lower ranking than receivables of other creditors of the company.

II. Setting up

1. Shareholders

No minimum or maximum number of shareholders is prescribed. Even a one-man GmbH foundation is possible. The founders of a GmbH may be both German and foreign natural persons and legal entities as well as trading partnerships (oHG, KG and EEIG) and civil law partnerships (GbR).

2. Individual shareholders agreement/standard record

Notarisation is prescribed for the GmbH agreement as well as the record concerning the setting up of the company. The shareholders agreement must include at least the following information: company name and registered office of the company, object of the company, amount of nominal capital, amount of original capital contributions to be made by each shareholder (original capital contribution).

Although the remaining content may essentially be freely structured, it is recommended to include provisions on the following topics in the shareholders agreement: business year, term of the company and termination, appointment of managing directors, scope of power of representation of managing directors, resolutions of shareholders, calling of the meeting of shareholders, distribution of votes, disposal of shares, transmission of shares by succession, preparation of the financial statements, profit distribution, collection of shares, withdrawal and final distribution, foundation costs, exemption from the prohibition of self-contracting for the managing director, arbitration clause, competition clause. (standard GmbH memorandum and articles of association to be recorded).

In the event of simple standard foundations of both the classical GmbH and the UG (with limited liability), it is possible to use a standard record (which also includes the memorandum and articles of association, see Annex 1 to the Act). In this way the foundation is simplified and costs are saved. This record must be notarised. The application for entry in the commercial register is then submitted with the notarised signature of the managing directors. The electronic transmission of the registration with the standard record to the local court (commercial register) is carried out by the notary. The legislator provides a "standard record for the setting up of a one-person company" and also a "standard record for the setting up of a multiple person company with up to three shareholders".

The setting up with the less expensive standard record is only possible:

If the company is founded by a maximum of three shareholders. From four shareholders onwards the setting up is only possible through an individual, notarised shareholders agreement.
If the shareholders can agree on a maximum of one managing director. This managing director is then empowered to represent the company alone.
If the managing director is exempted from the prohibition of self-contracting (i.e. the managing director may enter into transactions of the UG (with limited liability) or the GmbH with himself as a private person or as a representative of another person).
The setting up with the standard record is solely possible for a formation by cash subscription. A formation by non-cash capital contribution is not possible within the framework of the foundation with a standard record.

3. Capital

The nominal capital of the GmbH amounts to at least EUR 25,000.

The nominal capital of the UG (with limited liability) amounts to at least EUR 1.

Since the latter is, however, to progressively accumulate the minimum capital of the normal GmbH, it may not fully distribute profits but must transfer one-quarter of the net income for the year to a legal reserve until the statutory minimum capital of EUR 25,000 is reached (§ 5a GmbHG).

4. Original capital contributions

The nominal capital can be contributed by the shareholders with different amounts of original capital contributions. An original capital contribution must, however, amount to at least EUR 1. The amounts of the original capital contributions of the shareholders may differ.

The original capital contributions may be made with money (formation by cash subscription) or by contributions in kind (formation by non cash capital contribution). At least one-quarter of each original capital contribution to be made in cash must be paid in. The application for entry in the commercial register may not be made unless the capital contributions have reached at least half of the minimum nominal capital, i.e. EUR 12,500.

In the case of the Entrepreneurial Company (with limited liability), the full original capital contribution must be made in cash already prior to the application for entry in the commercial register; non cash capital contributions are not possible.

In practise the formation by cash subscription is carried out by an account being opened for the GmbH with the bank which is at the free disposal of the company. For the purpose of the entry in the commercial register the managing director must assure that the capital contribution is available to him. If there are considerable doubts concerning the accuracy of the assurance, the local court may demand evidence e.g. in the form of a pay-in slip or a statement of account of the GmbH.

If contributions in kind are made i.e. if, instead of cash, moveable or immoveable property such as cars or companies are to be contributed there are two particularities: firstly the contribution in kind must always be fully made in such a way that it is at the free disposal of the managing director upon registration and secondly the value of the contribution in kind must be evidenced in a report on the formation by non cash capital contribution. If there are considerable doubts which suggest a material overstating of the contribution in kind, the local court may demand by way of evidence an expert opinion on the value which involves corresponding costs. Consequently, a formation by cash subscription may be easier.

Any increase or decrease in the nominal capital of the company must be notarised and submitted for entry in the commercial register.

5. Company name

The company name is the name of the GmbH under which it is entered in the commercial register and under which it appears in business transactions. The company name of the GmbH may either refer to the activity of the company (objective company name), include the name of one or more shareholders (personal company name) or it may be based on an imaginary designation. Combinations of these elements are possible; the objective company name must in all cases be furnished with a distinguishing addition. The addition "private limited company" or the abbreviation "GmbH" or Entrepreneurial Company (with limited liability) or the abbreviation "UG (with limited liability)" is a compulsory component of the company name. The addition "with limited liability (limited liability)" may not be abbreviated.

When the court reviews the admissibility of the company name, the principles of truthfulness of the company name must be taken into account. The company name may not have an addition which might lead to deceit in respect of the type and scope of its business.

Geographical additions are basically admissible if the company has a certain reference to the mentioned territory, e.g. its registered office. Preceding geographical designations are often considered by the courts as pretensions of size. This applies, more particularly, if the geographical designation is followed by a generic designation. In these cases the companies should provide evidence of corresponding size or if the requirements cannot be met, have the name preceded by an distinguishing designation (if necessary, a combination of letters).

6. Registered office of the company

As a matter of principle, the registered office of the company is freely selectable. The registered office of the company entered in the memorandum and articles of association must, however, be located in Germany. Regardless of this statement, the GmbH may have its administrative head office (the place of main administrative activities) outside Germany, too. A relocation of the registered office of the German GmbH or UG (with limited liability) outside Germany without liquidation is not, however, possible under the new legal provisions.

7. Object

By virtue of law the GmbH is always considered as a trading partnership regardless of the object actually pursued (company on which the law confers merchant status). It may pursue almost all objects which are legally admissible (trades subject to approval). The object must be unequivocally designated in the memorandum and articles of association. A formulation like "trade in goods of all kinds" is considered to be too general by the courts. According to the corresponding Code of Professional Conduct different liberal professions may not be pursued in the form of a GmbH/UG (with limited liability); this applies for instance to pharmacies and notaries offices. See section on Trades Liberal Professions.

In the event of an object which also includes activities subject to authorisation (such as brokerage of real estate, crafts activities) the authorisation need no longer be evidenced immediately, i.e. upon entry in the commercial register, according to the GmbH reform. This results in an acceleration of the entry procedure. It suffices if the necessary authorisation is available when the activities subject to authorisation are started. It must be evidenced on registration of the trade.

8. Appointment of the bodies

The GmbH has two necessary bodies: managing director(s) and meeting of shareholders. The memorandum and articles of association may provide for the creation of additional bodies such as a supervisory board.

One or more managing directors may be appointed. The managing director(s) applies (apply) for the entry of the GmbH in the commercial register. The managing directors are appointed by the shareholders agreement or a resolution of the shareholders. The appointment may be revoked at any time.

The names of the managing directors are entered in the commercial register.

9. Notarisation

On notarisation of the formation of the GmbH founders who are not known to the notary must prove their identity by presenting valid ID documents. If a person appearing does not act on his own behalf but for another person, a written power of attorney and/or a subsequent consent in a notarised form are required. If the signature under a power of attorney is certified by a foreign notary a legalisation (or Apostille) is needed depending on the country of origin. Legalisation can be issued by a consul of the Federal Republic of Germany.

If a legal entity is one of the founders, the existence of the legal entity must be evidenced through a certified extract from the commercial register (in the case of foreign enterprises: corresponding official registration documents).

10. Opinion of the Chamber of Commerce and Industry

The competent Chamber of Commerce and Industry prepares an opinion, at the request of the local court, in cases of doubt about the admissibility of the company name. In order to exclude at an early stage any possible risk of confusion or possible doubts concerning the company name, it is useful to contact the competent CCI.

Within the framework of entry in the commercial register only the risk of confusion with companies registered at the same place is verified. However, since company names and trademarks registered elsewhere also confer a claim to injunctive relief to the entitled party, it is recommended that company names and trademarks registered nationwide be included in the verification.

The electronic commercial register provides information about company names registered in Germany.

National, international and community trademarks may be researched on the website of the German Patent and Trademark Office.

11. Application for entry in the commercial register and entry in the commercial register

The GmbH exists only after the application for registration and registration in the commercial register. (Entry in the commercial register).

The entry in the commercial register must be applied for in writing by the managing director to the locally competent local court. The signature and the company name must be notarised.

The company name, the registered office of the company, the object of the company, the nominal capital, the date of conclusion of the memorandum and articles of association, the person of the managing director and his power of representation must be stated at the time of entry in the commercial register.

Furthermore, the application for registration must include as an Annex:

The memorandum and articles of association entered into in a notarised form,
if necessary, powers of attorney for the acting persons,
a list of shareholders signed by the managing directors, in the event of non cash contributions the report on the formation by non cash contribution as well as documents concerning the value of the non cash contributions.

Furthermore, the assurance must be given that the necessary minimum payments in respect of the original capital contributions have been made and are at the final and free disposal of the managing directors.

The notary transmits all documents electronically to the competent local court.

The entries in the commercial register are published in the electronic Bundesanzeiger.

12. Formation expenses

The formation expenses depend on the nominal capital and goodwill and on whether the less expensive formation record or an individual memorandum and articles of association are used. According to the information currently available, the following costs are incurred:

a. For a nominal capital of EUR 25,000 and an individual memorandum and articles of association the following notary fees are to be expected:

Notarisation of the memorandum and articles of association EUR 168
Notarisation of the appointment of the managing director EUR 168
Application for entry in the commercial register and
notarisation approximately EUR 42
List of shareholders EUR 13
Expenses approximately EUR 35
plus 19% VAT
For a one-person GmbH the costs are reduced by EUR 84

b. For the notarisation of a EUR 25,000 GmbH with a formation record

approximately EUR 181 less are incurred, the other costs remain the same:

Notarisation of the formation record
(including list of shareholders and appointment of managing director) EUR 168
(for the one-person GmbH only EUR 84)
Application for entry in the commercial register and notarisation approximately EUR 42
Expenses approximately EUR 35
plus 19% VAT

c. The formation of an Entrepreneurial Company (with limited liability) for which the nominal capital can be EUR 1, the following notarial fees arise based on a nominal capital of EUR 1 and the use of the formation record:

Notarisation of the memorandum and articles of association
for the one-person Entrepreneurial Company (with limited liability) EUR 20
for a multiple-person Entrepreneurial Company (with limited liability) EUR 30
Application for entry in the commercial register and notarisation approximately EUR 10 to 15
Expenses approximately EUR 35
plus 19% VAT

d. Without a formation record the costs for the formation of an Entrepreneurial Company (with limited liability) are the same as for a GmbH without a formation record.

The fee for the entry of a company in the commercial register is

approximately EUR 100.

Additional costs are incurred for the publication of the entry in the Bundesanzeiger and possibly in other official journals. Here, too, an amount of EUR 100 to 300 should be expected per publication. This calculation does not include costs for further support in respect of certain formulations by the notary or for the availment of advice by a lawyer, for instance for drafting a memorandum and articles of Association. Concerning the drafting of a memorandum and articles of association, it is recommended to raise the cost issue first as the fees are subject to free negotiation and agreement.

III. The management of the GmbH

1. Appointment of the managing director

The managing director must be a natural person. A German or non-German living permanently outside Germany can become a managing director. In the same way, a shareholder can be appointed as managing director (managing shareholder).

As a matter of principle, the managing director does not need any special qualifications. If the activity of the GmbH requires, however, an authorisation which presupposes a special personal qualification (e.g. craft: master title), only a managing director who has this qualification may be appointed. Only a natural person with unrestricted legal capacity can be appointed as managing director provided that such person is not prohibited from exercising an occupation or trade relating to the object of the GmbH.

Further reasons for exclusion for managing directors include a final and conclusive conviction on the grounds of criminal delay by the managing director in filing an insolvency petition, erroneous information in accordance with § 82 GmbHG or § 399 AktG (German Stock Corporation Act), on grounds of incorrect representation under § 400 AktG, § 331 HGB, § 313 UmwG, § 17 PubG as well as a final and conclusive conviction on grounds of general criminal acts relating to the company (§§ 263 to 264a and §§ 265b to 266a StGB German Criminal Code).

The managing director may be dismissed at any time and without notice by the body defined in the memorandum and articles of association. The dismissal must be entered in the commercial register.

2. Status of the managing director

As a rule, the employment contract of the managing director with the GmbH is contract for services of a self-employed person (no contract for work). This is the case for a managing shareholder if he exercises the economic power of the company in a decisive manner (more particularly, if he has a majority shareholding). However, managing directors with a shareholding of less than 50% of the nominal capital are also to be considered as self-employed if they are not bound by mandatory instructions. Self-employed persons are in Germany not normally subject to social security contributions (pension insurance, health insurance and unemployment insurance). Voluntary continued insurance in the statutory health insurance is possible for former employees. Furthermore, there is the possibility to apply for compulsory or voluntary insurance under the statutory pension insurance. In some sectors an entrepreneur is subject to insurance in the statutory accident insurance (employer's liability insurance associations) if he does not employ any employees. A voluntary insurance is, however possible, for persons not subject to social security contributions. The managing partner is considered as a self-employed person for tax purposes.

As far as the stay of a foreign managing director in Germany is concerned, special considerations under the law concerning foreign nationals need to be taken into account.

A contract for work may be entered into with the managing director who is not at the same time a shareholder (third-party managing director), i.e. who exercises the economic power in respect of the company subject to instructions. In this case he is subject to social security contributions in the pension, health and unemployment insurance. The third-party managing director is subject to employment tax.

3. Internal management

The managing directors are obliged to execute instructions by the shareholders. They conduct the business of the GmbH in the internal relationship and represent it externally. As a matter of principle, joint management applies unless otherwise provided for by the memorandum and articles of association (this is, however, often the case).

4. External representation

The managing directors represent the company externally. The power of representation vis a vis third parties cannot be restricted.

5. Liability of the managing director

The managing director is in charge of the management of the company. In this connection he has to safeguard the pecuniary interests of third parties on a trust basis as well as care for a smooth, efficient and profit based operation. The managing director is subject to different liability risks. These are the most important ones:

a. Liability based on principles of reliance and liability in the event of representation

Based on the particular trust position of the managing director, there may be liability vis a vis the company, e.g. in the event of speculation transactions.

b. Liability in the field of taxes/accounting

One of the most important tasks of the managing director is proper accounting and the preparation of financial statements. If an obligation is violated in this area the managing director is personally liable vis a vis the company and the creditor and may even incur a penalty.

If the GmbH hires employees, the managing director takes over the task of an employer and must submit monthly employment tax and turnover tax advance returns and retain the employment tax for the account of the employee and pay it to the tax authority. The same applies to value added tax. If these obligations are infringed, the managing director is threatened with liability under property law in accordance with §§ 69 ff. AO (German Tax Code) as well as consequences under criminal law in accordance with § 370I or § 378 I AO.

c. Liability in the field of social security law

The managing director also has obligations under social security law. The staff employed at the GmbH must be registered with the health insurance carrier and the retained amounts relating to health, pension and unemployment insurance must be paid to the corresponding sickness fund. The managing director is personally liable for the employee shares in social security contributions retained and not paid and, moreover, in that case he also incurs a penalty.

d. Liability in the event of insolvency

In the event of imminent insolvency, i.e. in the event of over-indebtedness or inability to pay due debts of the company the managing director is obliged to submit an application for the initiation of insolvency proceedings within three weeks. If he fails to submit such an application in due time, consequences under criminal law will be imposed in accordance with § 84 I No. 2 GmbHG.

If the managing director continues to make payments after the insolvency of the company, he is personally liable vis a vis the company for such payments.

Furthermore, a violation on grounds of fraud and insolvency offences is possible.

e. New: liability brought forward

The liability of the managing director is now brought forward in the event of payments to the shareholders if they could not but result in the insolvency of the company unless this was not identifiable for a prudent managing director.

IV. Controlling of the GmbH and financial statements

1. Meeting of shareholders

Apart from the competencies under the memorandum and articles of association and other fundamental competences, the shareholders have numerous additional powers. These also include ongoing management and establish an extensive obligation of the managing directors to follow instructions.

The resolutions of the shareholders are mostly adopted at a shareholders meeting. In the case of a one-man GmbH the body consists of the sole shareholder. The formal provisions concerning the meeting of shareholders are, however, basically simpler than for a stock corporation. Unless otherwise provided for in the memorandum and articles of association, the vote is based on shares. Each amount of EUR 1 results in one vote. Apart from ongoing management tasks, the competency of the shareholders also encompasses the preparation of the financial statements and the appropriation of results, the appointment and dismissal of the managing directors, measures to audit and supervise the management, the appointment of Prokurists (persons empowered to represent the company) and general agents, legal relationships between the company and the shareholders, etc..

The managing directors must immediately furnish every shareholder, on request, with information about matters concerning the company and allow them to inspect the books and documents of the company.

2. Supervisory Board

The introduction of a supervisory board is admissible under the relevant statutory provisions but is not always prescribed. A supervisory board may be appointed but is not necessary (facultative supervisory board). Only if the GmbH is subject to co-determination by the employees, i.e. if it has more than 500 employees, is a supervisory board prescribed (necessary supervisory board). This also applies to corporations operated in the form of a GmbH or non-profit house building companies.

3. Co-determination

The German Co-determination Act of 4 May 1976 applies to all GmbHs which employ, as a rule, more than 2,000 employees and which are not subject to coal and steel co-determination. The Co-determination Act prescribes the parity-based composition of the supervisory board. It is composed of 50% representatives of the shareholders and 50% representatives of the employees. The Coal and Steel Co-Determination Act of 21 May 1951, which applies to enterprises in the field of mining as well as the iron and steel producing industries, likewise provides for the parity-based composition of the supervisory board. If the particular prerequisites under these laws are not met, co-determination is governed by the Works Constitution Act 1952. According to that Act one-third of the supervisory board must be composed of employee representatives if more than 500 employees are employed. If fewer employees are employed, a supervisory board is not prescribed.

4. Tasks of the Supervisory Board

The task of the supervisory board is to supervise management. Furthermore, it audits the financial statements prepared by the managing directors together with the management report and the proposal for the appropriation of the unappropriated retained earnings. Measures of the executive management cannot be transferred to the supervisory board. The memorandum and articles of association can, however, subject the implementation of certain types of transactions to the approval of the supervisory board.

In the case of a GmbH with the necessary supervisory board, the appointment and dismissal of the managing directors is for instance transferred to the supervisory board under the Co-determination Act and the Coal and Steel Co-determination Act.

5. Status of the Supervisory Board

The employment contract with a supervisory board member is a contract for services which concerns agency services. It may be based on remuneration or no remuneration. Members of the supervisory board are not subject to compulsory social security contributions.

6. Audit of the GmbH and financial statements

The duration of the business year results from the memorandum and articles of association. It may not, however, exceed 12 months. The first business year may be shortened (incomplete business year).

The GmbH, as a trading company, is obliged to keep accounting records. It is obliged to prepare a balance sheet (annual balance sheet) and a profit and loss account at the end of each business year. Furthermore, the financial statements must be supplemented by notes. It must be prepared in German.

The financial statements must be based on generally accepted accounting principles and give a true and fair view of the assets, financial and earnings position.

The audit of the financial statements is compulsory for large and medium-sized GmbHs.

§§ 325-329 of the German Commercial Code (HGB) contain strict provisions for corporations concerning the disclosure of financial statements. These provisions also apply to trading companies (oHG) and limited partnerships (KG) in which no natural person is a personally liable partner.

The audits must be carried out by auditors and firms of auditors; the financial statements and management reports of medium-sized companies must be prepared by certified accountants and firms of accountants.

The auditors have an extensive right to information and inspection of books, stocks of securities and goods etc. They are bound by absolute secrecy. They must prepare an unbiased written audit report about their audit. If no objections are to be made, the auditors have to issue a certificate.

With his certificate the auditor makes a general assessment of accounting and the financial statements of the company vis a vis the company and the shareholders as well as with effect for third parties. He confirms the conformity of accounting with the statutory provisions.

V. Information on the business papers

The following information must be stated on business documents company name, legal form, registered office of the company, local court of the commercial register, commercial register number, names of all managing directors (including deputies) (with at least one first name), possibly chairman of the supervisory board.

VI. Taxes

In particular corporation tax, capital gains tax, trade tax, solidarity allowance and value added tax have to be paid.

More extensive information can be found in our brochure on accounting and taxes for founders".

VII. Dissolution and termination

The dissolution of a GmbH is, in most cases, carried out pursuant to a resolution of its shareholders. Other reasons for dissolution are specified in § 60 GmbHG. As a result of the resolution to dissolve the company the liquidation procedure is initiated at the end of which the termination and extinction in the commercial register are implemented.