Limited liability company (GmbH)
incl. entrepreneurial company (limited liability) (UG (haftungsbeschränkt))
To match the requirements of people setting up a business who only have very little share capital at the beginning, the MoMiG has introduced the limited liability entrepreneurial company - in German: UG (haftungsbeschränkt)-, § 5a Limited Liability Companies Act (GmbHG). This is not a new legal form, but an LLC which can be formed without a certain minimum share capital.
The law of an LLC and an entrepreneurial company (limited liability) has been regulated in the Limited Liability Companies Act (German: GmbH-Gesetz). The following information contains both the current regulations for the LLC and the entrepreneurial company (limited liability), and also the special points on the entrepreneurial company (limited liability).
I. Essential features
1. Capital company
The LLC (GmbH) is a trade company with a corporate organisation and its own legal personality. Unlike partnerships, it is not the combination of persons, but the provision of capital amounts which is in the foreground. It can be set up for any admissible purpose. It has a share capital determined by the Shareholders’ Agreement, which matches the sum total of the share contributions to be made by the shareholders. Only the company is liable to creditors for corporate debts.
Such a summarising definition is not contained by the Limited Liability Companies Act. It is assumed by the act.
Precisely for people founding a company who have and need very little share capital at the beginning (e.g. in the service area), there is not the possibility of founding an LLC without a certain minimum share capital, the limited liability entrepreneurial company.
The LLC is the simplest form of a capital company. One great benefit of this legal form is its flexibility. There is a great degree of liberality in the organisation of the Shareholders’ Agreement. The LLC is equally suited to small enterprises, medium-sized family-run companies or also large-scale companies.
Compared with a stock corporation, the LLC is partly subject to less strict directives. Formation is less formalised and therefore easier and cheaper. One-man foundation is also admissible. Normally, a Supervisory Board is not necessary with an LLC.
On the other hand, an LLC is not a public company. Sale and assignment of shares possible without limitations must be certified by a Notary Public. However, assignability of shares can also be made dependent on other prerequisites, e.g. the approval of the co-shareholders, in the Shareholders’ Agreement.
2. Constitution, organs
The LLC is an independent legal entity. It is organised as a corporation, independent of the number of members and has an organisation with at least two independent executive organs, the Managing Director(s) and the Shareholders’ Meeting. Appointment of a Supervisory Board is admissible, but not necessary in every case.
3. Legal relationship of the shareholders, liability
The shareholders themselves are not merchants. The shareholders’ liability towards creditors is limited to the company’s share capital. This also explains the term “limited liability” in the two company designations. The shareholders are not personally liable towards the creditors if the share contribution has been completely paid in. If the share contribution has not been paid, the shareholders are liable up to the amount of the share contribution.
At this point, reference is to be made to two danger areas of personal liability:
The LLC only originates when entered into the Register of Commerce. Only then does it bear its own rights and duties. Both the shareholders and also those acting can be made liable for transactions concluded before entry in the Register of Commerce. Only upon entry do they become free of liability as a matter of principle.
A further risk exists in the event of financial difficulties. If a shareholder has granted the company a loan at a time at which ordinary merchants would have provided equity, he has a claim to repayment of the loan in the event of insolvency against the company’s assets, but the shareholders’ loans may not be paid back without limitations as the managing director(s) and the board of directors are liable if they make payments to shareholders which automatically lead to insolvency of the company. In addition, shareholders’ loans are satisfied subordinately compared with claims of other creditors of the company.
No minimum or maximum number of shareholders has been prescribed. Formation of a one-man LLC is also possible. Founders of an LLC can be both German and also foreign natural and legal entities, in addition trading partnerships (general partnerships, limited commercial partnerships and EEIGs) and civil-law corporations (German: GbR).
2. Individual Shareholders’ Agreement / sample of record
Notarial certification has been prescribed for the LLC contract and the record concerning the set-up of the company. The Shareholders’ Agreement must contain at least the following information: corporate name and registered office of the company, object of the enterprise, amount of the share capital, amount of the contributions to be paid by each shareholder (share contribution).
Although there is basically freedom of organisation with a view to the remaining contents, but including regulations on the following subjects in the Shareholders’ Agreement is to be recommended: fiscal year, term of the company and termination, appointment of managing directors, scope of representation power of the managing directors, passing resolutions by the shareholders, convening of the Shareholders’ Meeting, distribution of the votes, disposal of shares, inheritance of shares, production of the annual financial statements, allocation of the profits, redemption of shares, departure and settlement, costs of formation, exemption from the ban on self-contracting for the managing directors, arbitration cause, competition clause. (Sample of the Shareholders’ Agreement of an LLC to be recorded)
In uncomplicated standard formations both of the classical LLC and also the entrepreneurial company (limited liability), the use of a standard record (also containing the statutes, see Annex 1 to the act) is possible. This makes the foundation easier and also saves costs. This record must be notarially authenticated. Entry into the Register of Commerce is then applied for with a notarially certified signature of the management. Electronic forwarding of the declaration with the sample record to the Local Court (Register of Commerce) is then done via the Notary Public. Legislation provides, on the one hand, a “sample record for the foundation of a one-man company” and, on the other hand, a “sample record for the foundation of a multi-person company with up to three shareholders”.
Foundation with the sample record and more favourable costs is only possible:
- if the company is formed by a maximum of 3 shareholders. From four shareholders up, formation is only possible by means of an individual, notarial Shareholders’ Agreement.
- if the shareholders can agree on a maximum of one managing director. This managing director shall then be entitled to represent alone.
- if the managing director is exempted from the ban on self-contracting (i.e. the managing director is allowed to conclude transactions of the entrepreneurial company (limited liability) or the LLC with himself as a private person or as a representative on behalf of somebody else
- Formation with a sample record is exclusively possible as a cash formation. Formation with contributions in kind is not possible as part of formation with a sample record.
The share capital of the LLC is at least 25,000 Euro.
The share capital of an entrepreneurial company (limited liability) is at least 1 Euro.
But as the latter is to accumulate the minimum capital of a normal LLC in the course of time, it is not allowed to distribute the profits completely, but must pay one quarter of the annual surplus into a statutory reserve until the statutory minimum capital of 25,000 Euro has been reached, § 5a GmbHG (German).
4. Share contributions
The share capital can be provided by the shareholders by share contributions of differing amounts. A share contribution must amount to at least 1 Euro. The shareholders’ contributions can be of different amounts.
The share contributions can be provided in cash (cash formation) or in the form of contributions in kind (formation by contributions in kind). At least one quarter of each share contribution to be provided in cash must be paid in. The declaration to the Register of Commerce can only be made if the payments together have reached half of the minimum share capital, i.e. 12,500 Euro.
In the case of an entrepreneurial company (limited liability), the complete share capital must be provided in cash before the declaration to the Register of Commerce, contributions in kind are not possible.
In practice, cash formation is done by an account being opened with a bank for the LLC and being at the company’s free disposal. For the entry into the Register of Commerce, the managing director must assure that the contribution is at his disposal. In the event of considerable doubts about the correctness of the assurance, the Local Court can also demand proof, e.g. by a paying-in slip or an account statement for the LLC.
If contributions in kind are to be made – i.e. movable or immovable objects instead of money, e.g. cars or enterprises – two particular points exist: on the one hand, the contribution in kind must always be provided to the complete amount such that it is finally at the managing director’s free disposal at the time of application, on the other hand the value of the contribution in kind must be proven in a report on the formation by contributions in kind. In the event of considerable doubts indicating a not inconsiderable over-valuation of the contribution in kind, the Local Court can demand an expert analysis to prove the valence of the contribution, this causing further costs. To this extent, cash formation can be easier.
Increasing or decreasing the company’s share capital requires notarial certification and is to be declared to the Register of Commerce for entry.
5. Corporate name
The corporate name is the name of the LLC under which it is entered in the Register of Commerce and appears in business dealings. The corporation designation of the LLC can either be based on the company’s activity (factual designation), contain the name(s) of one or more shareholder(s) (designation by name) or only comprise a fantasy name. Combinations of these elements are also possible, and in any case the factual designation must contain an individualising addition. The addition “Limited Liability Company” ("Gesellschaft mit beschränkter Haftung") or the abbreviation “LLC” ("GmbH") or entrepreneurial company (limited liability) (“Unternehmergesellschaft (haftungsbeschränkt)”) or the abbreviation "UG (haftungsbeschränkt)" is a mandatory component of the corporate name. The suffix "haftungsbeschränkt" (“limited liability”) may not be abbreviated.
On the examination of the admissibility of the corporate name by the Court, the principles of identity of the company are to be considered. The corporate name may not contain any additions suited to causing deceit about the nature and the scope of the business.
Geographical additions are admissible as a matter of principle if the company has a specific relationship to the area stated, e.g. its headquarters. Geographical designations in front of the name are often regarded as a statement of specific importance in the area. This particularly applies if the geographical designation is followed by a general term. In these cases, the companies ought to prove the matching order of magnitude or, if the requirements cannot be fulfilled, place a further individualising designation (if applicable combination of letters) in front of the name.
6. Company headquarters
The company headquarters can be chosen at random as a matter of principle. However, the company headquarters stated in the statutes must be located in Germany. Independent of this, the LLC can also have its administrative headquarters (place at which the main administrative activity is carried out) outside Germany. However, moving the headquarters of the German GmbH or UG (haftungsbeschränkt) abroad and circumventing liquidation is also not possible according to new law.
By law, a GmbH is always deemed a trading company, regardless of the purpose actually pursued (formal merchant). It can pursue practically all purposes admissible by law (trades requiring approval). The object must be unambiguously stated in the statutes. A formulation such as “trade with goods of all kinds” is regarded as being too general by the courts. According to the professional law in question, various freelance professions may not be run in the form of a GmbH/UG (haftungsbeschränkt), e.g. pharmacies and notaries’ offices. They have the abbility to form partnership companies.
In the event of an object of an enterprise also containing activities subject to approval (for example organisation of real estate, craftsmen’s activities), permission no longer needs to be proven immediately, i.e. upon entry into the Register of Commerce, according to the new LLC law. This leads to an acceleration of the registration procedure. Existence of the necessary permission at the start of the activity subject to permission suffices. It is to be proven at the business registration.
8. Appointment of executive organs
The GmbH has two necessary executive organs: managing director(s) and Shareholders’ Meeting. Additional organs can be created in the statutes, e.g. a Supervisory Board.
One or more managing director(s) can be appointed. Application for entry of the GmbH in the Register of Commerce is attended to by the managing director(s). The latter is/are appointed by the Shareholders’ Agreement or by a resolution passed by the shareholders. The appointment can be revoked at any time.
The name(s) of the managing director(s) is/are recorded in the Register of Commerce.
9. Notarial certification
When the set-up of the GmbH is recorded, founders not known to the Notary Public must prove their identity by valid identity papers. If a person appearing is not acting on his own behalf, but for another person/entity, a written power of attorney or a subsequent approval in a notarially certified form must be presented. If the signature under a power of attorney is certified by a foreign Notary Public, a legalisation (or apostille) is necessary, depending on the country of origin. The former can be granted by a Consul of the Federal Republic of Germany.
If a legal entity is one of the founders, its existence must be proven by a certified extract from the Register of Commerce (for foreign enterprises: corresponding official registration documents).
10. Comments by the Chamber of Industry and Commerce
By request from the Local Courts in cases of doubt, the competent Chamber of Industry and Commerce gives comments on the admissibility of the corporate name. In order to rule out a possible risk of confusion or possible reservations with a view to the identity and clarity of the company at an early stage, contact with the competent CIC is recommended.
But in the course of the entry into the Register of Commerce, only the risk of confusion with companies entered at the same location is checked. But as corporate names entered elsewhere and trademarks grant the entitled parties a claim to omission against new founders, it is recommended that corporate and trademark names entered nationwide are also included in the examination.
The electronic Register of Commerce gives information about companies entered all over Germany.
National, international and community trademarks can be researched via the Internet sites of the German Patent and Trademark office.
11. Application to the Register of Commerce and entry in the Register of Commerce
The GmbH only originates upon application to and entry in the Register of Commerce (entry in the Register of Commerce).
Entry into the Register of Commerce is to be applied for in writing at the locally competent Local Court (Amtsgericht). The signature and the signing of the corporate name must be certified by a Notary Public.
Upon entry into the Register of Commerce, the corporate name, the company headquarters, the object of the enterprise, the amount of the share capital, the date of conclusion of the Shareholders’ Agreement, the person of the managing director(s) and his/their representation powers are to be stated.
The following must also be enclosed with the application:
- the Shareholders’ Agreement concluded in a notarial form,
- if applicable, powers of attorney for the persons acting,
- a list of shareholders signed by the managing director(s), in the event of provision of contributions in kind, the report on the foundation by contribution in kind and documents on the valence of the contributions in kind.
- In addition, an assurance that the necessary minimum payments of the share contributions have been made and are finally at the free disposal of the managing director(s) is to be given.
The Notary Public transmits all the documents to the competent Local Court by electronic means.
The entries in the Register of Commerce are made known by publication in the Electronic Federal Gazette.
12. Costs of foundation
The costs of foundation are dependent on the share capital and company goodwill and also whether the more favourable set-up record or an individual Shareholders’ Agreement is used. To the extent to be seen according to statements up to now, the costs are due as follows (German).
Without a foundation record, the costs for the foundation of an “UG (haftungsbeschränkt)” are just as high as for a GmbH without foundation record.
The fee for the entry of a company into the Register of Commerce is
approx. 100 Euro.
There are then also costs for the publication of the entry in the Federal Gazette and possibly in further publication organs. Here too, an amount in the order of magnitude of 100 to 300 Euro should be expected per publication. This calculation does not include costs for further support in particular formulations by the Notary Public or for making use of a lawyer’s advice, e.g. for the production of a Shareholders’ Agreement. In particular with a view to the production of a Shareholders’ Agreement, it is recommended that the question of costs be discussed beforehand, as the fees due are subject to free agreement.
III. Management of the LLC
1. Appointment of the managing director
The managing director must be a natural entity. A German or foreigner permanently resident abroad can also become a managing director. Likewise, a shareholder can also be appointed managing director (managing shareholder).
As a matter of principle, the managing director does not need any specific qualification. However, if permission is necessary for the company’s activity, presupposing a certain personal suitability (e.g. for craftsmen: master craftsman’s title), only a managing director possessing this suitability can be appointed. A managing director can only be a natural entity of unlimited legal capacity who has not been banned from a profession or trade which comes in contact with the object of the enterprise of the GmbH.
Further reasons for exclusion of managing directors are legally effective sentences on account of procrastination of insolvency, on account of false statements according to § 82 GmbHG or § 399 German Stock Corporations Act (AktG), incorrect portrayal according to § 400 AktG, § 331 HGB, § 313 German Company Conversion Act (UmwG), § 17 Publications Act (PublG) and a legally effective sentence on the basis of general criminal offences with a relationship to the enterprise (§§ 263 to 264a and §§ 265b to 266a German Penal Code (StGB).
Recall of a managing director is possible at any time and without notice by the executive organ stated in the statutes. Recall must be recorded in the Register of Commerce.
2. Managing director’s position
As a rule, the managing director’s hiring contract with the GmbH is a service contract of a freelance worker (not an employment contract). This is the case with a managing shareholder if he decisively exercises the economic power of the enterprise (in particular if he has a majority holding). But also managing shareholders with a share of less than 50% of the share capital are to be regarded as freelance employees if they are not bound by instructions. Normally, freelance workers in Germany are not subject to social insurance (pension insurance, health insurance and unemployment insurance). Voluntary further insurance in statutory health insurance is possible for former salaried employees. There is also the possibility of applying for compulsory insurance or voluntary insurance in statutory pension insurance schemes. In some branches, an entrepreneur is also subject to insurance in statutory accident insurance (employers’ accident insurance scheme) if he does not have any employees. But voluntary insurance is not possible for those subject to compulsory insurance. The managing shareholder is however an employee in the sense of income tax law (even in the case of a so-called one-man GmbH) if this results from the overall impression of the contractual situation and its factual performance. In such a case, the remuneration received by him is payment for work, to the extent suitable with a view to the amount, i.e. to the extent that it would also be paid for the same service to an outside managing director who is not a shareholder (outside comparison). This work payment is subject to income tax. In return, it can be deducted by the company as operational expenditure (details and fiscal consequences from the fact that the remuneration is not regarded as a work payment, but, for example, as a hidden distribution of profits, should be discussed with a tax counsellor).
For residence of a foreign managing director in Germany, specific directives of foreigners’ law are to be obeyed.
An employment agreement can be concluded with a managing director who is not simultaneously a shareholder (external managing director), i.e. exercising the economic power over the company dependent on instructions. In such a case, he is liable to social insurance in pension, health and unemployment insurance. The external managing director is subject to income tax.
3. Management to the inside
The managing directors are obliged to carry out instructions from the shareholders. They manage the business of the GmbH in the internal relationship and represent it to the outside. As a matter of principle, joint management applies to the extent that the statutes do not prescribe to the contrary (which however is frequently the case).
4. Representation to the outside
The managing directors represent the company to the outside. The representation power towards third parties cannot be limited.
5. Managing director’s liability
The managing director is responsible for running the company. For this purpose, he is to attend to outside asset interests on trust and ensure an unproblematic, efficient and profit-orientated course of business. In this context, the managing director is subject to various liability risks. To mention but the most important ones:
Reliance-based liability and liability in representation
The managing director’s specific trust situation can result in liability towards the company, e.g. in speculative transactions.
Liability in the area of taxes / accounting
One of the managing director’s most important tasks is proper accounting and drawing up of the balance sheet. A breach of duties in this area means personal liability of the managing director towards the company and the creditors, possibly even liability to criminal punishment.
If the GmbH employs people, the managing director assumes the tasks of an employer and must make income tax and turnover tax returns each month and also retain income tax for the employee’s account and pay it to the Inland Revenue Office. The same applies to turnover tax. If these duties are breached, both asset law liability pursuant to §§ 69 et seq., German Fiscal Code, as well as penal law consequences according to § 370 I or § 378 I, German Fiscal Code, threaten the managing director.
Liability in the area of social insurance law
Duties from social law also affect the managing director. The people employed by the GmbH are to be registered with the health insurance scheme and the amounts retained for health, pension and unemployment insurance are to be paid to the health insurance scheme in question. The managing director is personally liable for employees’ shares of the social insurance contributions which have been retained and not paid in and additionally makes himself punishable under penal law.
Liability in insolvency
In the event of threats of insolvency – i.e. the company’s excessive indebtedness or inability to pay – the managing director is obliged to make an application for opening of insolvency proceedings within three weeks. If he fails to do so in good time, penal law consequences pursuant to § 84 I no. 2 Limited Liability Companies Act threaten.
If the managing director makes further payments after the company has become insolvent, he is personally liable towards the company for these payments.
In addition, fraud and insolvency crimes are also possible.
New: forward displacement of liability
The managing director’s liability is not displaced forwards in payments to the shareholders to the extent that they led to the company’s insolvency, unless this was not recognisable from the view of a prudent managing director.
IV. Control of the GmbH and annual financial statements
1. Shareholders’ Meeting
Alongside their competence according to the statutes and other fundamental competences, the shareholders have numerous further powers. They also extend to the area of the ongoing management and substantiate a far-reaching binding of the managing directors to instructions.
The shareholders normally pass their resolutions at a Shareholders’ Meeting. In a one-man GmbH, this organ is formed by the sole shareholder. The formal directives concerning the Shareholders’ Meeting are considerably simpler than those for a joint-stock corporation. To the extent that the Shareholders’ Agreement does not state anything to the different, voting is done by shares. Each 1 Euro grants one vote. The shareholders’ responsibility extends not only to the ongoing management, but also to approval of the annual financial statements and allocation of the profits, appointment and recall of the managing directors, measures for auditing and monitoring of the management, appointment of holders of a limited commercial power of attorney and general agents, legal relationship between company and shareholders etc..
The managing directors must give each shareholder information about corporate matters and grant insight into the company’s books and correspondence without delay upon request.
2. Supervisory Board
Creation of a Supervisory Board is admissible by law, but not always absolutely necessary. A Supervisory Board can be appointed, but is not necessary (optional Supervisory Board). Only if the GmbH is subject to co-determination by the employees, i.e. has more than 500 employees, is a Supervisory Board mandatory (necessary Supervisory Board), likewise in capital investment companies run in the form of a GmbH or non-profit-making residential construction companies.
The Co-determination Act of 04.05.1976 applies to all LLCs which employ more than 2,000 people as a rule and for which co-determination in the coal and steel industry does not apply. The Co-determination Act prescribes equal participation in the Supervisory Board. Half of the members are stock representatives, half are employees’ representatives. The Coal and Steel Industry Co-determination Act of 21.05.1951, which applies to companies in mining and iron and steel production, also prescribes equal participation in the Supervisory Board. If the specific prerequisites of these acts are not fulfilled, co-determination is subject to the Company Constitution Act of 1952, according to which the Supervisory Board must have one third of its members as employees’ representatives if more than 500 people are employed. If there are less employees, a Supervisory Board is not prescribed.
4. Tasks of the Supervisory Board
The Supervisory Board’s task is monitoring the management. It is further responsible for auditing the annual financial statements drawn up by the managing directors and the management report and the proposal for the allocation of the profits as shown on the balance sheet. Management measures cannot be assigned to the Supervisory Board. However, the statutes can make certain kinds of transactions dependent on approval by the Supervisory Board.
In a GmbH with a necessary Supervisory Board, for example, appointment and recall of the managing directors has been assigned to the Supervisory Board according to the Co-determination Act and the Coal and Steel Industry Co-determination Acts.
5. Position of the Supervisory Board
The contract with a member of the Supervisory Board is a service contract, with an agency as its contents. It can be at a charge or free of charge. A member of the Supervisory Board is not subject to social insurance.
6. Auditing of the LLC and annual financial statements
The duration of the fiscal year results from the Shareholders’ Agreement. However, it may not exceed 12 months. The first fiscal year may be shortened (curtailed fiscal year).
As a trading company, the GmbH is obliged to keep trading books. It is obliged to draw up a balance sheet (annual balance sheet) and a profit and loss account at the end of every fiscal year. In addition, the annual financial statements are to be extended by notes with explanations. They must be drawn up in the German language.
The annual financial statements are to observe the principles of proper accounting and give a picture of the asset, finance and profit situation corresponding to the facts.
Auditing of the annual financial statements is mandatory for large and medium-sized LLCs.
§§ 325-329 of the German Commercial Code (HGB) contain strict regulations for the disclosure of annual financial statements for capital companies. The directives are also applicable to trading companies (general partnerships, oHG) and limited commercial partnerships (KG), in which no natural entity is a personally liable partner.
Auditors and auditing companies are responsible for auditing the statements and chartered accountants and chartered accounts’ companies for the annual financial statements and management reports of medium-sized companies.
The auditors have an extensive right to information and insight into books, cash in hand, stocks of securities and goods etc.. They are obliged to unconditional confidentiality. They are to make a neutral written audit report on their auditing. If no objections are to be raised, the auditors are to give an audit certificate.
With his audit certificate, the auditor gives his overall assessment of accountancy and annual financial statements of the company to the company and the shareholders and also with an effect to the outside. He certifies the correspondence of the accountancy with the statutory directives.
V. Information on letterheads
The following information is to be given on the letterheads: corporate name, legal form, company headquarters, Local Court of the Register of Commerce, Register of Commerce number, names of all (also deputy) managing directors (with at least one first name), if applicable chairman of the Supervisory Board.
In particular, corporation tax, capital gains tax, trade tax, solidarity surcharge and turnover tax are due for payment.
Further information can be found in our brochure Accounting and Taxes – Information for People Setting Up a Business.
VII. Dissolution and ending
Dissolution of a GmbH is normally resolved by the shareholders. Further reasons for dissolution have been stated in § 60 GmbHG. The dissolution resolution starts the liquidation proceedings, at the end of which there is the ending and deletion of the company in the Register of Commerce.