The limited liability company (GmbH for short) is a popular corporate structure for businesses in Germany. With a share capital requirement of at least €25,000 to establish a GmbH, this type of corporation makes it possible to limit the liability of the partners to the value of the business assets alone. In this article, we'll explain what other advantages the corporate structure of a limited liability company offers, what needs to be considered during its incorporation and how to proceed step by step.

What's in this article?

• What is a GmbH?
  
• What are the advantages and disadvantages of a GmbH?
  
• Who is liable in a limited liability company?
  
• What are the prerequisites for incorporating a GmbH?
  
• How does the incorporation of a GmbH work step by step?
  
• What costs are involved in the incorporation?
  

What is a GmbH?

The limited liability company (GmbH) is a type of corporate structure. In Germany, entrepreneurs can either incorporate a GmbH together with others or alone as a single-member GmbH. However, a classic limited liability company usually consists of several shareholders who incorporate it jointly. A minimum stock capital of €25,000 is required for this.

The meaning of "limited liability company" is already fairly clear from the name – for many entrepreneurs, the corporate structure of a GmbH is particularly attractive because of its limited liability. In a GmbH, the business assets of the company are clearly separated from the private assets of the shareholders – they are therefore not liable with their private assets. Exceptions to this limitation of liability are only possible in the event of breaches of duty towards the company. We will explain this below using examples, especially when it comes to the question of liability. In contrast to other corporate structures, such as a private partnership (GbR), a GmbH offers a higher degree of security as the risk is limited to the capital invested.

In addition, the procedure for incorporating a GmbH is straightforward and clearly defined, which makes the limited liability company a popular corporate structure for entrepreneurs in Germany.

A GmbH is composed of the following bodies:

• Management: This is either established in the partnership agreement when the company is incorporated or it is subsequently appointed by the shareholders' meeting.
  
• Shareholders' meeting: As the highest decision-making body of a GmbH, this meeting addresses everything that does not fall directly within the scope of the management's responsibilities.
  
• Supervisory board: This must be introduced as soon as the company has more than 500 employees. A supervisory board is appointed to monitor the actions of a GmbH.
  

The GmbH has its own legal identity, which is a separate legal entity. This means that the company itself bears rights and obligations and can act independently through the management.

What are the advantages and disadvantages of a GmbH?

A GmbH is an attractive corporate structure in Germany which offers several advantages, but it also brings with it some challenges.

Advantages of a GmbH

• Limitation of liability: Shareholders and management are only liable up to the amount of their investments, with private assets remaining unaffected.
  
• Respectability and trust: A GmbH usually enjoys a better reputation among customers and business partners. A GmbH must publish balance sheets and annual reports, in addition to making its goals and development transparent. This transparency ensures greater credibility – lenders, for example, are often easier to persuade under a GmbH.
  
• Tax advantages: A GmbH pays corporation tax instead of income tax, which is usually much lower.
  

Disadvantages of a GmbH

• High investment: In order to incorporate a GmbH, a stock capital of at least €25,000 is required.
  
• Costs and expenses: Incorporating, managing and dissolving a GmbH involves higher costs and more bureaucracy than other corporate structures, such as a sole proprietorship or private partnership. Notarial certification and an entry in the commercial register are mandatory. There is also an additional expense in ongoing business operations due to the mandatory double-entry bookkeeping.
  
• Comprehensive obligations: Shareholders must fulfil their duties reliably, as they can be held personally liable in the event of breaches of duty. This requires conscientious management and a clear distribution of tasks.
  

Who is liable in a limited liability company?

As a corporation, a GmbH is considered to be a legal entity that has rights and obligations – it acts independently and is represented by the management. The liability of a GmbH as a legal entity applies not only to its stock capital, but also to the entire company's assets.
Shareholders' liability is limited only once the company has been entered into the commercial register. Until this time, the company exists as a limited liability company under incorporation (GmbH i.G.) and the shareholders are personally liable with their private assets.

Liability for breaches of duty

The shareholders and managing directors of a GmbH have various obligations that they must fulfil in their daily business operations. They can only be held personally liable if they are guilty of a breach of duty. For example:

• If the stock capital is used for private purposes (private assets and company assets must be clearly separated)
  
• In the event of fraudulent behaviour – for example, if creditors are given the impression that they are doing business with a person or association of persons with unlimited liability
  
• If those responsible in a GmbH do not comply with the obligation to file for insolvency
  

What are the prerequisites for incorporating a GmbH?

The legal basis for the incorporation and operation of a GmbH is provided by the German Act on Limited Liability Companies (GmbHG). The number of founding members is not fixed. It is even possible to establish a single-member GmbH without any other shareholders. In this case, the management is also the sole shareholder.

Notarial certification and an entry in the commercial register

Notarial certification and entry in the commercial register are required by law. The articles of incorporation and the partnership agreement must also be notarised. These are important documents that determine the structure of a GmbH, the rights and obligations of the shareholders, and other aspects.

How much stock capital do you have to contribute?

Incorporating a GmbH requires a minimum stock capital of €25,000. This capital must be contributed when the company is incorporated, either in cash or in kind. A single-member GmbH also requires a stock capital of at least €25,000.

How does the incorporation of a GmbH work step by step?

In the preparation phase of incorporating a GmbH, it is important to decide on a company name, define the business idea clearly and determine the shareholder structure. In addition, founders should also check whether the desired GmbH requires approval. This only applies in certain cases – for example, pharmacies retirement homes, driving schools and tax consultancies all require approval. The trade regulations contain a list of companies requiring approval. You can also enquire at the Chamber of Crafts.

Once this preparatory phase is over, you can use the following step-by-step guide for incorporating a GmbH:

1. Determine company shares

When incorporating a GmbH, how many shares each future shareholder should receive in the company must be determined. The division depends on various factors – for example, who takes over the management or who invests the most capital in the GmbH.

2. Determine stock capital

When incorporating the company, the partners must contribute the stock capital proportionately, as specified in the partnership agreement. The stock capital can be more than €25,000. In addition, the agreement can also stipulate that a contribution in kind can be made instead of paying a sum of money. The shareholders then fulfil their cash payment obligation by transferring assets in kind to the GmbH. These contributions in kind can be made in a material form, such as machinery, equipment or property. They can also be assets, mortgages, patents or similar. It is important that the value of any contributions in kind is determined precisely.

3. Draw up articles of incorporation

For small businesses, the articles of incorporation can be drawn up on the basis of a sample agreement. The, the completed sample agreement simply needs to be certified by the notary. For larger companies with more than three shareholders, an individual partnership agreement is drawn up by the notary's office. In this case, all shareholders and the management must appear at the notary's office.

4. Make a notary appointment

A notary certifies the partnership agreement and the articles of incorporation. This ensures that all legal requirements are met, allowing the GmbH to acquire legal certainty. The notary's office checks whether all of the following required information is correct:

• First and last name of the partners
  
• Personal data of the management
  
• Registered office of the company
  
• Business purpose
  
• Amount of stock capital
  

If the notary's office has no objections, it will notarise a "limited liability company under incorporation" (GmbH i.G.). However, this cannot yet claim the limitation of liability for the shareholders because a GmbH i.G. is not yet a legal limited liability company.

5. Open a business account and enter it into the commercial register

The next stop when setting up a GmbH is to open a business account and pay in the stock capital, as determined previously. After the deposit has been made, the notary's office can have the GmbH i.G. entered into the commercial register at the competent local court upon presentation of the payment receipt. This turns the GmbH i.G. into a GmbH with legal capacity. From this point onwards, shareholders are no longer liable with their private assets, but only with the company's assets.

6. Enter in the transparency register

Once the extract from the commercial register has been received, shareholders must enter the GmbH and any shareholders with more than 25% of the shares or voting rights into the transparency register. This must be done within a two-week period. Registration is free and can be done on the transparency register website. Note that an annual fee is charged to maintain a user account. Entry into the transparency register is mandatory and violations of this obligation can be punished with a fine of up to €150,000.

7. Register at the trade office and tax office

The GmbH must now be registered with the trade office of the competent city or municipal administration. After that, the only thing left to do is to notify the tax office within one month of the business opening. This is done through the ELSTER portal of the tax office (electronic tax return). To do this, an ELSTER user account will need to be created, which will also be used for future tax information in the ongoing operation of the GmbH.

How long does the entire incorporation process take?

The limited liability company is named with the addition "under incorporation" until it is entered into the commercial register – only then does the company become a legal GmbH. Thanks to the introduction of the electronic commercial register, registering a GmbH usually takes no longer than two weeks. The processing time of the commercial register itself only takes a few working days. However, the necessary bureaucratic steps and formalities can extend over several weeks or months overall.

Can you also incorporate a GmbH online?

Since 1 August 2022, it has also been possible to incorporate a GmbH fully digitally via an online notary appointment. Founders no longer have to appear in person at a notary's office for notarisation. When incorporating a company online, the notary appointment is held as an online video conference. Even registrations with the commercial and cooperative register can be carried out online.

You can start the online process for incorporating a GmbH directly on the Federal Chamber of Notaries website.

What are the costs involved in the incorporation?

In addition to the minimum stock capital, other costs are involved in incorporating a GmbH, the amount of which depends on various factors. Above all, the notary costs, as well as the costs for trade registration and entering the commercial register, must be taken into account.

The notary costs depend on the value of the company, the number of shareholders and the work tasks of the notary, which are around €800. Entry into the commercial register costs €150 with cash contributions and €240 with contributions in kind. Trade registration costs between €20 and €60. Further costs arise from membership fees, for example at the Chamber of Commerce and Industry (IHK), Chamber of Crafts (HWK) or other chambers in Germany. The total cost of incorporating a GmbH is around €1,500.

Find additional articles on the topic of incorporating a company and find out what the ideal corporate structure is for your company in Germany. If you would like to find out more about Stripe and our solutions, please contact our Sales team.