Entrepreneurs looking to start a business in Germany often ask themselves: does it need to be a GmbH or AG? With more than 1.3 million entries in the Commercial Register, the limited liability Company (Gesellschaft mit beschränkter Haftung) is the most popular type of corporation in Germany. But the public limited Company (Aktiengesellschaft) also plays a major role: more than 12,000 businesses are registered under this legal formation, ranging from listed corporations to fast-growing, medium-sized enterprises.

Both the GmbH and the AG are limited in liability, subject to tax and regulated by law. However, they differ significantly in their capital structure, organisation and flexibility. In this article, you'll learn about the differences between the two and help determine which option is the best choice for your business.

What's in this article?

• What is a GmbH?
  
• What is an AG?
  
• Framework of GmbHs and AGs
  
• What is the minimum capital for GmbHs and AGs?
  
• How are GmbHs and AGs taxed?
  
• What are the differences between annual financial statements and accounting?
  
• Transferability of shares in GmbHs and AGs
  
• GmbH or AG: A direct comparison of their advantages and disadvantages
  

What is a GmbH?

A limited liability company (GmbH) is a capital company with its legal capacity. It offers entrepreneurs limited liability and flexible entity formation that is particularly suitable for small and medium-sized enterprises. The internal organisation can be regulated individually, making it notably attractive for businesses managed by the owner.

What is an AG?

The public limited Company (AG) is another type of capital company. The AG is more formalised and designed for a broad funding base. It is mainly suitable for growth-oriented businesses that eventually plan to involve external investors or go public. It is subject to stricter statutory criteria and is geared toward a clear separation of management and oversight.

Framework of GmbHs and AGs

When examining the legally prescribed frameworks of each, the distinctions in corporate management between GmbHs and AGs become quite clear. They have leadership and oversight bodies, but their structure, duties and interaction differ.

Structure of the GmbH

One or more managing directors run a GmbH – they can be shareholders or third-party individuals. The general meeting of equity investors serves as the highest decision-making body, making fundamental decisions on matters such as profit allocation, changes in capital and the dismissal of management.

Unlike an AG, there is no legal obligation for a GmbH to establish a supervisory board. GmbHs generally do not need to separate management from oversight. Only large ones are obliged to separate these two entities, according to Section 52 of the German Act on Limited Liability Companies (GmbHG) in conjunction with the One-Third Participation Act.

Structure of the AG

An AG has a three-tier management structure, consisting of a board of directors, a supervisory board and an annual general meeting. The board of directors manages the business independently and might not accept instructions. The supervisory board appoints and oversees the board of directors and supervises the governance of the operation. The yearly general meeting represents the shareholders and makes key decisions, including amendments to the articles of association or equity measures.

The AG separates leadership from oversight, a system that enhances transparency and fulfils statutory criteria for listed or capital-intensive businesses. Nevertheless, it also demands a higher level of organisational complexity. This allows for greater flexibility in a GmbH's internal organisation, which is especially beneficial for small and medium-sized enterprises.

What is the minimum capital for GmbHs and AGs?

One difference between a GmbH and an AG lies in the legally required capital resources. It determines both the criteria for establishing an entity and influences how banks, investors and partners perceive the business.

GmbH: A flexible capital framework for smaller businesses

To establish a GmbH, you need a minimum share capital of €25,000. The law also requires a minimum payment of at least €12,500 be made into the Commercial Register upon registration. Such contributions can be made in cash or kind. The equity framework provides a practical entry point into commerce, notably for smaller ventures or startups.

AG: Higher capital for greater flexibility in the long run

An AG needs significantly higher starting equity: the share capital must be at least €50,000 and it is also divided into stocks. This structure is not only a pre-requisite for launching the business but also the basis for subsequent capital measures such as share issues or equity increases.

Capital requirements as a strategic factor

In practice, paid-in capital also plays a role in the equity ratio, including in the context of financing rounds or balance sheet analysis by external stakeholders. Depending on the business model, growth strategy and investment needs, the higher equity threshold of an AG can either be a hurdle or a strategic advantage, particularly if the business plans to approach investors.

Other initial costs for GmbHs and AGs

Along with the required minimum capital, additional costs arise when starting a GmbH or AG, specifically for notarisation, registration in the Commercial Register and legal advice. The amount of these expenses depends, among other things, on the scope of the statutes, the type of deposit and regional fees.

GmbH

For a GmbH, the founding costs are typically between €800 and €1,000. These include the notarisation of the partnership agreement, registration with the Commercial Register and consulting fees. If a GmbH is founded using a template, the initial expenses are usually lower.

What's important is that a GmbH can solely cover its founding charges if these are explicitly quantified in the articles of association and remain within a maximum of 10% of the share capital, typically no greater than €2,500. Otherwise, the Commercial Register can delay or refuse registration.

AG

The establishment of an AG is significantly complex, making it more expensive. Besides the general costs, there are also added expenses that can amount to approximately €6,000. These charges include:

• The appointment of the management and supervisory board
  
• The notarisation of the articles of association
  
• Entry in the Commercial Register
  
• A legally required foundation audit pursuant to Section 33 of the Stock Corporation Act (AktG)
  
• Publication of the articles of association
  

Based on the individual design, the actual expenses might exceed this. Because of it, entrepreneurs need to plan out a sufficient budget and professional support in Advance.

How are GmbHs and AGs taxed?

The tax treatment of GmbHs and AGs follows the same rules: both are considered capital businesses and are therefore subject to corporate tax, trade duty and, in the case of profit shares, withholding tax. Yet, differences arise in the use of earnings, transparency and design options.

The GmbH and the AG pay a 15% corporate levy at the business level, plus a 5.5% solidarity surcharge on that levy. In addition, there is the trade duty, the amount of which varies on the assessment rate of the respective municipality.

At the shareholder level, both legal formations are subject to a flat-rate withholding tax on distributed profits of 25%, plus the solidarity surcharge and, if applicable, church tax. Such double taxation can be avoided by keeping earnings within the business instead of distributing them as dividends.

Use of profits and retention

Profit retention plays a key role, especially in AGs, as it strengthens the equity base and can be a pre-requisite for later capital measures. With GmbHs, on the other hand, flexible distribution based on investor resolutions is common. This enables pragmatic use of profits, in particular for smaller or owner-managed enterprises.

Stripe Tax helps businesses accurately manage levies on retained and distributed earnings, including the preparation of tax-compliant documentation for tax authorities. The solution not only helps organisations comply with legal requirements, but it also creates clarity for partners, shareholders and tax advisors alike. Stripe Tax also allows you to automatically record value-added tax (VAT) obligations, generate reports and meet regulatory deadlines, nationally and internationally.

What are the differences between annual financial statements and accounting?

GmbHs and AGs are subject to accounting, financial reporting and disclosure obligations. That said, the scope of filing responsibilities varies considerably depending on the legal formation and size of the business.

According to the German Commercial Code (HGB), a GmbH is required to maintain double-entry bookkeeping. The annual financial statements consist of at least one balance sheet and a profit or loss account. Based on the size of the operation, an appendix and a management report might also be necessary; still, small GmbHs benefit from simplified audit and disclosure requirements.

AGs are subject to stricter criteria, regardless of their size. An independent body is obliged to audit an AG's yearly financial statements. Publication duties are comprehensive, primarily for listed businesses, which must meet additional capital market law stipulations.

Digital support for reporting obligations

AGs have to cater more to external stakeholders, such as shareholders, investors and analysts, requiring structured, transparent financial disclosure. In such situations, Stripe Revenue Recognition can come in handy. Revenue Recognition automates Income allocation and periodisation, making it easier to create reports that comply with the HGB and the International Financial Reporting Standard (IFRS).

Transferability of shares in GmbHs and AGs

Another important difference between a GmbH and an AG is the ease of transferring stock and, as a result, the question of how flexible shareholdings can be transferred or sold to third parties.

Transferability in the GmbH

Transferring shares of a GmbH is possible, but it's further strictly regulated by law. Every Transfer requires notarisation, which limits flexibility and demands additional effort. The articles of association can outline specific approval criteria or preemptive rights to control the composition of the shareholder structure.

Transferability in the AG

AGs have greater freedom here: equity is more or less freely transferable. They can be moved either by agreement and Transfer in the case of bearer shares or by re-entry in the share register in the case of registered stock (Section 68 of the AktG). Notarisation is not necessary. For listed AGs, trading occurs through the stock exchange. For non-listed enterprises, trading typically occurs within the framework of internal regulations or through private placements.

The ease of stock transfer makes the AG particularly attractive for investors and strategic partners, whether in capital rounds, exits, or succession solutions. At the same time, however, it also increases the requirements for transparency and Compliance.

GmbH or AG: A direct comparison of their advantages and disadvantages

Whether it is a GmbH or an AG, both legal formations have their pros and cons. Keep in mind that an advantage for one enterprise could be a disadvantage for another. The choice ultimately depends on the size of the business, its equity thresholds, the planned growth strategy and the desired governance framework.

Here are the most notable differences at a glance: