Limiting liability in a GmbH is a key advantage of this type of structure. However, it requires shareholders and managing directors to comply with legal obligations.

In this article, you’ll learn how the limitation of liability works in a GmbH and in which cases shareholders and managing directors are individually responsible. We also explain how those involved can protect themselves from personal liability.

What’s in this article?

• What is a GmbH?
  
• Who is liable in a GmbH?
  
• In which cases are the shareholders of a GmbH liable?
  
• In which cases are the managing directors of a GmbH liable?
  
• How responsible parties can protect themselves from GmbH liability
  

What is a GmbH?

The limited liability company (GmbH) is a form of corporation in Germany. You can establish one as a sole founder or with others; typically, at least two people set it up to pursue a common business interest. The partners can be either natural or legal persons. To establish a GmbH (see Section 5, Paragraph 1 of the German Act on Limited Liability Companies [GmbHG]), you need a minimum share capital of €25,000. Half this amount must be deposited immediately, with the rest payable within five years.

Every GmbH is governed by a partnership agreement (also called articles of incorporation), which defines the rights and obligations of the shareholders, the entity’s objectives, and the organization of the business (see Sections 2 and 3 of the GmbHG). Leadership of a GmbH is usually the responsibility of one or more managing directors, who do not necessarily have to be partners (see Section 6 of the GmbHG).

The GmbH is subject to corporate tax, trade tax, and the solidarity surcharge, meaning it is considered an independent entity for tax purposes. The legal basis for the GmbH is the GmbHG. Due to its numerous advantages, this structure is very popular in Germany.

Who is liable in a GmbH?

The GmbH’s namesake limitation of liability particularly distinguishes it. The shareholders’ liability is limited to their contributions—their original investments. According to Section 13, Paragraph 2 of the GmbHG, they are not responsible for their private assets, which are separate from the business’s.

The GmbH is indebted independently of its shareholders and management as a legal entity. Therefore, only the business’s assets are used to cover its liabilities. The amount of these resources is recorded in the Commercial Register and forms the basis for the limitation of liability.

A GmbH’s exposure generally covers its resources and is not limited to its share capital. For example, if a GmbH has total assets of €100,000, it is fully responsible for this amount, regardless of the paid-in equity.

In which cases are the shareholders of a GmbH liable?

There are exceptions to the principle that the liability of a GmbH does not extend to the shareholders. Below, you will find some cases in which partners are responsible for their private assets:

Liability before entry in the Commercial Register

The GmbH is in a special legal interim phase until it is registered in the Commercial Register. As a GmbH in formation (limited liability company under incorporation, or GmbH i. G.), the business already has partial capacity and can act as a legal entity. That said, the limitation of liability to the business’s assets only takes full effect upon entry in the Commercial Register. Until then, the shareholders remain personally and jointly accountable for the obligations of the GmbH in formation (see Section 11 of the GmbHG).

Violations of the GmbH minimum capital

If shareholders violate the minimum capital requirements in Section 5, Paragraph 1 of the GmbHG, they could be individually liable. This applies if they conceal holdings or make false statements about their stakes—for instance, if they overvalue contributions in kind.

Sureties and personal loans

A GmbH’s responsibility can extend to the private assets of the shareholders if they voluntarily assume sureties or provide individual security for their liabilities. According to Section 765 ff. of the German Civil Code (BGB), a surety means that the guarantors are obliged to guarantee a claim of the GmbH if it becomes insolvent. Banks often require personal sureties that can be called upon directly without prior enforcement against the GmbH.

Other forms of personal security—such as pledging private real estate—likewise remove the protection offered by limited liability.

Abuse of the corporate form to harm third parties

In the event of grossly negligent or intentional misconduct, the individual property of the shareholders could be seized, which is referred to in case law as “piercing the corporate veil of liability.” For example, the limited protection of the GmbH does not apply if the business’s form is misused to harm creditors deliberately.

Such a scenario includes undercapitalization—establishing a GmbH is insufficient for long-term operations—or withdrawing equity after incorporation through prohibited repayments (see Section 30 of the GmbHG), causing bankruptcy and creditor loss.

The principle of apparent legality can also lead to personal liability for shareholders when they sign contracts without an obvious reference to the GmbH or express themselves in such a way that creditors wrongly assume individual responsibility.

Failure to pay social security contributions

Under Section 266a of the German Criminal Code (StGB), failure to pay social security contributions is a criminal offense. While management is primarily responsible for this, partners can be accountable if they are actively involved in the decision. Serious instances could result in fines or imprisonment of up to five years.

Delaying insolvency

One grave breach of duty is a delay in filing for insolvency (see Section 15a of the Insolvency Code [InsO]). Managing directors must file within three weeks of the onset of financial distress or overindebtedness. Missing the deadline makes them personally liable, and the shareholders can be, too, if they acted as de facto directors or have significantly influenced the delay. Postponing insolvency proceedings can be punished with fines or imprisonment of up to three years.

In which cases are the managing directors of a GmbH liable?

In exceptional cases, shareholders and managing directors can be liable for the GmbH. Beyond nonpayment of social security contributions and delay in filing for insolvency, director exposure can arise in the following situations:

Violation of founding obligations

Consider the potential liability of a GmbH’s managing directors when establishing the business. They must complete every formal step correctly—registering the GmbH with the Commercial Register, securing licenses, notifying the tax office, and registering employees with the relevant authorities. Personal liability can only be excluded if all deadlines are met.

Violation of due diligence obligations

The managing director is also accountable for breaches of due diligence. According to Section 43, Paragraph 1 of the GmbHG and Section 347, Paragraph 1 of the German Commercial Code (HGB), leadership is obliged to exercise the due diligence of prudent businesspeople to protect the business.

A central part of this duty is responsibility for proper accounting. Managers must record all financial transactions accurately and comply with legal requirements when preparing annual accounts. Errors can lead to tax problems and legal liability risks.

Leadership is also obliged to convene the general meeting of shareholders promptly and adequately. They must supply information on the business’s finances and developments upon request. Violating these duties or withholding important details can lead to personal liability.

Furthermore, the management cannot conduct any activity that contradicts the purpose of the GmbH. It must avoid entering into contracts that entail costs disproportionate to the benefits. Additionally, entering into precarious credit transactions could result in individual responsibility.

Illegal repayment of share capital

The managing directors of a GmbH are personally liable if they violate Section 43, Paragraph 3 of the GmbHG and order an unlawful repayment of share capital that reduces the business’s assets. Loans from the tied capital are also not permitted. They must immediately notify the general meeting of shareholders if at least half of their equity is lost.

Violation of external obligations

The above points cover internal relationships. In addition, there is liability in external relations with creditors. This can occur in the following cases:

• Management does not clarify that it is acting on behalf of the GmbH
  
• Contract negotiations are influenced by the managing director’s personality or individual knowledge
  
• Management violates competition law standards or industrial property protection regulations with advertising measures
  
• Management submits the GmbH’s annual financial statements to the Commercial Register too late
  
• Management conceals changes in shareholders from the Commercial Register
  
• Management does not recall defective products promptly
  
• Management embezzles business assets
  
• Management conceals the impending insolvency from business shareholders before the conclusion of the contract
  

The above points make it clear that a GmbH’s limitation of liability is not absolute. If partners or leadership violate legal obligations or knowingly act unlawfully, they can be held personally responsible.

How responsible parties can protect themselves from GmbH liability

The shareholders and managing directors of GmbHs can reduce the risk of personal liability by observing the following points:

Compliance with legal requirements

Partners and managing directors must comprehensively inform themselves about the legal regulations that affect them and the business. Knowledge of the associated obligations is key to preventing personal liability. Such duties exist towards the entity, the persons acting, the creditors, and the public authorities.

Careful bookkeeping

Proper accounting keeps the business financially sound and ensures it meets statutory standards. All relevant documents must be organized and traceable to present evidence in an audit or legal dispute.

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Legal advice

It’s a good idea to seek advice from tax advisors and legal counsel, especially when making decisions that appear legally or financially risky. Regular training on the obligations of a GmbH and relevant legal framework changes can help minimize personal liability risk.

Early identification of risks

Early detection of economic problems or the risk of overindebtedness enables those involved to react quickly. In the case of financial difficulties, it is important to observe insolvency regulations and file if necessary.

Taking out D&O insurance

Directors and officers (D&O) insurance can provide valuable protection against liability claims that might arise due to breaches of duty. It usually covers the costs of legal disputes and possible claims for damages resulting from misconduct. However, intentional breaches of duty are not insured.