Share capital is the backbone of a GmbH (limited liability company) in Germany and forms the financial basis for all of the GmbH’s business activities. As one of the most fundamental concepts in corporate law, share capital plays a key role when setting up, running, and even dissolving a GmbH. In this article, you will learn about the legal requirements and various important elements of share capital in a GmbH in Germany.
What’s in this article?
- What is the share capital of a GmbH?
- What level of share capital is required to found a GmbH?
- What form can share capital take?
- How can you deposit share capital?
- The obligation to maintain share capital—can you use the capital?
- What are the alternatives to share capital?
- How is share capital displayed on the balance sheet?
- What happens to share capital when a GmbH is dissolved?
What is the share capital of a GmbH?
The share capital of a GmbH is the basic capital that is deposited by the shareholders when the business is founded. It forms the financial basis and recoverable assets of the GmbH.
The share capital protects the GmbH’s creditors in the event of insolvency. Therefore, it represents security for business shareholders, customers, and suppliers. It can be provided via cash, contributions in-kind, or even in the form of receivables. Share capital is paid into a special account that is managed by a notary. The notary also certifies the certificate of incorporation.
What level of share capital is required to found a GmbH?
The share capital required to found a GmbH in Germany is set by law. According to Section 5 Paragraph 1 of the GmbHG (Law on Limited Liability Companies), share capital must be at least €25,000. It does not have to be issued in full upon formation. A portion of the share capital can act as reserves for future investment or as security for operational activities. However, a minimum sum of €12,500 must be deposited when setting up the business.
The amount of share capital influences the liability of the shareholders. Since the GmbH is a legal entity, the shareholders’ liability generally only extends to their contributions. This means that the shareholders’ personal assets are, generally, not affected in the event of the GmbH going bankrupt.
How much do you need to deposit in the first instance?
When founding a GmbH, there are many legal aspects to consider. These include the amount of share capital to be deposited. When the GmbH is founded, the share capital must be paid in cash or via contributions in-kind. Note that the minimum amount of €12,500 must be deposited immediately. The remainder can be paid within five years of founding the GmbH. If the required amount of share capital is not deposited immediately, the shareholders are personally liable for the missing sum. This means that their personal assets can be used to settle debts in the event of the GmbH going bankrupt.
Failure to comply with the deposit requirement can have serious consequences. For example, the GmbH can be classified as a “sham business,” meaning the shareholders are liable for the business’s liabilities, with the liability extending to cover the shareholders’ entire assets. In summary, it is important that founding members take the requirement to deposit share capital seriously when setting up the GmbH. They must comply with the legal requirements in order to avoid legal risks, and to ensure the business operates on a solid financial foundation.
What form can share capital take?
When founding a GmbH in Germany, it is important to recognize that share capital can take different forms. Whether via cash, machinery, real estate, or other assets, the choice of how to contribute share capital to a GmbH in Germany offers flexibility for the shareholders. Furthermore, it makes it possible to adapt the financial basis of the business to individual circumstances.
The following provides an overview of the possible share capital forms:
Cash: The most common way to deposit share capital is via cash. The shareholders contribute the agreed sum in the form of a cash deposit. The deposit is made into a special account specifically managed for the GmbH. This liquidity is immediately available to the GmbH and can be used for investments, operating costs, and other expenses.
Contributions in-kind: In addition to cash, shareholders can also provide contributions in-kind. Various assets such as machinery, vehicles, office equipment, and even intangible assets such as patents or trademarks can be contributed. The assessment of these contributions in-kind is usually carried out by an expert and must meet the legal requirements.
Real estate: Another way to contribute capital is via real estate. For example, this could be done via land, buildings, or other types of real estate. This also requires an appropriate expert valuation in order to correctly determine the value of the property for the GmbH.
Receivables: In addition to cash, contributions in-kind, and real estate, accounts receivable from third parties can also be used as a deposit. For example, this could be the case if the GmbH has already provided services prior to its foundation and payments are still outstanding. An assessment of the receivables is also required to determine their value to the GmbH.
How can you deposit share capital?
Share capital must be deposited in the correct, legal manner. The most common method for this is via cash deposit. Shareholders transfer the agreed amount to a special GmbH bank account. This account is usually opened by a notary, who also certifies the certificate of incorporation for the GmbH. In order to contribute share capital to the GmbH as a contribution in-kind, real estate, or receivable, it must be valued by an expert and meet the legal requirements.
The capital is always deposited under notary supervision. The notary checks the deposits and ensures that all legal requirements are adhered to. They also certify the GmbH’s certificate of incorporation and play an important role in ensuring the process is legally compliant.
The obligation to maintain share capital: Can you use the capital?
The obligation to maintain share capital is a fundamental legal requirement for GmbHs in Germany, since it serves to protect creditors and ensure the financial stability of the business. The use of share capital is strictly regulated. This ensures that the GmbH meets its legal obligations and conducts its business on a solid financial basis. According to the Law on Limited Liability Companies, the shareholders must ensure that the GmbH’s share capital is permanently maintained.
This obligation has the following impact on the use of capital:
Limitation of liability: The share capital protects the GmbH’s creditors in the event of insolvency. By not using the share capital for personal purposes, the shareholders can ensure that liability remains limited to the business’s assets. This means the shareholders’ personal assets are not at risk.
No distribution to shareholders: The share capital cannot easily be distributed or repaid to the shareholders, unless this happens during a proper distribution of profits in accordance with established legal and statutory standards.
Not for use in business operations: The share capital is not intended to be used for the GmbH’s normal business operations. Instead, it is intended to serve as security for creditors. Therefore, the GmbH may not use the share capital for investments or operating expenses. The business must use its own assets or borrowed capital for these purposes.
Compliance with capital maintenance rules: Shareholders are obliged to ensure that the share capital does not fall below the legally stipulated minimum amount due to losses or distributions. Otherwise, the shareholders may be held personally liable for the losses.
What are the alternatives to share capital?
For a proper GmbH, there are no direct alternatives to share capital in the literal sense, since share capital is a key feature of this legal formation: the minimum share capital is a legal requirement.
However, there are a few ways to strengthen the GmbH’s financial basis or to raise additional funds:
Capital increase: The GmbH can increase its share capital via additional contributions from the shareholders. This strengthens the business’s financial stability and provides more funds for investment and growth.
Establishment of reserves: Instead of increasing the share capital, the GmbH can retain profits and report them as reserves on the balance sheet. These funds serve as financial reserves and can be used for investments or to cover losses if necessary.
Debt capital: As well as the share capital, a GmbH can also raise outside capital by taking out loans from banks or other financial institutions. This enables the GmbH to raise additional funds without increasing the shareholders’ stake.
Equity financing: The GmbH can also finance itself by selling shares in the business to external investors. This form of financing can be particularly useful for larger capital expenditures or expansion plans.
Cooperations and joint ventures: The GmbH can also explore additional financing through cooperations or joint ventures with other businesses. By collaborating with other businesses, costs and risks can be shared and new business opportunities can be tapped.
Alternatives to a “proper” GmbH
There are alternatives to the classic GmbH, particularly for founders with limited seed capital. This means there are also alternatives to share capital. One promising option is the mini-GmbH, also known as an “entrepreneurial business (with limited liability” or “UG.”
The mini-GmbH—or UG—is a special form of GmbH. It was created to make it easier for founders with little seed capital to enter the business world. In contrast to a classic GmbH, you do not require a minimum share capital of €25,000 to found a UG. Instead, a UG can be founded with a share capital of €1.
These are the advantages of the mini-GmbH:
Lower starting capital: The fact that you can found a UG with a share capital of €1 makes it easier for founders with limited financial resources to set up their own business.
Flexibility: After a UG has been founded, the share capital can be gradually increased until the minimum amount of €25,000 is reached. At this point, the UG can be converted into a classic GmbH.
Limitation of liability: As with a GmbH, the UG’s shareholders are only liable with the business’s assets. The liability does not extend to their personal assets.
Despite the lower barriers to entry, founding a UG can come with certain restrictions, since a UG is often viewed as less formal than a classic GmbH. This could, for example, affect business relationships. Furthermore, long-term financial planning plays a key role in order to gradually increase the share capital and convert the UG into a GmbH, if this is an objective.
How is share capital displayed on the balance sheet?
Share capital is a central component of a GmbH’s balance sheet. It reflects the business’s financial basis. A GmbH’s share capital is displayed on the balance sheet under equity. Within the equity capital, the share capital is often listed as a separate item. This highlights its importance as the financial bedrock of the business.
When a GmbH is founded, the share capital is recorded as a debit posting on the assets side of the balance sheet. This is because the capital is an asset that belongs to the business. At the same time, a corresponding credit posting is made on the liabilities side of the balance sheet in order to record the contributions made by the shareholders.
In the event of a capital increase, the additional capital contributed is also recorded on the assets side of the balance sheet as a debit posting. A corresponding credit posting is made on the liabilities side of the balance sheet in order to record the contributions made by the shareholders. Consequently, the share capital increases accordingly.
What happens to the share capital when a GmbH is dissolved?
Dissolving a GmbH is a significant step involving various legal and financial aspects.
When a GmbH is dissolved, the business is usually wound up first. The assets are sold, the liabilities are paid, and any proceeds from the sale are distributed among the shareholders. During this process, the share capital remains untouched. It continues to serve as security for creditors.
After the winding up has been completed and all liabilities have been settled, the remaining share capital can be paid back to the shareholders. Repayment is usually made in accordance with the shareholding structure. However, the share capital can only be repaid after the winding up has been completed and all liabilities have been settled.
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