A limited liability company (GmbH) has been a valid, legal business formation in Germany since 1892. In a GmbH, the shareholders’ liabilities do not extend to their personal assets—a fact that helps explain why GmbHs are so popular in Germany. As of 2023, the GmbH is the most common legal formation for registered businesses in Germany. Of all businesses in the Company Register, 79% are a GmbH. In this article, you will discover who can incorporate a GmbH, the step-by-step process for setting one up, and how much this may cost.
What’s in this article?
- What is a GmbH?
- What are the requirements for incorporating a GmbH?
- What is the step-by-step process for incorporating a GmbH?
- How long does it take to incorporate a GmbH?
- How much does it cost to incorporate a GmbH?
- Can you incorporate a GmbH alone?
- Is it possible to incorporate a GmbH without any capital?
What is a GmbH?
The limited liability company (GmbH) is a type of corporate structure. A classic limited liability company (GmbH) usually consists of several shareholders who incorporate it jointly. A minimum share capital of €25,000 is required for this.
Many entrepreneurs are attracted to the idea of a GmbH because the liability for shareholders in a GmbH does not extend to their private assets. The liability only covers the business’s assets. This is clearly implied in the term “limited liability company.” In contrast to other corporate structures such as a private partnership (GbR), the limited liability company (GmbH) offers a higher degree of security, making it a compelling option for entrepreneurs in Germany. Furthermore, the legal formation of a GmbH conveys a higher level of professionalism and trust among customers and business partners.
What are the requirements for incorporating a GmbH?
Any natural, legally competent person can incorporate a GmbH. Legal entities, such as associations or foundations, can also incorporate a GmbH. The number of founding members is not fixed when incorporating a GmbH. It is even possible to incorporate a one-person GmbH. The legal basis for incorporating a GmbH in Germany is the Law on Limited Liability Companies (GmbHG).
A key prerequisite for incorporating a GmbH is the contribution of a minimum share capital of €25,000. This can be made either in cash, in-kind, as real estate, or from bills outstanding. In the case of contributions in-kind, all material assets must be described and estimated in the articles of incorporation. To achieve this, a founder’s report must be created. Furthermore, when incorporating a GmbH, you are required to have the articles of incorporation certified by a notary, and to file an entry with the Company Register.
Is it possible to incorporate a GmbH without being a resident in Germany?
The residence of the person or persons founding the GmbH is not required to be in Germany. Only the registered office and business address must be in Germany.
What is the step-by-step process for incorporating a GmbH?
Before starting the process of incorporating a GmbH, there are a few preparations to make: during the preparation phase, it is important to agree on a business name and the shareholder structure. You should also check whether the GmbH will require approval. Some industries have particular requirements. For example, pharmacies, retirement homes, tax consultancies, and driving schools require approval to be a GmbH. The affected business types are listed in the industrial code. The Chamber of Crafts can also provide guidance on this.
Once you have received clarity on these points, you can begin the step-by-step process for incorporating your GmbH. The process for incorporating a limited liability company in Germany is clearly regulated via the Law on Limited Liability Companies. If you have decided to incorporate a GmbH, you are advised to adhere to the following checklist:
- Define the share structure.
- Determine the amount of share capital.
- Identify shareholders and managing directors.
- Draw up the articles of incorporation. This can be done using a sample agreement or with the help of a law firm.
- Make an appointment with a notary and have the articles of incorporation and memorandum of association notarized. The notary will then apply for the “GmbH under incorporation” status.
- Open a business account and deposit the share capital.
- The notary shall complete the entry into the Company Register. At this stage, the GmbH is now legally binding.
- Complete entry into the Transparency Register within two weeks of receiving the Company Register statement.
- Complete registration of the newly founded GmbH with the trade and tax offices.
What is a “GmbH under incorporation”?
During the incorporation process, a GmbH is only considered legally binding once it has been entered into the Company Register. Until this point (e.g., following certification of the articles of incorporation by the notary), the GmbH is given the official status of “GmbH under incorporation” (GmbH i.G.). A GmbH under incorporation is considered to have partial legal capacity and is capable of insolvency. The business’s liability is not yet limited. At this stage, the shareholders’ liabilities still cover their private assets.
It is important to ensure the GmbH under incorporation is identified as such in external business transactions. The business’s name must include the addition “GmbH i.G.” This can be advantageous for shareholders, since it means they can start running their business as a GmbH at this point.
How long does it take to incorporate a GmbH?
It is key that you follow all formalities when incorporating a GmbH. You must not miss any steps, including the final stages of registering with the trade and tax offices. The incorporation of a limited liability company is only complete when it is entered in the Company Register. At this stage, the GmbH is legally binding and fully functional. The end-to-end incorporation process can take anything from several weeks to several months. It is important that you take this time frame into account when incorporating the business.
How much does it cost to incorporate a GmbH?
As well as the share capital of at least €25,000, you will incur other costs when incorporating your GmbH. The largest costs are the notary’s fees:
- Notary costs are around €800. The exact amount depends primarily on the value of the business and the number of shareholders.
- Entry in the Commercial Register costs around €150 with cash contributions and around €240 with contributions in-kind.
- Trade registration costs are between €20 and €60.
- There are various membership fees for IHK, HWK, etc.
When incorporating a GmbH, you will also usually be required to take consulting costs into account (legal and tax advice). These costs can vary significantly depending on the amount of consultation work involved. Therefore, it is not possible to specifically quantify the total costs incurred when incorporating your GmbH.
Can you incorporate a GmbH alone?
Although it is known as a “company” with limited liability, this does not mean that you have to involve other people when incorporating the GmbH. There is also the option of having a one-person GmbH. In this case, the management is also the sole shareholder. However, even a one-person GmbH needs share capital of at least €25,000 to be incorporated.
Is it possible to incorporate a GmbH without any capital?
The high levels of share capital required to incorporate a GmbH can represent a major hurdle for many entrepreneurs looking to set up a business. However, there are cheaper alternatives to a classic GmbH, which may be particularly suited to founders who cannot raise the required share capital of €25,000:
The UG: Limited liability entrepreneurial company (“mini-GmbH”)
Founders have the option of setting up a so-called “mini-GmbH.” This is a limited liability entrepreneurial company (known as a “UG” in German). With one exception, the mini-GmbH has the same requirements as a GmbH. The difference between the two is the amount of share capital required. You only need one euro to start a mini-GmbH. However, the business’s management is required to transfer 25% of the profits to the share capital until the €25,000 total is reached. Therefore, we recommend you start with more than euro of share capital from the outset.
Founders who opt for this route when starting their business can still convert the mini-GmbH into a GmbH at a later date, as soon as the required €25,000 of share capital is available.
The GbR: Civil law partnership
A GmbH is a corporation, while a GbR is a partnership created when two or more people come together to work toward common business goals. The GbR generally does not require a contract, but it is recommended. Starting a GbR is not as complicated as incorporating a GmbH, since there are no court or notary costs, and there are no share capital requirements. Furthermore, a GbR is less complex than a GmbH from a tax perspective. However, although starting a GbR is cheaper, the partners of a GbR are personally liable.
A GbR also comes with the option of “starting small” and converting to a GmbH later, when you have more experience as an entrepreneur.
Special forms of GmbHs
As well as the mini-GmbH, there are other options for incorporating a business based on the legal formation of a GmbH:
gGmbH: The nonprofit limited liability company (gGmbH) must have a charitable purpose behind its business activities. Profits must not be distributed to shareholders. The gGmbH is exempt from corporation and trade tax.
GmbH & Co. KG: The “Limited liability company & limited partnership” (GmbH & Co. KG) is a special form of limited partnership. In the latter, the partners hold personal liability. However, this is not the case in a GmbH & Co. KG. Therefore, the most important advantage of this type of legal formation is the limitation of liability risk.
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