The gGmbH is a well-established legal formation for businesses that operate in the charitable sector and also want to benefit from limitation of liability and tax relief. This article will explain what a gGmbH is and how to found one, including the conditions you will need to meet. We also outline the advantages and disadvantages of a gGmbH and explain what alternative legal formations may be suitable for a nonprofit business.

What’s in this article?

• What is a gGmbH?
  
• What is a nonprofit business purpose?
  
• What requirements must be met to found a gGmbH?
  
• How to found a gGmbH
  
• What tax advantages does a gGmbH have?
  
• Who is liable for a gGmbH?
  
• What are the alternatives to a gGmbH?
  
• What are the advantages and disadvantages of a gGmbH?
  

What is a gGmbH?

A gGmbH is a nonprofit limited liability company. It is a special type of GmbH that businesses pursuing a nonprofit purpose use. In a business landscape with an ever-increasing focus on sustainability, the gGmbH is a popular legal formation, especially for startups that are aiming to tackle social issues. Unlike an association (Verein) or a foundation (Stiftung), the gGmbH aims to generate profit. However, this profit must benefit the charitable purpose of the business. The gGmbH combines the economic advantages of a GmbH with the tax advantages of nonprofit law.

What is a nonprofit business purpose?

When starting a gGmbH, a key requirement is that the business pursues a nonprofit purpose. What this means in practice, and what criteria must be met, is set out by the legislative authority in the tax code.

In principle, the business purpose of a gGmbH must be nonprofit, charitable, and/or religious. Specifically, this means activities that serve the community in material, spiritual, or moral ways (Section 52 of the tax code); selflessly support individuals (Section 53 of the tax code); or promote religious communities (Section 54 of the tax code). This covers a broad spectrum and includes, among other things, environmental and animal protection; the promotion of art and culture; youth and elderly care; and the construction of places of worship. However, any activities that are carried out must have a clear connection to the specific business purpose. For example, if a gGmbH has committed itself to species protection within its articles of incorporation, it cannot pursue parallel projects that tackle poverty in old age. This would contradict the principle of exclusivity (Section 56 of the tax code).

A further principle of nonprofit status is that the business must act selflessly. Any profits made by a gGmbH must be used for the specified nonprofit business purpose, and not to primarily serve the business’s own economic interests (Section 55 of the tax code). Among others, beneficiaries can include foundations, nonprofit associations, gUGs (nonprofit UGs), or other gGmbHs. The business’s activities must also be carried out in-house. This means activities must not be outsourced to third parties. However, seeking support from auxiliary persons within a limited framework is permitted (Section 57 of the tax code).

If the business meets all the requirements for a nonprofit purpose, the responsible tax office will grant the gGmbH nonprofit status. In order to ensure that the business adheres to the requirements, this status is only ever temporary. It is granted retroactively for one calendar year. Violations and the withdrawal of nonprofit status can result in high back payments of tax.

What requirements must be met to found a gGmbH?

The core principle of the gGmbH is its nonprofit business purpose. This purpose should be clearly defined and accurately stipulated in the memorandum of association. If the tax office does not classify the business purpose as nonprofit, the gGmbH cannot be founded. This is particularly relevant for social entrepreneurs or businesses that not only pursue a positive impact, but also operate for their own economic success.

At least one partner is required in order to found a gGmbH. There is no limit on the number of partners, which means several people can form a team.

Another key requirement is the minimum capital, which is currently set at €25,000. At least half of this share capital must be available to the gGmbH at the time of founding. However, there is the possibility of taking tangible investments into account. These include, for example, real estate, machinery, or vehicles.

How to found a gGmbH

A gGmbH can be founded in just a few steps:

• Create a memorandum of association: The memorandum of association contains, among other things, the name and registered office of the gGmbH, the amount of share capital, the respective shares of each partner, and the resulting provisions for liability and profit distribution. Furthermore, the business purpose and social objectives must be clearly defined. To ensure that the information within the memorandum of association is complete and accurate, the business should consider seeking legal advice. Before notarization, the document can be submitted to the responsible tax office, where a check is carried out to establish whether the requirements for nonprofit status are met.
  
• Have the memorandum of association notarized: The memorandum of association must then be certified by a notary. As part of the notarization process, all shareholders must provide their signature.
  
• Deposit share capital: The next step sees the partners deposit their share capital into the gGmbH’s business account. As soon as proof is provided that at least half of the required €25,000 has been deposited, the notary will register the business in the Commercial Register at the responsible district court. During the period between the notarial certification and the entry in the Commercial Register, the gGmbH operates with the additional designation “i.G.,” which signifies that it is in the process of being incorporated. Once the gGmbH has been successfully entered in the Commercial Register, the business will receive the relevant excerpt from the Commercial Register within a few days.
  
• Register the business: The partners must register their gGmbH as a business with the relevant trade office.
  
• Fill out the tax registration form: The tax office requests the gGmbH to return its tax registration by post. To successfully complete this process, the gGmbH must submit its memorandum of association, Commercial Register excerpt, and confirmation of business registration. It must also submit an opening balance sheet and a profit forecast covering the first few years of trading.
  
• Register with the Chamber of Commerce and Industry (IHK) or Chamber of Crafts (HWK): If the business registration was successfully completed, the business will be contacted by the Chamber of Commerce and Industry (IHK) or the Chamber of Crafts (HWK). The partners are obliged to register the gGmbH accordingly and to pay membership fees.
  

What tax advantages does a gGmbH have?

First, the gGmbH benefits from the same tax advantages as a classic GmbH. Second, there are further financial advantages due to the business’s nonprofit status. However, this only applies to services provided in the course of nonprofit work. Services provided through normal business operations receive the same treatment for tax purposes as a classic GmbH. When compiling the accounts, the various services should be correctly separated from each other.

A gGmbH does not pay corporation or trade tax on nonprofit services. Furthermore, many services are exempt from value-added tax (VAT), or are only taxed at the reduced rate of 7%. If any purchased real estate is used for the gGmbH’s nonprofit purposes, the business does not have to pay property tax. Another advantage is that the tax office provides the nonprofit GmbH with a certificate allowing it to accept donations and issue tax-effective donation receipts. Finally, the gGmbH is also exempt from gift and inheritance tax.

Who is liable for a gGmbH?

When it comes to liability, there is no difference between a gGmbH and a classic GmbH as liability is limited to the business’s assets. This means that the shareholders’ liability only extends to the capital that they individually contributed, and not to their private assets (see Section 13 of the Law on Limited Liability Companies). However, this only applies if the shareholders have not breached their duty of care. If a crisis situation leads to the gGmbH being dissolved, the business’s contributions in-kind can also be used as liability. The limitation of liability takes effect once the business is entered in the Commercial Register.

What are the alternatives to a gGmbH?

If the business wants to provide nonprofit services, there are other legal formations to consider as well as the gGmbH. Alternatives include the gUG, a registered association, or a foundation.

The main difference between a nonprofit entrepreneurial company (gUG) and a gGmbH is the level of share capital required. A gUG only requires €1 per shareholder as share capital. This makes it a popular option for shareholders with limited financial resources. However, the gUG is obliged to retain a quarter of its annual profit as reserves. This regulation applies until the gUG has reached a primary deposit level of €25,000. Once this figure is achieved, the gUG can be converted into a gGmbH. The limitation of liability to cover only the business’s assets also applies to the gUG.

Another alternative to the gGmbH is the registered association, or e.V. for short. A gGmbH is a more popular option, since it enables a limitation of liability and has a better reputation for potential business partners. Further, the gGmbH can execute its strategy more efficiently and quickly, since the shareholders have the right to make decisions. By contrast, all members of an association have a vote when it comes to making decisions on specific projects. However, associations come with the advantage of not being required to build up capital.

The business can also pursue a nonprofit purpose through a foundation. However, in order to set up a foundation, more conditions need to be met than with a gGmbH. The process for setting up a foundation is complex and requires the approval of the responsible regional authority. A further difference is that the foundation’s capital may not be used to achieve the foundation’s purpose. Only the revenue stemming from the foundation’s capital is available to invest. Conversely, this also means that the capital contributions remain untouched and secure.

What are the advantages and disadvantages of a gGmbH?

Here is a summary of the advantages and disadvantages of a gGmbH that have been discussed in this article.

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