Limited liability company (Gesellschaft mit beschränkter Haftung - GmbH)

Limited liability company (Gesellschaft mit beschränkter Haftung - GmbH)

The most frequently-chosen business structure for corporations in Germany is the private limited company or Gesellschaft mit beschränkter Haftung (GmbH). The establishment of a GmbH makes good sense for entrepreneurs or freelancers who are embarking on more risky business ventures: unlike forms such as sole proprietorships or general commercial partnerships, the shareholders’ private liability is limited  However, the necessary formalities for founding a GmbH are quite demanding and may be beyond the means of many.

Key features of a GmbH

  • Establishment: Article of association; entry into commercial register
  • Capital: At least 25.000 euros, half of which needs to be in a bank account at the time of registration
  • Governance: Managing director, shareholders’ meetings, and supervisory board for companies with more than 500 employees
  • Liability: Up to the amount of capital contribution, or the amount of company assets; shareholders are usually exempt from private liability
  • Taxation: Liable for corporation tax, solidarity surcharge, trade tax, capital gains tax, VAT and payroll tax

How to establish a limited liability company in Germany

The minimum initial capital required to set up a GmbH is 25.000 euros. Half of this must be paid immediately to the company, and the other half at a later date. Bear in mind that this start-up capital can also be contributions in kind, such as real estate, cars, machines and facilities. There are also a range of grants and subsidies for new businesses that you may be able to take advantage of.

A GmbH is established via a partnership agreement, certified by a notary, who forwards the documents to the commercial register. The article of association is relatively flexible, but usually includes the following details:

  • Company name
  • Registered office of the GmbH
  • Object of the GmbH
  • Amount of share capital
  • Capital contributions of individual shareholders

Once submitted, the documents will be checked by the district court before the company is entered into the commercial register and officially comes into existence. The founders will also have to apply to the tax office, trade office and Chamber of Commerce to complete the establishment of the new company.

GmbHs & liability

The biggest advantage of setting up a GmbH is the limited liability of its shareholders, whose private assets are strictly separated from the assets of the company. The GmbH’s debts are therefore usually only paid off from the assets of the company, leaving your private assets unaffected. It is important to note that this only comes into effect once the GmbH has been entered into the commercial register. Before this has taken place, you may be personally liable.

Tax liability of GmbHs in Germany

GmbHs are liable to pay all kinds of business tax, including trade tax, corporation tax, solidarity surcharge, payroll tax, VAT and capital gains tax, where necessary.  

Managing a GmbH

A GmbH needs at least one managing director, who must be employed by the company, older than 18 and not have been convicted of bankruptcy in the last five years. Several managing directors can be appointed, in which case they are only permitted to act together, unless agreed otherwise.

Shareholders have the power to direct the managing director and decide on the use of profits. For GmbHs with more than 500 employees, a supervisory board is mandatory to oversee the management.

How to do accounts for a GmbH

As a commercial operation, a GmbH is obliged to use double-entry bookkeeping, prepare annual balance sheets and preserve business records for a minimum of 10 years. Information as to the GmbH’s profits and losses must be made publicly available.

What’s the difference between a GmbH and a UG?

If the start-up capital of 25.000 euros is beyond your reach, you might consider setting up a provisional private limited company (UG), a more beginner-friendly business structure which can be established with as little as one euro.

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