One of the most important decisions you have to make as a founder is choosing the right legal form. Why is that so? Because it defines the way a company is legally organised and operated. Basically, everything that has to be done in terms of bureaucratic to-do’s before the company is founded plus the contractual framework conditions for further work is wrapped around it.
Which legal form is the most suitable depends on many factors and depends on individual needs and the goals of the company. Parameters to consider when making a decision are, for example, liability, tax treatment, number of employees, financing and administration of the company. In many cases, it is advisable to consult a lawyer, a start-up centre such as the .garage Berlin or tax advisors. To clear up the jungle a little in advance, we offer you a brief overview of the most common legal forms here:
A sole proprietorship is an independent business entity that – as the name suggests – is operated by one person. The owner is solely responsible for the business and is personally liable for all debts and liabilities. If you work alone and do not plan to hire many employees, then this is the most suitable legal form for you. If you are planning a business, i.e. a market stall, a shop or an online shop, you have to register with the Trade Licensing Office. If you are a freelancer, other regulations apply to you (see below). However, this legal form is the easiest to implement without a lot of bureaucracy, but it has disadvantages in terms of liability, because as a founder you are liable with your private assets if something goes wrong.
Unternehmergesellschaft (Entrepreneurial company)
To counteract this, the Unternehmergesellschaft was created. An Unternehmergesellschaft, also known as “UG (haftungsbeschränkt)” or “Mini-GmbH”, is a form of limited liability company founded in Germany. The UG was introduced in 2008 to facilitate the establishment of companies by offering a legal form similar to a GmbH with a lower minimum share capital. In contrast to the GmbH, the minimum share capital for a UG is only 1 euro. However, the founder or founders must set aside at least 25 per cent of the annual surplus as a reserve. And this continues until the share capital of 25,000 euros is reached. After reaching the share capital of 25,000 euros, the UG could then be converted into a regular GmbH. In addition to tax registration and registration with the trade office, the formation of a UG requires notarisation of the articles of association. Like a GmbH, the UG is liable with its corporate assets, while the personal assets of the partners are only liable for liabilities to a limited extent.
Gesellschaft mit beschränkter Haftung (GmbH)
A GmbH is a company where liability is limited to the assets of the company. This means that the owners of the company are not personally liable for the debts and liabilities. A limited liability company is often a suitable legal form for larger companies that employ several people.
The big one is, of course, the public limited company. (Aktiengesellschaftt) The capital is divided into shares held by shareholders. The liability of the shareholders is limited to the amount of their shareholding. An AG is often a suitable legal form for larger companies that require a substantial investment. So if you are planning a large company with many employees and a high turnover, it is well worth considering dividing the capital.
Cooperatives are becoming increasingly popular again in Germany – a legal form in which members work together to achieve a common goal. If you buy a field, for example, you can farm it cooperatively and all members of the cooperative benefit from the yield. The members therefore have a say and a share in the profits. A cooperative is often a suitable legal form for companies that focus on cooperation and collaboration.
At the end, we return to freelancers. They are individuals who carry out a freelance activity. They can choose a variety of legal forms, including sole proprietorship or limited liability company. Freelancers often have a high degree of specialisation in their field and are therefore often successful in their sector. What distinguishes them is that their job title is found in the catalogue of freelancers and that they do not pay trade tax and accordingly do not have to register with the trade office.
Conclusion: As already written at the beginning, the choice of legal form is a very individual decision that depends on the goals and circumstances of your company. To avoid pitfalls, it is definitely worth getting advice in advance.