The right legal form for your german startup

25.05.2021 | Written by Ole Peterson

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Anyone founding a startup should think carefully beforehand about which legal form is best for their company in the long term. Depending on the business model, the startup capital and the constellation of the founders, either the civil law partnership (GbR), the limited liability entrepreneurial company (UG (haftungsbeschränkt)) or the limited liability company (GmbH) are suitable. In addition to these “classics”, there are many other options that we will not withhold from you.

Decision Graph

With this graph you should be able to find your very own path to the solution, that fits your business the best.

GbR vs. UG(haftungsbeschränkt)/GmbH - The Liability

The GmbH and the UG have in common that the founder does not have to be personally liable for the company, but that a share capital is contributed to the company, which is considered to be the upper boundary of liability. In other words, you pay money once and then cannot lose more money than this paid-in capital.

With a GbR, on the other hand, the founders themselves are liable for the company. Everything that your startup accumulates in possible debts must be paid by you as the founder if the startup runs out of money. Especially in areas where a product, in case it does not work properly, can cause high damage or if high investments are necessary to start the business, a GbR can be very expensive for the founder. On the other hand, no share capital has to be contributed at the beginning.

GbR vs. UG(haftungsbeschränkt)/GmbH - Foundation expenditure

The good thing about a GbR is that it requires little formal effort: you do not need a shareholders' agreement and save yourself the trip to the notary and the costs for the entire processing of formalities in the early founding phases. For anyone founding an UG or GmbH will in any case require notarization and should at best also seek legal advice before concluding such a partnership agreement.

With a GbR, on the other hand, the intention to pursue a common business goal is sufficient and the startup is then already legally secured by the German Civil Code (BGB).

Now, of course, it seems tempting to enter the startup business with a GbR and later, when a long-term success of the business is foreseeable, to carry out a legal transformation of the startup. However, this can, unsurprisingly, turn out to be very complicated. Particularly in the case of startups whose assets are largely intellectual property, including software, a transfer to the new corporate form is complex. In short, this is where the lawyers earn what they initially have missed out on by founding the company as a GbR.

UG (haftungsbeschränkt) vs GmbH

A limited liability UG and a GmbH are in principle very similar: The UG is even a form of the GmbH, which differs from a GmbH only by the requirements for the share capital. The UG is also called 1-Euro-GmbH, because it is theoretically possible to found this form of company with a share capital of one Euro. You will see in a moment why this makes no sense, but it is possible.

UG (haftungsbeschränkt) vs GmbH - Capital requirements

As already mentioned, as much or as little share capital as one wishes can be contributed to the UG. This share capital must be paid in cash for the foundation. In the case of a GmbH, at least 25,000 euros of share capital must be paid in. However, only 50% of this 25,000 must be paid in immediately and capital in kind can also be contributed to the share capital of 25,000 euros.

In the case of a UG with low share capital, it should be noted that costs incurred at the beginning, for example for an office or software development, can already cost quite a bit. If the startup is not profitable from the beginning, the paid-in share capital must cover these costs, otherwise a formal insolvency will arise very quickly. Then it is already over with the Startup, since then already insolvency must be announced. Since delaying insolvency, i.e. not filing for insolvency in the case of over-indebtedness, is a criminal offense in Germany, this should be monitored in any case. If not, it can even lead to the fact that convicted managing directors are no longer allowed to found new companies in the future. Insolvency delay is already the case from 3 weeks after formal insolvency. If you want to found a company even with low share capital, you should bootstrap well and generate income as early as possible. You can find more on this topic in our blogpost on Pre-Selling.

UG (haftungsbeschränkt) vs GmbH - Implications for the business

In the operational business, a limited liability UG means that a quarter of the profit from the startup must always remain in the company in order to increase the capital. With a GmbH, on the other hand, the entire profit from your startup can also be distributed as such.

Another, less formal thing is that of course customers also know what a UG means. The concern about a possible insolvency may resonate with one or the other partner of your startup, if he does not know with how much share capital the startup can be liable and would perhaps prefer the reputation of the “big” corporation, the GmbH.

Transition from UG to GmbH

Many founders choose the path of first founding a UG and then later converting it into a GmbH when the company profits cover the required share capital of 25,000 euros. This, however, requires some visits to a notary and an auditor and thus also corresponding costs. In order to become a limited liability company, an independently audited balance sheet and a notary public are required. If you simply pay in the 25,000 euros, i.e. do not increase them from company assets, you can save yourself the balance sheet, but you would have to have 25,000 euros at your disposal. Since the costs for the conversion can go fast into the thousands, a UG is worthwhile itself thus only if this is to exist also somewhat longer-term. Because you may not save so much with a UG if the GmbH is to follow soon.

At VIPERdev, we are particularly purpose-oriented and are always happy to bring non-profit startups to the market that are committed to education, ecology or the like. For ventures that focus on a non-profit purpose, there are special legal forms that usually come with less taxes.

A registered association (e.V.) can be founded with at least 7 founding members. One has thereby access to national means, the association as legal entity and a very democratic basis in management. An association can also be economically managed, it is only important that the non-profit and not the commercial thought stands in the center of the organization. Who prefers a firm management and an organization with more enterprise charackter, can think about a non-profit GmbH (gGmbH) or a non-profit UG (gUG). Here the only differences to the non-charitable variants of these legal forms are that tax relief and access to state funds are possible, as long as the non-profit purpose is given priority over the commercial one.

Founding an association (e.V.) is very easy and costs less than 100€, while for the non-profit GmbH/UG again a notary and also start-up capital is needed.

Purpose Company

The Purpose Company, is another alternative. With a pupose approach, the company belongs to itself, or to all participants in the company equally. Thus, no profit payouts are possible and the company dedicates itself to its own purpose instead of maximizing profits. In Germany, however, this legal form does not yet exist, although it is under discussion. However, the “Purpose-GmbH” can still be implemented de facto via a separate foundation that becomes the main shareholder or is given a veto right in the board of directors, albeit with a fair amount of bureaucracy that startups are often unable to bear.

If you want to learn more about this topic, you can have a look at the site neue-rechtsform.de and if you like also visit the petition for the legal introduction of this legal form in Germany.

We at VIPERdev live this form of society, although not formally, since this possibility does not yet exist in our country. You can find out why we chose this path and what we get out of it as a community in our blog article “How we work at VIPERdev”.

Overview-Table

In the following table we give a brief summary of the main take-aways from the article.

Legal Form Recommended Capital Advantages Disadvantages
Einzelunternehmen (Sole proprietorship) - Very easy No employees and full liability
GbR (Civil law partnership) - Easy and cheap Full liability
UG 500€ Cheap and safe Higher risk for insolvency, less trust
GmbH (Limited liability company) 25.000€ Well covered, high trust Costly and time-consuming to set up
Purpose GmbH 25.000€ GmbH owned by everyone in the company Not a legal form in Germany yet
gUG / gGmbH 500/25.000 Non-profit alternative with company-character Consumes as much time and money as GmbH
e.V. (registered association) - Easy solution for Purpose Requires 7 founding members and willingness for fully democratic governance
Foreign legal forms (o.Ü., Ltd.) Depends Tax advantages Legal issues, bureaucracy

Other countries, other legal forms. In our globalized world, there is also the possibility to found a company with headquarters abroad and thus possibly save taxes and/or bureaucracy. The O.Ü., for example, is the Estonian counterpart to the GmbH; however, you only need a starting capital of 2500€ and the state of Estonia does not charge any taxes on profits that remain in the company and only 20% on paid out profits. The same applies, for example, to an American limited company, which can be founded online with little effort. In general, however, we are convinced that we have many options in Germany and that there is a suitable and fair alternative for everyone.

If you have further questions or would like to talk specifically about which legal form is the best choice for you, you are welcome to make a free, no-obligation consultation appointment with us here and we will help you with your request. You are also welcome to contact us in writing via our contact form.

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