The Gesellschaft mit beschränkter Haftung (GmbH) is the most popular form of a company when limited liability is desired. A GmbH can be established by one person (single-member GmbH) or by several persons and has its own legal personality. The company itself acquires rights and obligations.
Formation
To establish a GmbH, a notarial deed of association is required.In case of a single-member GmbH, this is referred to as a declaration of establishment. In addition, the first managing director(s) must be appointed. This can be done either in the articles of association or by shareholders’ resolution.
Subsequently, the shareholders must pay in their capital contributions. Once this has been completed, the bank issues a confirmation. The GmbH must then be registered with the Commercial Register by all shareholders. The signatures on the application for registration must be notarised or certified by a court. The bank confirmation must also be attached. The GmbH comes into legal existence upon registration in the Commercial Register. Under certain conditions, single-member GmbHs can also be established electronically via the Business Service Portal (USP).
As registration with the Commercial Register may take some time, but shareholders often wish to commence business activities earlier, the “company in formation” may already perform legal acts and conclude legal transactions. Upon registration, these legal relationships are transferred to the GmbH without any further action by the shareholders.
The company name must include the legal form suffix “GmbH”, “Ges.m.b.H.” or “Gesellschaft m.b.H.”.
Liability
A major advantage of the GmbH is its limited liability.Shareholders are not personally liable with their private assets for the obligations of the GmbH. In the event of liability, only the company’s assets are used to satisfy claims.
Share Capital
As compensation for the limitation of liability, the law requires a minimum share capital of EUR 35,000, at least half of which must be paid in cash at the time of formation.The share capital consists of the sum of the individual capital contributions of the shareholders. The amount of each shareholder’s contribution must be specified in the articles of association. Each shareholder must pay in at least one quarter of their contribution in cash.The total capital contributions may be reduced to EUR 10,000 if the shareholders make use of the founders’ privilege.
Example
The share capital amounts to EUR 40,000. The GmbH is founded by four shareholders, each assuming a capital contribution of EUR 10,000. At least half of the share capital (EUR 20,000) must be paid in cash. Each shareholder must therefore pay in at least EUR 2,500. If each shareholder pays this amount, EUR 10,000 has already been paid in. The remaining EUR 10,000 required to reach the minimum cash contribution can be distributed among the shareholders as agreed.
Representation and Internal Decision-Making
The GmbH is represented by one or more managing directors. They are appointed by the shareholders either by resolution or in the articles of association. Both shareholders and external persons may be appointed as managing directors.The managing directors are responsible for conducting the company’s business internally and representing the company externally.
Under certain conditions (e.g. more than 50 shareholders, share capital exceeding EUR 70,000, or more than 300 employees), a supervisory board must be appointed. Its task is to supervise the management. It consists of at least three members appointed by shareholders’ resolution.
Tax Aspects
A GmbH is subject to double taxation:The GmbH is a separate taxable entity. Its profits are subject to corporate income tax at a rate of 25%.If profits are distributed to shareholders, capital gains tax of 27.5% is levied. This tax is withheld by the GmbH and paid to the tax authorities.In addition, the GmbH is required to keep double-entry bookkeeping, regardless of its size. This includes preparing both a balance sheet and a profit and loss statement.
Advantages of This Legal Form
Due to its limited liability, the GmbH is a particularly popular legal form. In the event of liability, only the company’s assets are available to satisfy claims; access to shareholders’ private assets is generally excluded.Furthermore, changes in shareholders or the sale of the company are relatively straightforward, as only the shares need to be transferred. However, such transfers require a notarial deed.Another advantage is that shareholders appoint and remove the managing directors themselves and can therefore directly influence management.
However, one must consider that a relatively high minimum share capital of EUR 35,000 is required and that double-entry bookkeeping is mandatory. In addition, due to limited liability, banks often require personal guarantees from shareholders when granting financing.
Conversion into a GmbH
From a tax perspective, a change of legal form is facilitated by restructuring tax law, which allows the transfer of business assets at book values. This makes it possible to adapt the “legal structure” with minimal tax impact.If such a restructuring is advisable should always be carefully discussed with legal and tax advisors.
