Apart from numerous traditional forms of companies, the legal form public limited company can nowadays be considered for a middle-sized enterprise. This form, however, is not optimal for all enterprises.
Choosing a legal form
When starting up or restructuring a company, you must carefully consider what legal form suits it best. The choice of a legal form usually depends on three major factors: limitation of liability, optimal succession of ownership as well as tax benefits. You should also consider important issues relating to employment law, proprietorship and structuring of the company. Proprietary relations, decision-making processes and sharing of liability are all influenced by the choice of the legal form.
Here are some questions which can be helpful when choosing the legal form for your company: What formalities are necessary concerning the start-up? Do you want to run your business alone or with partners? How extensive do you want your liability to be? What is to be done in case of death or withdrawal of one of the partner?
Persons who start up a business alone can generally choose among two legal forms of a company: sole proprietorship (Einzelunternehmen) and self-employment (Einmann-GmbH). Which of these two forms is most suitable can be decided after conducting a thorough analysis of each individual case.
If a group of persons wants to start up a company, they can choose among a civil-law partnership (Gesellschaft bürgerlichen Rechts, GbR), general partnership (offene Handelsgesellschaft, OHG), limited partnership (Kommanditgesellschaft, KG), limited liability company (Gesellschaft mit beschränkter Haftung, GmbH), small public limited company (kleine AG) or other forms which are rarely opted for. However, the freedom of choice is to some extent limited by certain requirements for each of the above-mentioned forms.
To answer a question whether foreign forms of companies, such as the British limited company can or should be considered, you should thoroughly evaluate the risks involved.
If you want to limit your liability, you should consider one of the capital investment companies, such as a private limited company (GmbH) or a public limited company (AG). However, compared with partnerships (such as OHG or KG), these legal forms do not provide optimal taxation. Succession of ownership can be regulated in a more straightforward manner in case of capital investment companies.
Sole trader (merchant by virtue of entry in the Commercial Register)
Both sole traders as well as the so-called merchants by legal form (incorporated organisations having the statute of a merchant) are obliged to comply with commercial law. Therefore, a sole trader (merchant by virtue of entry in the Commercial Register) can exercise the extended rights embodied in the commercial law, such as granting general commercial power of representation, he must also, however, fulfil the extended duties embodied in the commercial law, such as bookkeeping.
A sole trader is personally liable for mistakes in the fulfilment of professional tasks.
Partnerships include: civil-law partnership (GbR), general partnership (OHG) and limited partnership (KG). GmbH&Co. KG and partnership of professionals (company form designed for partnerships of professionals, e.g. lawyers, medical doctors, etc.) are special forms of partnerships.
General partnership (OHG), limited partnership (KG) and the special forms of partnerships are governed by commercial law. A partnership is represented by its partners. Persons who are not partners cannot – contrary to a limited liability company (GmbH) – run the business. They can only be granted general commercial power of representation. From the point of view of employment law, the statutory regulations relating to workers’ codetermination do not apply to partnerships.
In principle, all partners are personally liable to the amount of their total assets. It is only partially possible to limit this liability.
Capital investment companies
Capital investment companies include the limited liability company (GmbH) and the public limited company (AG). A special form of a capital investment company is a partnership limited by shares (Kommanditgesellschaft auf Aktien).
One of the characteristic features of a capital investment company is the nominal capital of the partners forming the independent liability sum. A capital investment company is represented by its managing directors or boards of directors, who report to a supervisory board. According to legal guidelines, the supervisory board reports to a general shareholders’ meeting.
The minimum capital of a limited liability company is EUR 25,000, and of a small PLC – EUR 50,000. There are two statutory ways to start up a company, which can also be combined with one another: formation by founders’ capital subscriptions and formation on the basis of non-cash contributions. The formation of a company must be recorded by a notary. Articles of associations of a limited liability company can be flexibly drafted, whereas legal provisions concerning a PLC are stricter and provide for more stringent formal requirements. Formalities relating to starting up and running a public limited company are more extensive than in respect of a limited liability company. Furthermore, capital investment companies must comply with statutory regulations relating to workers’ codetermination and do not enjoy favourable tax treatment (there are, however, some possibilities to save taxes).
A company’s capital is at the same time liability coverage for company’s creditors. Partners or shareholders are not personally liable; piercing the corporate veil (direct liability of controlling shareholder) forms a rare exception..