International investors can register their operations in Germany as companies, branches or partnerships. The GmbH (Gesellschaft mit beschränkter Haftung) or in English a company with limited liability, LLC) is the most popular company form in Germany. This entity is preferred because of its uncomplicated and flexible financial and corporate structure. The shareholders carry limited liability covering the share capital of the company.
The GmbH can have its corporate seat at any location in Germany, it does not matter if the entity is actually managed from a different place. Therefore the headquarters of the company can also be located in a different country. It is also possible to perform exclusive business operations through a branch registered in another member of the EU. However, all registered GmbH are obliged to have a German business address that is included in the national Trade Register.
Requirements for minimum capital in the GmbH
The share capital required for the incorporation is 25 000 EUR in the form of cash or in-kind contribution. Twenty-five percent (but at least 12 500 EUR) of this capital needs to be transferred at the time of establishment of the company. Upon formation, each of the shareholders obtains one share corresponding to the amount he holds. In case in-kind contributions are made (for example claims, patents or equipment), the nature of each contribution and its corresponding share amount should be stated in the agreement.
The LLC cannot issue certificates of shares and cannot transfer shares freely. Shares can be transferred by assignment to third parties or other shareholders. The assignment contract is only effective if accompanied by a notarized agreement. Regardless of any limitations stipulated in the Association Articles, shareholders are entitled to refuse the transfer of interest of any shareholder to a third party.
GmbH incorporation requires the presence of at least one shareholder. There are no limitations with respect to the number of other persons taking part in the act of formation. Both physical and legal entities, including other incorporated companies, can become partners in a General or Limited Partnership: OHG / Offene Handelsgesellschaft or KG / Kommanditgesellschaft. The formation requires an agreement in the form of Association Articles that needs to include information on the company, its central office, share capital, scope of operations and acquisition of contributions by the members of the company.
The Meeting of Shareholders is the highest decision-making authority of the GmbH where all shareholders are represented. It can decide on all company matters unless the Establishment Act of the GmbH (also referred to as GmbHG from GmbH-Gesetz) or the Association Articles specify otherwise. The purpose of the Meeting of Shareholders is to adopt resolutions. In case of unanimous approval, its members can waive formal requirements if no stricter measures are required by law or the Association Articles. For example, voting by electronic mail can be adopted.
If no specific requirements of majority are set in the Association Articles or by law, more than half of the votes cast are sufficient to pass a resolution. Some decisions, however, require 75 or more percent majority of the cast votes in order to be adopted. Such cases include amending of the Association Articles, mergers, decisions on increase or decrease in capital, etc.
The shareholders’ liability covers only their contributions. This liability limitation becomes effective upon registration in the Trade Registry. The shareholders’ responsibility with respect to the company’s debts does not involve their personal assets. In regards to losses from routine business operations, shareholders are considered liable only if they have incurred the losses due to unlawful failure.
Representation and management of the GmbH
The GmbH needs to have a minimum of one lead manager (or Geschäftsführer). He/she does not necessarily have to hold shares, but cannot be a legal person. All shareholders can participate in the business management (even on a daily basis) by giving broad or more specific guidelines to the lead manager. The managers report to the shareholders who have the right to dismiss them at their own discretion.
The Management Board of any company has the statutory power to represent it in front of third parties. In case the GmbH has multiple managers, all members of the Board must work together in order to represent the firm in a valid manner, unless the Association Articles state otherwise. The lead manager is authorized to sign any relevant documentation collectively with another manager or a procurator. If the lead manager is just one, then he/she has full authority to sign any relevant documents. The Management Board members shall act conscientiously, in the interest of the company. Under particular circumstances, managers and supervisors, where present, can carry liability for damages incurred due to breaches of their duty, especially if gross negligence and intent are involved.
There are no general rules relating to the structure of the corporate body. However, a company with 500+ employees can be put under an obligation to establish a Board of Supervisors (BS). This Board must include members of the staff. If the GmbH has 500 – 2000 employees, a third of the members of the Board shall represent the staff. The rest of the members shall be appointed by the Board of Shareholders. In case the company has more than 2000 employees, the SB shall include 12 seats. If the employees are 10 000+, the seats increase to 16, and for more than 20 000 employees: to 20. In these two cases, the seats are split equally between staff representatives and shareholders.
The shareholders are entitled to exclusive decision-making authority on some matters. The following are examples of matters requiring the approval of the whole assembly: annual financial reports, profit appropriation, dismissal and appointment of managing directors, rules of monitoring and auditing of management, issue of procuration/power of attorney concerning the whole business, and legal representation of the Management Board.
It is permitted to appoint one or multiple procurists. The procurist may represent the company individually, with another procurist or with a lead manager.
Companies are separate legal entities. The formation of a GmbH requires the execution of a Deed of Incorporation (DoI) in the presence of a notary. Companies begin to exist only after their inclusion in the Trade Registry.
The GmbH must submit to the Trade Registry its DoI, a full shareholder list and details of the lead managers. The necessary documents include a copy of the Association Articles and notarized specimen signatures of the lead managers. The Trade Registry must be duly notified of any changes in the submitted information.
Taxes and expenses
The establishment of a GmbH is connected to notary fees and court expenses for document certification, and application at the Trade Registry that must be covered by the shareholders. There are also additional costs associated with the publication of an official notice in the State Gazette (Bundesanzeiger). The overall expenses for GmbH incorporation with 25 000 EUR of share capital most often fall in the margins of 450 – 550 EUR. With respect to the effort necessary to complete the procedure, the amount of legal fees may reach around 2 000 EUR. The inclusion of an entity in the Trade Registry usually takes 2 – 4 weeks, if all necessary documents are prepared.
The profit of the company is subject to tax as corporate income (Körperschaftssteuer). There is a flat tax rate of 15 percent that applies regardless of whether the profit is retained or split between the shareholders. If income is transferred to a national shareholder, it is also charged with a withholding tax (or Abgeltungssteuer): 25 percent flat rate + 5.5 percent solidarity tax. Apart from the tax on corporate income, companies are also liable for trade profit tax (Gewerbesteuer) collected by the local authority in the respective area.
The procedure for registration at the Trade Registry involves a certain delay. This can be circumvented by purchasing an already set-up company (also called a shelf company), typically from an agent specializing in incorporation. Shelf companies are incorporated by professionals offering legal services, complete with the necessary share capital. Even though the required capital is paid in full and the agents guarantee that their shelf companies are free of previous economic transactions and encumbrances, the acquisition of such a company is considered as economic reestablishment.
According to the jurisdiction, the GmbH is a free entity that, when acquired, is backed up by a company. Consequently, all described regulations related to GmbH establishment and designed to guarantee its capitalization are consistently applied. Additionally, share capital acquisition shall also be reported to the Registry court. Therefore the abovementioned economic reestablishment involves disclosure of information to the Trade Registry, while the company’s lead manager needs to guarantee the provision of shares. This demonstration is intended to ensure that even if any losses were incurred, the paid-up capital has not been used partially or entirely. The lack of disclosure with respect to reestablishment leads to personal and, in most cases, unlimited shareholder liability. Potentially, the impairment model of liability relevant to the legal establishment of the company may apply. The liability amount is equal to the difference between the value of the capital and the assets of the company upon disclosure. Thus the liability period starts at the time when the company is acquired and ends at the time of disclosure of the reestablishment. Last but not least, any impairment resulting from non-disclosure also impacts shareholders who did not participate in the reestablishment. Thus shareholders that have become company members after this reestablishment are also affected, regardless of whether they had any knowledge of the reestablishment.
All German companies listed on the stock/capital market (also called “quoted companies”) and other entities involving public interest are obliged to follow the Corporate Governance Code of the German Ministry of Justice. The aim of this legislative document is to ensure the transparency of the rules for company management and, as a result, to strengthen the trust of local and foreign investors in the management of national corporations.