Company formation in Germany – setting up a German company

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Aims of company formation

The formation of a company with legal advice typically has these goals:

Choosing the right legal form.
Limiting liability.
Legally secure formation.
Minimising overheads.

With our help, you can pursue these goals when forming your company, and start your entrepreneurial career with peace of mind.

Objektive 1
Choosing the right legal form
Forming a company is a long and demanding process. To ensure that you only have to fulfil formal requirements once, the formation should be prepared down to the last detail. The legal form provides the appropriate legal framework for the company, and is therefore one of the most important decisions to be made at the beginning. It determines:
1. the company’s external image
2. the liability of your shareholders
3. tax obligations and
4. accounting overheads.
Your basic questions will be answered in the free initial consultation.

Your specific entrepreneurial questions regarding the formation of your company will be dealt with in the formation consultation with your individual lawyer. For example, there is always a trade-off between the aims of forming a company very cheaply and of limitation of liability, as the latter is mainly possible with corporations, such as the UG or the GmbH.

If sufficient assets and a profitable return are already in prospect from the start of the formation process, you should refrain from forming a Personengesellschaft and go straight to forming a Kapitalgesellschaft. If you are not averse to high administrative overhead and are interested in tax-efficient withdrawal of assets, a hybrid form such as the GmbH & Co. KG will be the best choice.
Objektive 2
Limiting liability
One of the more important questions that you should ask yourself before forming a company concerns protecting your private assets. The financial risks associated with a partnership such as a GbR or OHG should be assessed in their entirety. If you have sufficient financial resources, we usually recommend a limited liability corporation, such as the GmbH.

Objektive 2
Objektive 3
Legally secure company formation
Our legal advice on forming a company also serves to ensure that your company is formed in a legally secure manner. The company must be assessed in its entirety and examined for legal risks.

The formation consultation therefore serves to assess all details of the planned undertaking. A lawyer will discuss the possible scenarios with you and draw your attention to all relevant areas of law. Finally, the process also involves drawing up all formal formation documents if the legal form is already known.
Objektive 4
Minimising formal overheads
Our firm specialises in company formation and gives you the perfect start to your business life. We form your company and check all legal details, leaving you free to focus on making sure your business gets off to a successful start.

Objektive 4

Step-by-step procedure for forming a company

This is how we proceed for you:

Free initial consultation
Legal formation advice
Formation process

PartG

Step-by-step procedure for forming a company

Step 1 - FREE INITIAL CONSULTATION
Before the actual process of forming your own business begins, your relationship with us should begin with a free initial consultation. As already mentioned at the beginning, numerous questions arise on your part as soon as you start to think about forming a company. Frequently, these questions relate to topics such as the legal form of your company, your personal liability, your company’s external image, the administrative overheads involved, tax issues and the personal suitability of partners and managing directors.

Many of these questions can be covered in a free initial consultation. In particular, the consultation will clarify which legal form suits your start-up.
Step 2 - LEGAL FORMATION ADVICE
Once your choice of legal form has been determined in the free initial consultation, your legal adviser will provide comprehensive advice on forming a company.

The main objective of legal advice on forming a company is to ensure that the company is formed in a legally secure manner. Thus, the formation consultation helps you avoid legal mistakes during the actual formation process, which can cost you a lot of time and effort later.

Your lawyer will draw up your bespoke articles of association based on the information you provide.

Step 2 - LEGAL FORMATION ADVICE
Step 3 - FORMATION PROCESS
On the basis of the formation consultation, our law firm will handle your entire formation process. Typically, we take the following steps:
- Renting a business address.
- Checking your company name.
- Preparing the formation documents, especially your bespoke articles of association.
- Organising the necessary certification appointments with the founders on site/in diplomatic missions.
- Opening an account.
- Commercial registration.
- Tax registration.
- Taking over the bookkeeping.
- Individually adapting the managing director’s contract.
- Trademark registration.
- Drawing up T&Cs.
- Preparing employee contracts, such as employment contracts or freelancer contracts.
- Preparing the company’s financial statements.
You are relieved of the formalities of the formation process and can focus on your company instead. Our team of lawyers will be at your disposal during the entire formation process.

Legal forms

Visa ans work permit

Digression: Company name

In principle, the name of a company can be freely chosen. Depending on the type of company, a personal name, factual- or fancy name can be selected. However, some requirements must be observed:

The name has to be distinguishable from that of other companies. It also must not infringe third party trademark rights. It makes sense to have checked whether there are colliding trademarks, companies and domains.
If a company with the same name is already registered in the competent commercial register, a different company name or registered office must be chosen.
The name must not be misleading. For example, an “Import-Export UG” must actually carry out imports and exports.
In addition the company must add a legal form suffix to its name (e.g. “UG”).

Digression: Foundation from abroad

To form a company, the formation documents must be signed before a notary public in Germany. If shareholders or managing directors cannot appear in person, we can take care of the formalities for you

Shareholders and Managing Directors

For this purpose, we need a so-called power of attorney, which entitles us to make the declarations necessary for the foundation and to sign the formation documents on behalf of the shareholders.

We require copies of the shareholder’s Identity cards to draft the power of attorney. The shareholders must have the power of attorney signed and notarized before a local notary public, at the German embassy or at a German consulate. If they choose a foreign notary an additional apostille is required.

The managing director of a newly founded GmbH has to sign his notarial instruction as well as the application to the commercial register. We prepare the documents for you. The signature of the managing director under the application to the commercial register ahs to be notarized before a local notary public, at the German embassy or at a German consulate.

Business account

The documents required to open a business account in Germany must be signed before a notary public. A copy of the passport is required for this and the signature must be certified with an apostille or legalized (authentication by the German consulate or embassy). We prepare the documents required to open a business account in Germany in consultation with the bank of your choice.

Forming an Unternehmergesellschaft (UG)

The

Unternehmergesellschaft (haftungsbeschränkt),
UG,
UG (haftungsbeschränkt), or
colloquially, “mini GmbH”, “1 euro GmbH” or “small GmbH”

is not a separate legal form per se, but rather a modified version of the classic GmbH. The legislator created this legal form in 2008 to allow business start-ups to benefit from the option of forming a limited liability company. The UG is now frequently found in the German corporate landscape.

Forming an entrepreneurial company limits your liability

By forming a UG, entrepreneurs protect their private assets by excluding personal liability. This drastically reduces the overall risk of the project.

Company registration possible with as little as €1 share capital

Forming a company without paying in share capital is possible, thanks to the lenient requirements of the UG. Forming the classic GmbH requires an initial contribution of €12,500 or €25,000. The UG may be formed with €1. In practice, a higher initial contribution is usually necessary, but there are no specific requirements.

The UG has its own legal personhood

The UG is a legal person and can therefore conduct business independently. If you conclude business transactions as a managing director and owner of a UG, the UG acts as the contracting partner (Sections 13, 5a GmbHG).

The company name of a UG

The company name is the name designation of a company. Anyone who forms a company is obliged to give it a company name. The name must not be misleading or used by another company. Furthermore, the abbreviation “UG (haftungsbeschränkt)” or “Unternehmergesellschaft (haftungsbeschränkt)” must be added.

Option of employing an external managing director

Like the GmbH, the UG is managed by a managing director (Sections 35 and 5a GmbHG). However, you as the owner of the UG do not necessarily have to be the managing director. You can minimise your personal liability risk by hiring a third-party managing director.

One-person UG

The low requirements for forming a UG make it the perfect legal form for operating a “one-man company”. No second shareholder is required to form the company.

Advantages of the UG
The Unternehmergesellschaft is favoured by many entrepreneurs because it is simple and inexpensive to form, but limits the founder’s liability. A UG can in theory be formed with as little as €1 of share capital. Although a higher contribution amount is usually required in practice to implement the business plan, the low requirement makes things easier for many founders. At the same time, the owner is not liable to cover the company’s debts with their private assets.

In addition, forming a UG can provide tax advantages that should not be overlooked. Where all the sole proprietor’s operating profits are subject to taxation at the full income tax rate, which may be up to 45%, the UG’s profits are only subject to 15.6% corporation tax. Profits can be kept in the business to be invested the following year.

In addition, the preparation of the balance sheet allows for the formation of hidden reserves. If an asset is held at book value while its current market value is significantly higher, this produces a non-taxable value.

Disadvantages of the UG
The only disadvantage of the UG is the obligation to prepare a balance sheet. However, this may already be necessary in the case of an OHG or registered businessperson’s company, and is therefore unavoidable for certain business models.

For larger entrepreneurial ventures, the UG can easily reach its limits. There is a lack of opportunity to involve investors. If you wish to do this, it is advisable to form a UG & Co. KG, as this mixed form allows silent investors to participate with tax advantages.

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Forming a Gesellschaft mit beschränkter Haftung (GmbH)

The limited liability company is a legal person and has its own legal personhood. It has existed as a company form for decades and enjoys a good reputation due to its solid legal basis.

Release from private liability for the owner

By forming a GmbH, the owner eliminates the economic liability risk to their private assets. Only the business assets are liable for the company’s debts. The limited liability contributes to the positive image of the GmbH. Thus, the owner is only privately liable if they have violated their personal duties as a managing director.

Option of formation with initial contribution of €12,500

Even if the legally stipulated share capital is €25,000, it is possible to form a GmbH with as little as €12,500. In this case, the release from private liability is not complete. The owner remains liable for company debts up to a maximum of the remaining amount of €25,000. With the minimum deposit of €12,500, therefore, the owner’s private assets remain liable in the same amount.

Company name of the GmbH

The company name is the official designation of a company. The GmbH, just like the UG, requires a company name. The name can be creative, but the abbreviation “GmbH” for “Gesellschaft mit beschränkter Haftung” or “Ges. m. b. H.” (Section 4 GmbHG – German Limited Liability Companies Act) must be added.

Option of management by an external managing director

The owner of a GmbH only risks becoming personally liable if they also take over the management of the company. However, they may appoint an external managing director to minimise the risk of a breach of duty as managing director.

Articles of association and entry into the commercial register

If the GmbH is chosen for the formation of the company, articles of association must be drawn up (Sections 2 et seq. GmbHG). Based on our experience, we recommend that a contract be drawn up for every business venture. Individual wishes should be included in the articles of association from the very beginning. For this reason, intensive consultation with a specialist lawyer is recommended so that no corrections need to be made later.

The registration of a GmbH in the commercial register is also planned (Section 7 GmbHG).

Advantages of the GmbH
A notable advantage of the GmbH is the limitation of liability, which is the reason why the GmbH has a positive image among founders.

At the same time, the GmbH grants entrepreneurs tax advantages. Its operating profit is taxed only at the level of corporation tax, that is, 15.6%. A sole trader is fully subject to income tax, and must pay 45% tax on profits at a personal top tax rate. A GmbH therefore allows profits to be more easily held as business assets and invested in the next financial year. Further advantages result from the formation of hidden reserves within the framework of professional accounting.

Disadvantages of the GmbH
The only disadvantage of the GmbH is the lack of opportunity for silent investors to participate. If you are planning such projects in the near future, we recommend that you form a GmbH & Co. KG. This legal form allows even inactive shareholders to participate in profits with tax advantages.

First-time founders tend to feel that the formal overheads and ongoing administration of the GmbH are too much to handle. Therefore, we recommend that you rely on our tried and tested formation process. We will help you make a successful start to self-employment, and will explain all the important issues in detail.

Forming a UG & Co. KG

The UG & Co. KG is a legal person, and has its own legal personhood. It was de facto created in the course of introducing the UG in 2008 and offers the shareholders the cost-effective formation of a corporation with investors as limited partners.

Release from private liability for the owner

By forming a UG, the owner eliminates the economic liability risk to their private assets. The general partner of the KG is thus the corporation UG, so there is no privately liable part of the company. Only the business assets are liable for the company’s debts. The limitation of liability contributes to the positive image of the GmbH. Thus, the owner is only privately liable if they have violated their personal duties as a managing director.

Company formation from as little as €1

Forming a UG, just like forming a KG, does not require a legally stipulated initial contribution. Therefore, the UG & Co. KG can be formed with as little capital as €1. Nonetheless, we recommend starting capital of at least €500–1,000. This ensures that the company will remain solvent, especially at the start of the business.

Company name of the UG & Co. KG

The company name is the official designation of a company. The UG & Co. KG also requires a company name. The name may be creative, but one of the abbreviations “UG & Co. KG” or “Unternehmergesellschaft & Co. KG” must be added. Furthermore, the name must not be misleading or the name of an existing company.

Option of management by an external managing director

The owner of a GmbH only risks becoming personally liable if they also take over the management of the company. However, they may appoint an external managing director to minimise the risk of a breach of duty as managing director.

Advantages of the UG & Co. KG
The UG & Co. KG is very popular with founders for many reasons. On the one hand, it offers all parties involved the advantage of release from liability. Liabilities only fall back on the business assets of the UG in its role as general partner. Furthermore, the combination of UG and KG offers the option for investors or family members to participate easily in the business. They can draw profits from the investment in a tax-efficient manner. Finally, the formation of a UG & Co. KG is significantly cheaper than that of a GmbH & Co. KG as there is no stipulated amount of share capital.

Disadvantages of the UG & Co. KG
Primarily, the UG & Co. KG has significantly higher administrative and formation costs. Two companies must be registered and operated. This also means that bookkeeping and management costs arise twice. If you want to enjoy the advantages of release from private liability without having to operate two companies, you can form a UG.

Furthermore, a UG & Co. KG has a worse reputation than the GmbH & Co. KG as it does not have any share capital and the company form is relatively new. For a better image in the commercial sector, form a GmbH & Co. KG.

Forming a GmbH & Co. KG

Only a few decades ago, the GmbH & Co. KG was still considered rather exotic. In the meantime, various courts have confirmed the raison d’être of this hybrid form through case law. Since the company form combines the positive aspects of the GmbH and the KG, it now enjoys enormous popularity among entrepreneurs and investors. It serves as evidence of an advanced corporate structure and therefore enjoys an excellent reputation.

The GmbH & Co. KG as a legal construct, formed from a GmbH and a KG

The GmbH & Co. KG is de facto not a legal form of its own, but rather a clever legal construct. However, repeated confirmatory jurisprudence can provide it with a firm legal basis. It consists of:

the GmbH as a corporation and
the KG as a partnership.

Drawing up and amending the articles of association of both companies in a particular way allows you to merge them. The GmbH takes the place of a natural person as a fully liable general partner. Thus, no partner is liable with their private assets.

Option of company formation from €12,500 upwards

Normally, the GmbH requires an initial contribution of €25,000, so the GmbH & Co. KG does too. Through an exception arising from Section 7 (2) GmbHG, there is the option of forming with as little as €12,500. The GmbH’s shareholder is, however, privately liable for the remaining amount required up to €12,500.

Company name of a GmbH & Co. KG

Before you form a company, you need a unique company name. The name of a GmbH & Co. KG may be creative but must be unique, and may not be misleading. Furthermore, the corresponding abbreviation “GmbH & Co. KG”, “Gesellschaft mit beschränkter Haftung & Co. KG” or “Ges. m. b. H. & Co. KG” must be added.

Advantages of the GmbH & Co. KG
The advantages of the GmbH & Co. KG lie in combining the positive aspects of both legal forms. On the one hand, the private assets of the operating partners are protected by the GmbH, while on the other hand, silent partners can be involved in the company with tax advantages.

There is also the option of forming the company as an individual.

If turnover reaches a certain level, a higher managing director’s salary is appropriate. When it reaches such a size, a pure GmbH may reach the limits of a reasonable managing director’s salary.

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Forming a gemeinnützige UG (gUG)

The gUG is a variant of the UG (haftungsgeschränkt) whose corporate purpose is not-for-profit activities. Basically, it offers similar advantages to the normal UG but has specific features, especially in terms of tax burden.

The company’s not-for-profit status is determined the company’s purpose. This may involve:

the welfare of young people and the elderly,
environmental protection and animal welfare, and
the protection of consumers and monuments.

The advantages of the gemeinnützige Unternehmergesellschaft
Forming a gUG offers the following advantages for your company.
1. The members of a gUG are released from private liability.
As with a conventional UG, the liability of the gUG is limited to its business assets.
1. Option of forming a gUG with a €1 initial contribution
The gUG also retains cheap formation, and can be formed with as little as a €1 initial contribution. This makes it many times cheaper than the gGmbH.
1. Positive image
The gUG has a positive image in the commercial sector, partly because of its not-for-profit activities and partly because of its entrepreneurial structure. Both the company and the people involved can use their participation in a not-for-profit enterprise for marketing purposes.
1. Tax advantages
The gUG cannot operate on a for-profit basis. It therefore enjoys enormous tax exemptions. It is not subject to either trade or corporation tax. No VAT is payable on transactions in not-for-profit activities, it is not subject to gift and inheritance tax, and no property tax is payable on real estate for not-for-profit purposes.
1. Commercial organisation
Finally, the gUG allows for centralised commercial management of the company. Thus, company management is much more effective and direct than, for example, in the case of a registered association.

Disadvantages of the gUG
The gUG brings with it a higher administrative overhead compared to a registered association. Like all corporations, it is subject to the double-entry bookkeeping requirement and must be entered into the commercial register when it is formed.

Furthermore, its company purpose is limited. The articles of association of the gUG must explicitly state that it is a not-for-profit organisation. Otherwise, the tax office may deny it not-for-profit status, which will result in the normal tax burden of the ordinary UG being due. This may even apply retroactively.

Finally, no distribution of profits is possible. Shareholders can only participate in the profits of the gUG in the form of a salary.

If you want to work for profit, you must form a UG instead. However, this will cause you to miss out on the tax benefits of a gUG.

Forming a gemeinnützige Gesellschaft mit beschränkter Haftung (gGmbH)

The gGmbH is a variant of the GmbH, and was introduced in the 2013 reform. It pursues predominantly or exclusively not-for-profit purposes.

Categories of not-for-profit activities include the following in particular:

welfare of young people,
welfare of the elderly,
environmental protection,
animal welfare,
consumer protection and
protection of historical monuments.

Advantages of the gGmbH
Forming a gGmbH offers you the following advantages.
1. The shareholders of a gGmbH are released from private liability
The gGmbH’s liability is limited to its business assets, just like the GmbH.
1. Concessionary use of resources
As a not-for-profit organisation, the gGmbH is granted privileges by the public authorities. In this way, the gGmbH can obtain access to public resources, consultations and subsidies more cheaply and easily, as well as the provision of staff.
1. Positive image
The not-for-profit status of your company creates a positive image in commercial transactions. Since the GmbH is the most popular corporation form in Germany and is generally respected, this image is all the more important for the gGmbH.
1. Tax advantages
As long as the not-for-profit status of the gGmbH is recognised by the tax office, there are numerous tax advantages. Specifically, you do not have to pay either corporation tax or trade tax, turnover in not-for-profit activities is VAT-free, the gGmbH is exempt from inheritance and gift tax, and no property tax is payable on real estate.
1. Commercial organisation
Forming a gGmbH enables you to combine the commercial organisation of the GmbH with the tax advantages of not-for-profit status. Since 2013, the gGmbH has partially replaced the formation of not-for-profit associations.

Disadvantages of a gGmbH
Forming a gGmbH is considerably more complex than forming a registered association. The company needs comprehensive formation documents, notarisation and double-entry bookkeeping.

At the same time, the not-for-profit nature of your activity has to be checked on an ongoing basis. Should the tax office deny you not-for-profit status, you will be liable for retrospective tax payments and the burden of proof will lie with you.

Finally, the ban on profit orientation applies. The shareholders may not distribute any profits, and the salaries of the shareholders and other employees may not be unusually high. Otherwise, the not-for-profit status will be withdrawn.

Forming a Gesellschaft bürgerlichen Rechts (GbR)

No release from liability

The shareholders of a GbR are fully liable for the company’s debts. If one of the partners is a limited liability corporation, full access to the business assets is granted. Entrepreneurs who wish to form a company in order to minimise their private liability should choose another legal form, such as the UG or GmbH.

Option of formation with €0 share capital

There are no requirements regarding share capital. The GbR is operated with private or corporate assets.

Shareholder’s obligation to manage the company

In contrast to the UG, the GbR lacks the option of appointing a managing director. The company is jointly managed by the shareholders.

Minimal formal requirements

There are few formal requirements for the GbR. It can be formed informally. The accounts can be documented using a revenue surplus account. This is one of the main reasons for the GbR’s popularity.

Advantages of the GbR
For many, the GbR appears to be beneficial because its forming and administrative costs are minimal. It can be formed informally, even if articles of association are recommended. Due to the minimal requirements for accounting, administering a GbR is not particularly complicated. If you would like to form a company with the least possible administrative effort, the GbR is the right choice for you.

Disadvantages of the GbR
The lack of limitation of liability is seen as a disadvantage. This gives rise to significant risks for the shareholders, which could be eliminated by forming a Kapitalgesellschaft instead. If you want to protect your private assets from risk and debt, you should register a limited liability company such as a UG or GmbH.

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Forming an Offene Handelsgesellschaft (OHG)

No release from private liability

The OHG does not release the company shareholders from liability. A natural person is therefore always liable to cover the company’s debts with their private assets. If one of the shareholders is a legal person, their liability is limited but applies to all the business’s assets.

No external managing director

The OHG does not offer the option of hiring an external managing director. The business must be jointly managed by the shareholders themselves.

Higher formal requirements

Unfortunately, the advantage of minimal administrative effort does not apply to the OHG. As this is a commercial operation, it is necessary to prepare proper accounting records, including a balance sheet (Section 105 (2) HGB (German Commercial Code)). The OHG is therefore no less demanding in its accounting obligations than a corporation.

Company name of the OHG

The company name of an OHG is the official designation of the company. A creative name may be chosen. There is no obligation to name it after the shareholders. However, the abbreviation “OHG” or “Offene Handelsgesellschaft” must be added.

Advantages of the OHG
One advantage of the OHG is its low formation costs. No written articles of association are required to form the company. Compared to the GbR, the OHG enjoys a better reputation for trading companies. In addition, a better name can be found because the name may be more creative.

Disadvantages of the OHG
Founders of OHGs see the tax regime as a disadvantage. The profits must be fully taxed at the shareholders’ personal tax rate. If the partners are natural persons, the maximum tax rate of 45% may apply. The operating profits of a UG, on the other hand, are taxed at only 15.6%, making it the better option for many business models.

Furthermore, there is no release from liability for shareholders, and accounting requirements are demanding. As a result, in most cases it is advisable to form a corporation like a UG or GmbH instead.

Forming a Kommanditgesellschaft (KG)

Full liability for the general partner

The general partner is the fully liable part of the limited partnership. They can be either a natural or a legal person. As the intended managing director, they have primary responsibility for the success of the business. If they are a natural person, they are liable to cover the company’s debts with their private assets.

Mandatory double-entry bookkeeping and balance sheet preparation

The limited partnership must document its business with double-entry bookkeeping and balance sheet preparation. The administrative requirements are therefore the same as those for the GmbH or UG. Nonetheless, there is no limitation of liability for the managing general partner.

Company name of the KG

There is no obligation for shareholders to be included in the company name. A creative fictional name may be used. Only the corresponding abbreviation “KG” or “Kommanditgesellschaft” must be added to the end of the company name. In addition, the name must not be misleading and must be distinctive.

Taxation according to shareholder tax rate

The KG is taxed after the balance sheet has been drawn up and the operating profit determined. The profit is derived from the difference between the current and the previous year’s annual balance sheet. Profit is distributed according to the articles of association. The limited partners pay taxes at their individual tax rate.

It is more expedient to register a mixed form

Only 0.8% of all German companies are KGs. The UG & Co. KG and the GmbH & Co. KG are significantly more common as they combine the positive aspects of both legal forms: the limited liability of the UG or GmbH for the general partner, and the participation options for the limited partners.

Advantages of the KG
The greatest advantage of the KG is the option for investors to participate. As a limited partner in a KG, one can participate in the success of the business without being obliged to participate in day-to-day operations. Furthermore, in the event of a profit withdrawal, the limited partner is only subject to tax at their personal income tax rate.

Disadvantages of the KG
The large administrative overhead is often described as a disadvantage and there is no limitation of liability for the limited partners. A similar administrative overhead would allow you to operate a GmbH or UG, which protects shareholders’ private assets. For this reason, the pure KG is rarely found. Significantly more often, entrepreneurs decide to form a GmbH & Co. KG, which combines the positive aspects of both legal forms.

Forming an Aktiengesellschaft (AG)

The AG is especially worthwhile as a company form for large companies, or enterprises and start-ups with a very large number of investors and a very large amount of available capital.

Advantages of the AG
The AG offers you as a founder a wide range of advantages.
1. Simple change of shareholders
Once the company has been formed, shares can easily change hands. A change of shareholder does not require notarisation and is generally subject to few formal requirements.
1. Simple financing
Financing is very uncomplicated, consisting in the participation of investors through the sale of shares. You do not have to burden yourself to start your business, nor do you need a large fortune yourself. The sale of shares generates the necessary funds to start the business, especially in the start-up phase.
1. Release from liability
The shareholders of the AG are fully released from private liability. Debts and liabilities only affect business assets.
1. Good reputation
Due to the share capital of €50,000 and the ease of participation, it is absolutely respected as a legal form in Germany. The reputation of an AG is advantageous for your company, both nationally and internationally.

Disadvantages of the AG
Forming an AG entails a large formal and financial effort. The share capital alone amounts to €50,000. This means that the requirements for an AG are significantly higher than, for example, those for a UG or GmbH.

The administration of the AG is just as extensive. Greater organisational effort is required, as information exchange and communication between all three company organs can be costly.

Finally, there are extensive disclosure requirements. Depending on the size of the AG, its disclosure obligations may be greater or smaller, but in any case they are an additional expense for the founders.

If forming an AG is too expensive for you but you would like to be released from private liability, you should consider forming a GmbH or UG.

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Forming a sole proprietorship

If you as a founder have a business idea with which you would like to go into self-employment “alone”, there are essentially two options. You can either make use of the so-called “one-person corporation”, such as a:

“one-person GmbH”,
“one-person UG”,
“one-person GmbH & Co. KG” or
“one-person UG & Co. KG”.

Or you can use the so-called “sole proprietorship” to start your own business.

The sole proprietorship is the most popular form of business!

In Germany, the sole proprietorship is the most popular legal form. Around 79% of all founders start their self-employment with this legal form, especially because companies often start as small businesses. This is due to the fact that many founders, as beginners, do not give much thought to the legal status of their self-employment. Often a business is registered and then, for example, a shop is opened, thus automatically paving the way for a sole proprietorship. Only then is the step to the UG or GmbH taken.

The three types of sole proprietorship:

There are three types of sole proprietorship: merchant, freelancer and farmer. The individual self-employed person’s ultimate classification depends on the business in which they are engaged.

Merchant

In principle, any trader can be a merchant. An organisation is deemed to be a trading organisation if the purpose of the activity is to manufacture goods, sell products or provide services, not by itself but mainly as an intermediary. These include, for example, retailers, craft businesses and brokers.

Traders are primarily distinguished according to whether the trade requires a commercial organisation or not. If so, the term “actual or full trader” is used. Otherwise, the term “small trader” is used. In practice, most sole proprietors start as small business owners, as this does not require significant organisation, extensive bookkeeping, structural personnel planning or entry into the commercial register.

When your business is entered into the commercial register, its name receives the suffix “eingetragener Kaufmann (e.K.)” (registered trader), which is particularly popular for representative purposes. However, this registration is accompanied by obligations such as commercial accounting.

If your business operations then reach a scope that requires a commercial organisation, you will automatically become a full merchant. This brings with it a number of obligations, such as entry into the commercial register and preparation of balance sheets in accordance with the provisions of the Handelsgesetzbuch (German Commercial Code).

Freelancer

A freelancer has clear advantages over a commercial trader. These advantages include the fact that as a freelancer you do not need to register a business and therefore do not have to pay trade tax. In addition, you as a freelancer have the option of merging with other freelancers by forming a partnership company. Who counts as a freelancer is determined by various laws, whereby the area of freelancers is not conclusively regulated. Rather, special professional qualifications or talents of an artistic nature and the autonomous and professionally independent provision of higher-level services (such as lawyers and architects) serve as the basis for the status of freelancer.

Farmer

As a farmer, you do not carry on a trade within the meaning of the trade regulations and are not a merchant. The occupation of farmer is a recognised skilled occupation that involves the production of plant or animal products on a cultivated area (for example, animal husbandry, horticulture and viticulture, or agriculture and forestry). This type of business may sell products without registering a trade.

Sole proprietorship leads to private liability

Forming a sole proprietorship establishes private liability on the part of the founder for the company’s debts that arise in the course of business. In contrast to a UG or GmbH, the founder of a sole proprietorship does not enjoy any release from personal liability or reduction in risk.

Forming a sole proprietorship without initial contribution

The sole proprietorship does not require an initial contribution. Rather, you run it with your own private capital.

The sole proprietorship is not a legal person

The sole proprietorship is “identical” to you. You are fully liable to cover its liabilities with your private assets.

Your responsibility for managing the sole proprietorship

You are responsible for managing the sole proprietorship. Like the GmbH or UG, it is not possible to practically exempt oneself from liability by appointing an external managing director.

Advantages of the sole proprietorship
One advantage of the sole proprietorship over a legal person is that it is relatively easy to form. This means that anyone can form a sole proprietorship without major hurdles and special formalities, by first registering a business and then registering for tax. The start-up costs are low, especially for small businesses. Furthermore, managing the company is comparatively simple, as there are no special accounting obligations as with the KG, UG or GmbH.

Disadvantages of the sole proprietorship
Forming a sole proprietorship also involves considerable risks. The main disadvantage compared to a GmbH and a UG is that the sole proprietor is personally liable. Thus, as a sole proprietor you are personally liable to cover all the sole proprietorship’s debts with all your assets.

A further disadvantage is that registered traders are subject to the obligation to prepare accounts, despite being fully liable.

If you are setting up a high-risk business and therefore want to protect yourself from private liability, you can form a UG instead.

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