GmbH formation in Germany – setting up a German limited liability company

The formation of a GmbH requires a capital contribution of €25,000 or €12,500.

Alternative: If a founder lacks these means, they can form an UG. They will receive a company that excludes liability, which can be formed with only €1 of share capital. However, the UG has an image disadvantage compared to a GmbH.

If you want to involve investors or family members as shareholders in the GmbH, they would not be able to participate in the company’s success in a tax-privileged way through a managing director’s salary. The profits would have to be subject to corporation tax, trade tax, solidarity surcharge and capital gains tax. The overall tax burden would be significantly higher than the income tax that has to be paid on the managing director’s salary.

Alternative: With aGmbH & Co KG all shareholders are taxed as limited partners at their individual income tax rate. The disadvantage here is the higher start-up and administrative costs of a GmbH & Co. KG. These costs are incurred twice over in each case because two companies (GmbH and KG) have to be established and managed. The GmbH & Co KG is therefore most suitable for companies that are already operating and have a calculable income.

As an alternative to the GmbH & Co. KG, it is therefore also possible to choose a dormant investment by investors or family members, or a shareholder loan to the GmbH. It should also be borne in mind that in the first few years most profits are set aside for investment and not distributed. Here, the GmbH offers advantages.

If the shareholders of a GmbH change, the articles of association are supplemented by the new shareholder at the notary’s office.

Alternative: In the case of the GmbH & Co. KG, the articles of association can be amended without notarisation. The commercial register application alone is changed by a notary, but this is less expensive than changing the articles of association of a GmbH. Here, too, the savings made at the notary’s office are offset by the doubled costs of the GmbH & Co. KG, so, for this reason alone, it is rarely used and a GmbH is usually formed.

The profits of a GmbH are of a commercial nature and are fully taxable. If you set up in the non-profit or charitable sector and still want to exclude your liability, you would have to tax all your income and would not be able to issue tax-deductible donation receipts to your donors.

Alternative: A gGmbH (gemeinnützige Gesellschaft mit begrenzter Haftung or charitable limited liability company) offers you the possibility of tax exemption and the authority to issue “donation receipts” to donors or contributors. This means that any profits do not have to be taxed. Instead, they are set aside for use for the special company purpose. At the same time, donors can be encouraged to make tax-efficient donations. In contrast to an association, a gGmbH can also be formed by one person working alone. Seven founding members are not required. The disadvantage is that no part of any profit may be paid out to shareholders. The founder only receives an appropriate managing director’s salary.

If a GmbH operates several different lines of business, there is a risk that a financially crisis-ridden line of business could put the entire GmbH at risk of insolvency. Its losses are attributed to the other branches of the GmbH. The owner may be at risk of a “total loss”.

Alternative: To avoid this risk, a holding company structure is established. To this end, a holding company is first set up as a “parent company”, at the price and after the expiry of a GmbH formation. After this, the parent company sets up a subsidiary company for each of its branches of business. In turn, we carry out a coordinated GmbH formation for each of them. If one of the subsidiaries enters a financial crisis, this can then be ended independently by an insolvency application or other means. The remaining subsidiaries can continue their business without restriction. The creation of a holding company structure makes sense if you have several business areas, one of the business areas is running successfully or a large investment is available for the operation of several companies. In such a case, it is worth investing in several GmbHs with a holding structure to protect the entire company. A GmbH & Co. KG is often formed as a “parent company”, to give the participating founders the advantage of a tax-efficient withdrawal. We therefore almost always equip the GmbHs we form with the option of later use as a holding company or parent GmbH (extended company purpose). The disadvantage of the holding company structure is that its financial start-up and administrative costs are at least twice as high

If shares in a GmbH are sold, the capital gain is taxed at 60%, according to the partial income method.

Alternative: To avoid this risk, a holding company structure is established. The holding company that is then formed must tax a capital gain at a rate of only 5% (Section 8b (3) or (5) KStG (German Corporation Tax Act) – only 5% is regarded as GmbH expenses that may not be deducted as business expenses). However, this only applies as long as the proceeds remain in the holding company, for example, in order to make another investment or to become active in another line of business. The holding company can be formed at the beginning if the founders have a fixed exit plan. If the idea of selling only emerges later, a holding structure can also be established at a later date, by means of a “share swap”. The holding GmbH receives shares in the current GmbH in exchange for shares in the holding GmbH. After that, the holding GmbH sells the shares in the GmbH in a tax-efficient way. The disadvantage is that its financial start-up and administrative costs are at least twice as high. A further disadvantage is the high tax rate that applies when the proceeds from the holding company are paid out to its owner. It is possible to reduce this rate by forming a holding GmbH & Co. KG, but this in itself requires double the formation and administrative expenses.