Limited Liability Companies in Germany

In Germany, there are primarily two main types of Limited Liability Companies (LLCs): the “Gesellschaft mit beschränkter Haftung” (GmbH) and the “Unternehmergesellschaft” (UG).

While both provide limited liability protection for shareholders, they have differences in terms of minimum capital requirements and their suitability for specific business scenarios. Here’s an overview of the differences between them:

The GmbH is the traditional form of the German LLC and is widely used for various types of businesses. Some key characteristics of the GmbH include:

• Minimum Capital Requirement: The GmbH requires a minimum share capital of €25,000, which must be fully paid up at the time of formation.
• Shareholders: GmbHs can have one or more shareholders (Gesellschafter), and their liability is limited to the amount of their capital contribution.
• Management: GmbHs are managed by one or more managing directors (Geschäftsführer), who can be shareholders or external individuals.
• Flexibility: GmbHs offer flexibility in terms of ownership structure, voting rights, and profit distribution.
• Registration: The GmbH is registered in the Commercial Register (Handelsregister) upon formation.

The UG, also known as the “mini-GmbH” or “UG (haftungsbeschränkt),” was introduced to provide a more accessible option for startups and small businesses with limited initial capital. Some key features of the UG include:

• Minimum Capital Requirement: The UG has a reduced minimum share capital requirement of only €1. However, a portion of profits must be reserved to gradually increase the share capital to the €25,000 required for a regular GmbH.
• Shareholders: Like the GmbH, UGs can have one or more shareholders.
• Management: UGs are managed by managing directors, similar to the GmbH.
• Transition to GmbH: As the UG accumulates profits over time, it can convert into a full GmbH by increasing its share capital to €25,000.

The choice between a GmbH and a UG depends on various factors, including the size and nature of your business, your initial capital availability, and your long-term goals. Here are some considerations:

• GmbH: If you have sufficient capital, are planning a larger-scale business operation, or seek immediate credibility with clients and partners due to the higher capital requirement, a GmbH might be more suitable.
• UG: If you’re a startup with limited capital but have aspirations for growth, a UG can provide a cost-effective way to establish a legal entity and access the benefits of limited liability. However, it’s important to plan for the eventual increase in share capital to meet the €25,000 requirement if you intend to continue expanding.

Both the GmbH and the UG offer advantages and challenges, and the decision should be made based on your specific business circumstances, financial situation, and long-term objectives. Consulting with our legal professionals experienced in German corporate law can help you make an informed choice that aligns with your business goals.

At Schlun & Elseven Rechtsanwälte, our corporate lawyers guide clients through the process or company registration, formation and launch for LLCs in Germany. Our team has supported clients worldwide, guiding them through the intricacies of the process, from meticulous documentation to compliance with naming conventions, charting a course that transforms visions into resounding realities.

The first step involves selecting the legal form. We collaborate closely with  our clients to ascertain the optimal legal form: Gesellschaft mit beschränkter Haftung (GmbH) or Unternehmergesellschaft (UG). This choice is influenced by capital availability, growth projections, and long-term goals. Once we have decided on the form our lawyers are available to assist with drafting the Articles of Association. Our legal team crafts tailor-made articles of association, defining the LLC’s purpose, capital structure, management roles, and operational guidelines. This foundational document lays the groundwork for the LLC’s identity and future operations.

In the area of capitalisation planning and determining the required share capital, our corporate lawyers guide clients in estimating the capital needed to fund operations, factoring in minimum capital requirements and future growth prospects. Our lawyers advise corporate clients on all aspects of their business plan.

During the establishment phase, our team also assists clients with defining the ownership structure, allocation of shares, and financial contributions. This process ensures equity distribution aligns with the business’s vision and the roles of shareholders.

When the company is ready, our team supports clients with registering the LLC. The registration process is essential and needs to be meticulously executed. This involves submitting the necessary documents to the appropriate local court or commercial register, a critical step to legalize the formation of the LLC in Germany. There are several essential documents for the registration process, including the following:

• Application for registration,
• Articles of Association,
• Proof of Capital Contribution,
• Declaration of Compliance.

Naming an LLC in Germany adheres to specific conventions. The chosen name must reflect the business’s purpose and include a term indicative of its legal form: “Gesellschaft mit beschränkter Haftung” (GmbH) for GmbHs and “Unternehmergesellschaft (haftungsbeschränkt)” for UGs. Our corporate lawyers ensure that the selected name meets legal criteria, facilitating a seamless registration process.

There are differences in the roles of the managing directors and the shareholders/members under German law.

Managing Directors (Geschäftsführer):

• Appointment: The managing directors are responsible for the day-to-day management and representation of the GmbH or UG.
• Roles: They oversee the company’s operations, make business decisions, and act on behalf of the company in legal matters.
• Liability: Managing directors can be personally liable if they breach their legal duties, leading to damage or insolvency.

Members (Gesellschafter):

• Decision-Making: Members have the right to participate in decisions affecting the company. Major decisions, such as the Articles of Association changes, require a specific majority vote.
• Shareholder Meetings: Members convene in shareholder meetings to discuss and make decisions about important matters related to the company.
• Rights and Obligations: Members’ rights and obligations are outlined in the articles of association. They may include voting rights, entitlement to profits, and participation in the company’s assets upon dissolution.

At Schlun & Elseven Rechtsanwälte, our professionals advise our corporate clients involved with LLCs in Germany on all aspects of their rights as managing directors and shareholders. Our team is ready to support them in legal disputes and other matters.

Foreign individuals and entities can indeed own and manage a German GmbH. Germany encourages foreign investment, and no specific restrictions prevent foreigners from establishing or owning a GmbH. However, there are a few considerations to keep in mind:

• Residency Requirement: While there’s no strict residency requirement for managing directors, having at least one resident director can be beneficial for administrative purposes. Foreign individuals or entities can become shareholders in a UG or GmbH and hold shares like domestic shareholders. Foreign individuals or entities can also serve as managing directors of the company. However, at least one managing director must have permanent residence within the European Economic Area (EEA) or another country with which Germany has a reciprocity agreement. This requirement ensures a point of contact within the local jurisdiction for legal and administrative matters.
• Legal Representation: Foreign individuals or entities may need a legal representative or agent in Germany to handle certain legal matters, such as interactions with authorities or courts.
• Tax Implications: Foreign shareholders and directors may need to understand the tax implications of their involvement in the GmbH in Germany and their home country.

At Schlun & Elseven Rechtsanwälte, our legal specialists are available to advise foreign entrepreneurs and directors regarding their rights under German corporate law. Our team will utilise their extensive experience to ensure that the ownership and management structure of the GmbH meets all legal requirements and suits our client’s specific circumstances.

LLCs in Germany have ongoing legal and regulatory compliance requirements which involve financial reporting, tax obligations, data protection, industry standards, and more. Annual financial statements, meticulously prepared and compliant with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), are a testament to an LLC’s fiscal transparency. Simultaneously, our corporate lawyers play a vital role in strategising tax compliance, ensuring the intricacies of corporate income tax, trade tax, and value-added tax (VAT) are skillfully navigated.

Moreover, companies need to be aware of corporate governance regulations such as those relating to shareholder meetings, appointing managing directors and the need for changes within the company,  including changes in share ownership, managing directors, or registered office, to be disclosed to the Commercial Register (Handelsregister).

LLCs in Germany must also adhere to German employment and labour laws and regulations, including proper employment contracts, wage payments, and compliance with workplace safety rules. Similarly, there are strong regulations revolving around employee data protection. If the LLC handles personal data, it must comply with the General Data Protection Regulation (GDPR) and ensure data protection measures are in place.

Furthermore, there are also industry-specific regulatory nuances that companies need to consider. Our corporate lawyers wield their expertise to guide LLCs in Germany through the labyrinth of such industry-specific regulations. Whether in the realms of healthcare, finance and banking, manufacturing, e-commerce or insurance, our team advises on the intricacies of licensing, safety standards, product regulations, and market-specific compliance to ensure seamless operations.

Our dedicated team of corporate lawyers stands as the ultimate safeguard for LLCs seeking to maintain compliance with their requirements under German law. We provide the following services relating to compliance:

• Meticulous tracking of regulatory updates ensures that clients are promptly informed of changes impacting their operations.
• Tailored compliance strategies tailored to our clients’ unique needs, considering the company’s size, goals, industry and many other factors.
• Comprehensive documentation that adheres to legal standards, such as preparing financial statements, drafting resolutions and minutes of meetings, and comprehensively advising in all aspects of German contract law.
• Preventing disputes by meticulously overseeing contracts, agreements, and partnerships.
• We offer dispute resolution services and legal representation in case of disputes or regulatory breaches.

Please, do not hesitate to contact us directly if you would like further legal support in all matters relating to legal compliance for LLCs in Germany.

At Schlun & Elseven Rechtsanwälte, our corporate law team is available to those establishing or managing LLCs in Germany, be it the UG or GmbH model. Our team offers a nuanced understanding of legal intricacies and regulatory frameworks and offers tailored expertise to transform entrepreneurial aspirations into thriving realities.

Strategic Financial Structuring: Beyond capital requirements, our corporate lawyers offer insights into the intricacies of financial structuring. Whether optimising equity distribution, structuring investments, or planning for capital injections, we aim to align financial strategies with business objectives. Our experts ensure that financial decisions meet regulatory obligations and maximise growth potential.

Governance and Ownership Structures: LLCs provide a canvas for crafting governance and ownership structures that align with a client’s strategic objectives. Our team collaborate closely with our clients to design and analyse operating agreements, shareholder agreements, and distribution mechanisms. Whether determining profit-sharing models or outlining decision-making procedures, our legal experts aim to empower clients to navigate operational complexities with clarity and efficiency.

Limited Liability Protection: Our corporate lawyers are instrumental in outlining the particular features of limited liability, safeguarding shareholders’ personal assets. Whether clients opt for a UG or a GmbH, we guide clients through the intricate web of legal obligations, ensuring they remain protected from undue personal liability in the event of corporate debts or liabilities.

Intellectual Property Protection: Dealing with intellectual property (IP) requires astute guidance. Our team safeguards your LLCs’ innovations, trademarks, copyrights, and patents. Through expert IP strategy, clients gain a competitive edge by protecting their intellectual assets while navigating the nuances of German IP laws.

Crafting Agreements and Contracts: Contracts form the bedrock of business operations. Our lawyers expertly draft and negotiate contracts, supplier agreements, client agreements, and more. Their meticulous attention to detail shields clients from potential pitfalls and legal disputes while establishing transparent and legally sound business relationships.

Employment Law and HR Compliance: As businesses grow, employment law becomes a crucial facet. Our employment law specialists steer our clients through labour regulations, employment contracts, and compliance with employee rights. This extends to addressing workplace disputes and crafting policies that foster a harmonious work environment.

Mergers and Acquisitions (M&A): Our team is available to play a pivotal role in facilitating mergers, acquisitions, and restructuring endeavours. From due diligence assessments to drafting complex agreements, we guide LLCs through the intricacies of M&A transactions, ensuring legal compliance and seamless transitions.

Real Estate and Leasing Transactions: The realm of real estate transactions requires precise legal counsel. Our team offer guidance on leasing agreements, property acquisitions, and related regulatory matters, ensuring that LLCs secure strategic locations for their operations in Germany.

International Expansion and Cross-Border Transactions: For clients with global aspirations, the lawyers at Schlun & Elseven Rechtsanwälte facilitate international expansion by providing guidance on cross-border transactions. From ensuring compliance with foreign jurisdictions to navigating complex cross-border tax implications, our experts offer insights to minimise risks and maximise opportunities.

Conflict Resolution and Litigation Support: In disputes or legal challenges, we act as decisive advocates for our clients. We offer negotiation and arbitration services and, when necessary, provide skilled representation in litigation. Our deep understanding of business law ensures clients’ interests are safeguarded throughout the resolution process.

These are just some of the services we offer. Please, do not hesitate to contact our team directly for specialised legal advice and support.