According to German law, Gesellschaft mit beschränkter Haftung (Limited Liability Company in English), abbreviated GmbH or Gesellschaft mbH, is a legal form for a legal entity under private law that belongs to the corporations. The German GmbH was one of the world’s first forms of limited liability corporations. Similar forms of society now exist in most countries of the world. The GmbH is by far the most common type of company for corporations in Germany. As of January 1, 2016, there were more than 1.15 million Gesellschaften mit beschränkter Haftung (limited liability companies) for every 15,500 stock corporations.
Since 2008, there has been an entrepreneurial company (limited liability), whose essential feature is that the share capital only has to be at least EUR 1 instead of EUR 25,000. From a legal and tax point of view, it is a limited liability company for which special regulations apply with regard to share capital, company name and use of annual surplus (§ 5a GmbHG).
GmbH History
These limited liability companies were made possible for the first time in the German Empire by the Gesellschaften mit beschränkter Haftung (GmbHG), which was enacted on 20 April 1892. As early as 1600, the shareholders of the British East India Company had been granted limited liability by royal decree in England, and in 1602 in the Netherlands the Dutch East India Company. However, it was not until 1855 that Great Britain introduced by law the generally accessible corporate form of the Limited Company (Ltd.), which is comparable to the German GmbH. After the creation of this form of society in Germany as well, the concept spread all over the world. Comparable legal forms were created in Austria in 1906, Portugal in 1917, Brazil in 1919, Slovakia in 1920, Chile in 1923, France in 1925, Belgium in 1935 and other countries.
On 1 November 2008, the Act on the Modernisation of the Law on Gesellschaften mit beschränkter Haftung (Limited Liability Companies) and the Combating of Abuses introduced the Unternehmergesellschaft (haftungsbeschränkt)(English: “entrepreneurial company (limited liability)”), also known colloquially as a mini-GmbH – a Gesellschaften mit beschränkter Haftung with reduced share capital, for which some special regulations apply.
Legal bases
The GmbH is considered a commercial company within the meaning of the German Commercial Code. The legal basis can be found in the GmbHG. Further provisions are contained in Sections 238–342a of the German Commercial Code (HGB) on accounting, the Transformation Act and the Insolvency Code.
Establishment of a Gesellschaften mit beschränkter Haftung
The GmbH is founded by one or more persons as founding shareholders (§ 1 GmbHG). Shareholders can be both natural persons and legal entities. Contrary to earlier belief, all joint ventures can also be founding partners. If a GmbH has only one shareholder, it is referred to as a one-person GmbH or one-man GmbH.
The shareholders conclude a memorandum of association, which must be notarized. Whether a notarization by a notary admitted abroad is sufficient depends on whether this or the procedure used by the notary is equivalent to the domestic one.
In addition to the agreement of the articles of association, at least one natural person must also be appointed as managing director at the founding meeting, who may also be a GmbH shareholder at the same time. The managing director accepts the capital contributions and registers the company in a notarized form for entry in the commercial register.
Since 1 November 2008, it has also been possible to set up a company in a simplified procedure. The simplified procedure according to § 2 paragraph 1a of the GmbHG is reserved for start-ups with a maximum of three shareholders and one managing director. It requires the use of a model protocol specified in the annex to the GmbHG, the content of which includes the articles of association, the list of shareholders and the appointment of managing directors. Provisions deviating from the Model Protocol cannot be made (§ 2 para. 1a sentence 4 GmbHG).
Establishment of the GmbH
A GmbH only comes into being when it is entered in the commercial register, i.e. the entry is constitutive. For this purpose, the articles of association must be notarized. Subsequently, a notarized commercial register application must be made. The articles of association define the founders’ obligations to cooperate in the formation of the GmbH and the articles of association of the future GmbH. Prior to the conclusion of the notarial articles of association, the company is a pre-founding company.
Between the time of the notarial certification and that of the registration, it is the founding company that bears the addition “i. G.”. It is referred to as a pre-GmbH. At this stage, the company already has partial legal capacity, i.e. it can, for example, acquire ownership of a piece of land. In terms of liability law, however, it corresponds to a partnership under civil law; until the GmbH is entered in the commercial register, the actors are personally and jointly and severally liable, which ends with the registration of the GmbH. The pre-GmbH forms a unit with the registered GmbH both legally and fiscally (principle of identity).
Content of the Articles of Association
According to § 3 GmbHG, the articles of association of the GmbH must contain:
- The company name of the GmbH must contain the designation “Gesellschaften mit beschränkter Haftung” or a generally understandable abbreviation of this designation, e.g. “GmbH” or “Ges. m. b. H.”. In particular, the company name must comply with the requirements of §§ 18, 30 HGB, i.e. it must be suitable for identification, not misleading and not confusable with companies that have already been registered.
- the registered office
of the company is the place specified in the articles of association 4a. A political municipality in Germany must be designated as the (statutory) seat. The administrative headquarters, branches or dependent branches can be located in Germany or abroad. - The object of the company
A Gesellschaften mit beschränkter Haftung can be established for any legally permissible purpose. - the amount of the share capital The minimum share capital
in Germany is 25,000 euros – the minimum share capital of the entrepreneurial company (limited liability) is 1 euro. - the amount of the shares
The share is the share of the share capital taken over by a shareholder. Each shareholder’s share must be denominated in full euros and must be at least 1 euro. In the case of the establishment of a GmbH, a shareholder can take over several shares in accordance with 5 paragraph 2 of the GmbHG, the amounts of the respective shares can be different.
In addition, further provisions may be included in the articles of association, which regulate, for example, the relationships between the shareholders or the departure of shareholders.
Registration of a GmbH
The GmbH must be registered with the register court of the district court in whose district it has its registered office for entry in the commercial register in section B. The minimum share capital is 25,000 euros in accordance with Section 5 (1) of the German Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG) (English: “Limited Liability Companies Act”). The notification may only be made if at least one-quarter of each share and at least half of the minimum share capital have been paid up.
Contributions in kind must be transferred to the company in such a way that they are finally at its free disposal (Section 7 (3) GmbHG). If a capital contribution is made that falls below the minimum share capital of 25,000 euros, a share capital of 25,000 euros will still be entered in the commercial register. As part of the registration, the list of shareholders must be submitted. Likewise, the domestic business address of the company must be stated (§ 8 para. 4 GmbHG), where the company must be reachable by post. It is not possible to specify a mailbox. After registration, the verification by the registration court and finally the registration of the company in the commercial register takes place.
Liability for transactions prior to registration
For liabilities that are established for the company to be founded before the articles of association are notarized, the founders are personally liable as joint and several debtors. The founders form a partnership under civil law, which does not form a unit with the later company.
If the GmbH that has been established but has not yet been entered in the commercial register is operated by the managing directors or individual shareholders authorized by the shareholders, the pre-GmbH is liable with its assets. In addition, the founders may also be liable for these liabilities, although the extent and manner of liability are controversial in jurisprudence.
If, at the time of entry in the commercial register, the net assets of the company are below the share capital (sub-balance sheet), the shareholders remain materially responsible in the amount of the GmbH’s sub-balance sheet.
The persons who act as representatives or as representatives of the company before entry in the commercial register are personally and jointly and severally liable with their private assets for the debts of the GmbH (acting liability, see § 11 para. 2 GmbHG).
Start-up costs
When setting up a Gesellschaften mit beschränkter Haftung, notary, court and lawyer’s fees are regularly incurred by the founders of the company. Notary fees are incurred for the notarization of the articles of association, the notarization of the first shareholders’ meeting as well as the draft and certified registration of the company and the registration of the managing director with the commercial register. Furthermore, the court costs for entry in the commercial register are incurred.
The founders of the company are generally interested in imposing the start-up costs on the established GmbH as far as possible. In principle, start-up costs may be borne by the GmbH within certain limits. The prevailing opinion applies the stock corporation law provision of Section 26 (2) AktG accordingly and requires that the start-up costs assumed by the GmbH be disclosed in the articles of association. The GmbH articles of association must show the specific maximum amount in money. In addition, the GmbH may only assume reasonable start-up costs. According to the prevailing view, this means the assumption of costs of up to 10% of the share capital.
The total cost of incorporation is between 450 and 1000 euros plus VAT. When using the model protocol in the simplified incorporation procedure, the notary fees are reduced if the share capital does not exceed 25,000 euros.
Management and external representation of GmbH
The GmbH must have one or more managing directors (§ 6 para. 1 GmbHG). The power of representation of the managing directors is structured in the form of organs. Managing directors can only be natural persons with unlimited legal capacity (§ 6 para. 2 sentence 1 GmbHG). The managing directors conduct the business of the GmbH in accordance with the instructions of the shareholders’ meeting and within the framework of the law and the articles of association (§ 37 para. 1 GmbHG).
The managing directors represent the GmbH in and out of court vis-à-vis third parties (§ 35 para. 1 GmbHG). The power of representation of the managing directors vis-à-vis third parties is unlimited and unrestricted (§ 37 para. 2 sentence 1 GmbHG). The managing directors must exercise the care of a prudent businessman in matters of the GmbH (§ 43 para. 1 GmbHG). Self-dealing is only permitted if it is expressly permitted in the articles of association or by shareholders’ resolution (§ 181 BGB).
In addition to representation exclusively by managing directors, there is also the possibility of so-called mixed or fake overall representation. In this case, the company is represented either jointly by managing directors or by a managing director in association with an authorized signatory as a legal representative (analogy to Section 78 (3) AktG). This type of representation is not permitted in the case of a sole managing director.
In addition, there is also the possibility of granting a general power of attorney in accordance with § 54 HGB, i.e. the appointment of a legal representative of the company, without granting a power of attorney.
Both mixed joint representation and the granting of a general power of attorney are only permissible if the rights and obligations of the managing directors (e.g. § 41, § 43 para. 3, § 64 GmbHG) are not impaired as a result. The rights and obligations of the organs remain with the managing directors.
Appointment and employment of the managing director
The managing director must be a natural person with full legal capacity, he is appointed by the articles of association when the company is founded, later by a shareholders’ resolution. Unlike a member of the board of directors of a stock corporation, managing directors can be dismissed at any time by a shareholders’ resolution without giving reasons (Section 38 (1) GmbHG), unless the articles of association prescribe important reasons for dismissal (Section 38 (2) GmbHG).
The contractual rights and obligations are usually regulated in an employment contract (service contract), including remuneration and the consequences of leaving, whether by the passage of time or by the revocation of the appointment. In the case of managing partners with a majority shareholding, this can be important in order to avoid tax disadvantages (e.g. the assumption of a hidden profit distribution).
The managing director is responsible for the management, see management and external representation.
Supervisory Board as a supervisory body
The articles of association of the GmbH may provide for a supervisory board. In principle, a supervisory board must be formed if the GmbH employs more than 500 people (Section 1 (1) No. 3 DrittelbG). In this case, the ratio of employee to employer on the Supervisory Board is 1 to 2 in accordance with the One-Third Participation Act. If a GmbH employs more than 2000 people, the ratio is 1 to 1 according to the Co-Determination Act, whereby it must consist of at least 12 natural persons. The Chairman of the Supervisory Board has a second vote in the event of a stalemate. The main task of the Supervisory Board is to supervise the management of the company.
The legal basis for the supervisory board of a GmbH is § 52 of the GmbHG.
Shareholders’ meeting
The supreme decision-making body of the GmbH is the shareholders’ meeting, in which the entirety of the shareholders is represented. Unless otherwise stipulated by law or articles of association, its jurisdiction extends to all matters of the GmbH (§ 45 GmbHG) that do not fall within the genuine competence of the management. The shareholders pass their resolutions at the meeting (§ 48 para. 1 GmbHG). With the consent of all shareholders, written voting without holding a meeting is permitted (§ 48 para. 2 GmbHG).
Liability of the GmbH and its shareholders
The GmbH is liable with its company assets (§ 13 para. 2 GmbHG) for the liabilities of the company. The private assets of the shareholders remain unaffected. For obligations that arose before the GmbH was entered in the commercial register, the GmbH has claims to intervene against the shareholders, insofar as these obligations have caused the net assets to fall below the capital figure on the record date of entry. These claims of the GmbH against the shareholders can be seized by creditors. The under-balance sheet liability serves to protect against an initial depletion of the share capital. The previously advocated prohibition of pre-encumbrance was abandoned because of its economically paralyzing effect.
The shareholders of the GmbH are only liable for losses from the ordinary business activities of a GmbH if they have caused the company’s lack of assets in an unlawful manner. To this end, the Federal Court of Justice has developed the offense of existential destruction liability in recent years.
Accounting of the GmbH
In principle, the provisions of the German Commercial Code on accounting (§§ 238 to 263 HGB) apply to the GmbH as well as §§ 264 to 335 HGB for corporations and in particular §§ 42 ff. GmbHG.
Rights and obligations of shareholders
In the articles of association, each shareholder has assumed the obligation to pay a share in the share capital (§ 3 para. 1 no. 4 GmbHG). The main obligation of a shareholder is to fulfill his obligation to make a capital contribution (§ 19 para. 1 GmbHG). Unless otherwise stipulated in the articles of association (transferability), the shareholder can freely dispose of his share. The share can be sold – provided a corresponding notarized contract (§ 15 para. 3 GmbHG) – and otherwise also inherited or given away.
The shareholders are entitled to the net profit for the year, unless they are permissibly excluded from the participation (§ 29 para. 1 GmbHG). Each shareholder may demand from the managing directors that they immediately provide him with information about the affairs of the GmbH and allow him to inspect the books (§ 51a para. 1 GmbHG). A shareholder can be excluded from the company by court judgment if an important reason in his person makes the continuation of the partnership with him unreasonable.
GmbH Taxation
Corporation tax
A Gesellschaften mit beschränkter Haftung is subject to corporation tax on its income. The tax rate is 15 percent plus a 5.5 percent solidarity surcharge on corporate income tax, so that the total tax share is 15.825 percent of taxable income.
Capital gains tax
If the GmbH distributes profit to its shareholders (dividend), it must withhold 25% of this capital gains tax plus solidarity surcharge and, if applicable, church tax and pay it to the tax office. The tax rate has been 25 percent since January 1, 2009. The further tax treatment of the dividend and the withheld capital gains tax by the shareholder depends on whether the shareholder is a natural or legal person domiciled or domiciled in Germany or abroad.
Business tax
A GmbH is considered a commercial company within the meaning of the German Commercial Code (HGB) (Form Merchant; § 13 para. 3 GmbHG). It is therefore a commercial enterprise by virtue of its legal form and is subject to trade tax regardless of its corporate purpose.
Sales tax
A GmbH can be an entrepreneur within the meaning of VAT law (§ 2 UStG). However, as a legal entity, it can also be a dependent part of a VAT group.
Income tax and social security
If the GmbH employs employees, it must fulfill the obligations of an employer. This also applies in relation to the (shareholder) managing directors, whose remuneration is usually assigned to income from employment (in rare cases, it is instead possible for the managing director to act as an independent entrepreneur in accordance with § 2 UStG and to invoice his GmbH for the management services).
The managing director’s salaries are wages and deductible as business expenses insofar as they are appropriate in terms of amount, i.e. insofar as they would also be paid to a third-party managing director who is not a shareholder for the same service (arm’s length comparison). As a rule, managing directors are exempt from statutory social security obligations as non-dependent employees. This means that they are not entitled to tax-free employer subsidies for health and long-term care insurance. However, this only applies to managing partners with a shareholding of less than 50 percent if they are not bound by instructions.
Tax liability
The liability norms according to § 69 AO and § 34 AO concern the nominal managing director(s) and the de facto managing director. The managing director is personally liable if he does not fulfill the tax obligations of the GmbH. Liability becomes particularly disadvantageous if the company has commenced its business prior to its registration. In this case, the personal, unlimited liability of the acting shareholders intervenes.
Dissolution of the GmbH
A GmbH is dissolved, among other things:
- by the expiry of the period specified in the articles of association
- by resolution of the shareholders (more than 3/4 of the shareholders’ meeting)
- by court judgment
- by opening insolvency proceedings; the addition “i. In.” or “i. IN.” for in insolvency is added to the company name of the GmbH
- with the force of res judicata of the order refusing to open insolvency proceedings for lack of assets.
A list of the reasons for dissolution can be found in the GmbHG (§ 60). The dissolution of the company must be registered for entry in the Commercial Register. The directors are the “born” liquidators, unless otherwise specified. In the opened insolvency proceedings, the liquidation of the GmbH is not carried out by the managing directors. If the insolvency proceedings are dismissed for lack of assets, the directors shall be the liquidators, unless otherwise specified.
Liquidation of the GmbH
Liquidation is the winding-up procedure after the dissolution of the GmbH, which, in accordance with Section 71 of the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (“Limited Liability Companies Act”), must state on the business letters at this stage that the company is in liquidation.
The liquidation of the company is carried out in accordance with § 66 GmbHG by the liquidators, i.e. in principle the previous managing directors except in the case of insolvency proceedings. They are entered in the register and have to terminate the current business of the GmbH and convert the assets of the company into money (§ 70 GmbHG). Once the liquidation has ended, the liquidators must register the conclusion of the liquidation for entry in the commercial register. The company must be deleted from the commercial register (§ 74 GmbHG).
If assets still appear after deletion of the GmbH from the commercial register or if other measures are still necessary, a supplementary liquidation must be carried out. The previous liquidators can only act until they are deleted from the commercial register.
References (sources)
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