Unpacking the Different Types of Company Structures in Germany
What are the different types of companies in Germany?
Limited Liability Company – Gesellschaft mit beschränkter Haftung (GmbH)
This format is the most common choice for entrepreneurs because it creates a separation of liability between the company and the shareholders. By establishing this type of company, you are not personally liable for any of the company’s debts. This is essentially the equivalent of a private company or LLC in the USA and requires a managing director to be appointed as a point of contact.
In order to set up a GmbH, all you need is one person and a share capital of at least €25,000. Once you get that in place you draw up a notarized agreement and it is entered into the Commercial Register (Handelsregister). One interesting twist in Germany that’s worth noting is that the name of the company must be derived from the core activities of the business or from the names of the shareholders.
All in all, this is a great option for new companies that intend to grow and scale into larger corporations over time, as it creates a separate vehicle for all the business activities to run through.
Joint Stock Company – Aktiengesellschaft (AG)
This company type goes a bit beyond a traditional GmbH because this is the only type of company that is allowed to be listed on stock exchanges. To form one of these you’re going to need at least 5 different members, a minimum share capital of €50,000 and articles of association which are entered into the Commercial Register as with a GmbH.
Because this company type can go public, you need to have a managing board with a mandate to make all operational and strategic decisions on behalf of the company and they need to meet on a regularly scheduled basis to do so. If your intention is to eventually list your company through an IPO, then this is the right choice for you.
General Partnership – Offene Handelsgesellschaft (OHG)
An OHG is very different to the two corporations above because in this case the directors take on the liabilities associated with the company. There is no protection from a legal perspective and all the partners are personally liable in any potential proceedings. This is really designed for looser companies that might be a collaboration between a few different parties, as opposed to a standalone business that is going to outlive the initial founders.
Under this format, every partner has a legal obligation to be involved in the operations, unless the agreement says otherwise, so keep that in mind as well.
Limited Partnership – Kommanditgesellschaft (KG)
This company type is similar to the OHG mentioned above with one key difference – there are some liability limitations built into the structure. In this case, you have two different types of partners, the first being the general partner who carries the liability in their personal capacity, and then limited partners whose liabilities will only exist to the extent of their involvement or equity interest.
This allows for more complex company structuring where you can bring someone into a partnership business without opening them up to excessive risk in a legal capacity. All of this is codified in the company agreements and you can create some really interesting businesses using this particular setup.
Limited Partnership with a Limited Liability Company as a General Partner (GmbH & Co.KG)
This is the ultimate combination between a corporation and a limited partnership, where the corporation plays the role of the general partner in a limited partnership, and there are other individuals who act as limited partners. This can be a fascinating structure when you consider how flexible it is and how it can provide unique interactions for certain types of businesses.
Subsidiary – Töchtergesellschaft
A subsidiary is a company type that is not independent, but instead it is owned by a parent company. The most common way this comes about is when a foreign company wants to set up a presence in Germany, so the subsidiary becomes a vehicle for that. It has some independence in terms of its own systems, assets, and the like – but at the end of the day it’s just an extension of another business.
Branch – Zweigniederlassung
A branch is even less independent than a subsidiary and basically represents a sales center for a foreign company that sits in Germany itself. Branches are entirely dependent on the operations of the parent company and don’t have many assets of their own. They are simply an outpost in the country which can be useful if you’re looking to reach new markets in German cities.
Which company structure should you pick for your business?
Now that you know all the different options available to you, the question becomes which one do you go with? What’s interesting about the German business ecosystem is that the vast majority of business is conducted through small and medium-sized entities, a section of the economy affectionately known as the Mittelstand. This really does form the heartbeat of the German economy and so you’ll see a wide range of SMEs plying their trade throughout the country.
This differs quite significantly to other industrialized nations across the world which are typically dominated by large publicly listed corporations. The German way of doing things is not to build the biggest company in the world, but rather find a customer need and service it as well as one can. There isn’t the same obsession with scale that you might see in China or the USA. Business tends to be done locally wherever possible and that makes for a rich and diverse entrepreneurial ecosystem.
In terms of company types, most founders will go for a limited liability company like a UG or a GmbH. While these are more administratively intense, the fact that the shareholders don’t have to answer for company debts in their own respects creates a healthy separation between the company and the individuals. For this reason, these tend to be the most common choices.
The choice of legal form is also influenced by a number of different tax considerations. Every type of company comes with its own tax implications and so it’s very important to take the time to understand which type would be most beneficial for you in terms of taxation. This can get complicated, as taxes tend to do, so we would be more than happy to put you in touch with a specialized tax accountant who can assist with the ins and outs of German tax law if that would be helpful. It is a rather intricate affair.
Don’t hesitate to contact us
At the end of the day, you need to make this decision based on your vision for the company, the industry you’re in, and how your taxes are going to be calculated. Here at German Immigration Lawyers, we’d be more than happy to help and bring our years of experience and expertise to the table to ensure that you make the right choice for you.