ESTABLISHMENT OF AN
LLC (GMBH) IN GERMANY

When founding your own company, the first question to be asked is what legal form to choose. The most common legal form in Germany is the Limited liability company (in German – Gesellschaft mit beschränkter Haftung – “GmbH”). This guide is intended to provide an initial overview of the key issues of founding a company in Germany, particularly a GmbH. Despite careful preparation of this overview, it cannot substitute a detailed legal advice.

 

LEGAL FORM – GMBH

A Limited liability company – GmbH – is an independent legal entity. It may perform any legal activities. In a GmbH, the shareholders are only liable with their contributions.

 

REGISTRATION OF A GMBH

A GmbH is considered registered at the moment it is entered into the trade register. Before the registration in the trade register legal transactions may be carried out in the name of a pre-GmbH. However, before the registration the shareholders are personally liable with all their assets for the liabilities of the pre-GmbH.

After entry into the trade register, the HRB number is assigned. The tax authority issues a tax number later. A bank account shall be opened prior to the notarization of the establishment.

 

SHAREHOLDERS OF A GMBH

The number of shareholders in a GmbH is not defined. The shareholders are liable with their contributions. Subsidiary liability can also arise, especially in the case of issues relevant to criminal law.

 

NAME OF A GMBH

The exact company name of a GmbH must be specified when it is founded. It should be noted that the use of individual terms, official designations and related derivatives are subject to approval. The use of individual city names may also be subject to approval and fees. In addition, the company name must not contain any information misleading about business relationships.

 

LEGAL ADDRESS OF THE COMPANY

Every company must have a legal address. It must be submitted to the authorities when the company is founded. A legal address is used by authorities, primarily by the tax authorities, as a contact address for the company. The notary will not be able to apply for the company registration without a legal address. Both tax authorities and banks treat this issue very seriously.

A legal address can also be at the domicile of the shareholder. The trade tax also depends on this. There are different trade tax rates in different municipalities.

 

SHARE CAPITAL OF A GMBH

The minimum share capital of a GmbH is EUR 25,000. This can be paid in cash or in kind. At least a quarter of the cash contribution must be paid in. However, to register a company, you need at least the half – EUR 12,500 as a deposit on a business account. In principle, the notary will not submit the registration application to the trade register without the proof of the payment.

The share capital can also be provided by contributions in kind. The value is proven in a non-cash foundation report. The registration authority can also request an expert opinion if there are doubts about the valuation of the contribution in kind. This increases the start-up costs.

 

OPENING BANK ACCOUNTS

Before the notary submits the registration documents to the trade register, the shareholders must prove that the share capital has been paid in.

This requires an account with a German bank or a bank in the EU. As already mentioned, at least EUR 12,500 must be deposited in order to receive the relevant proof from the bank and present it to the notary, who will then submit it to the trade register together with all other documents.

It is possible to enter several authorized signatories to the bank, who may release bank operations either independently or collectively. This “four-eyes principle” represents a strong control mechanism over the company’s finances.

If two authorized signatories are registered at the bank, the double-signature requirement shall apply to online banking as well. This means that the money transfers and signing of documents online will be only possible with two electronic signatures.

This regulation can significantly improve the control of the shareholders or of the foreign parent company over the finances of the subsidiary.

 

MANAGEMENT AND REPRESENTATION

The mandatory organs of the GmbH are:

• shareholders’ meeting,
• manager,
• supervisory board (mandatory if more than 500 employees).

Any natural person with unlimited legal capacity (at least 18 years old) can be appointed as a managing director. Non-EU-citizens can also be appointed as managing directors; a work permit or residence in Germany/EU are not required if the managing director is also a shareholder of the company.

A simple majority of the shareholders’ votes is sufficient for the appointment, unless the shareholders’ agreement provides otherwise. However, the entry of the managing director into the trade register requires the notarized signature of the managing director.

A managing director runs the day-to-day business and has among others the following obligations:

• holding a shareholders’ meeting,
• protection of share capital from prohibited pay-outs,
• prevention of prohibited personal acquisition of shares,
• bookkeeping, preparation of annual financial statements and the management report,
• provision of information to shareholders,
• changes in the trade register,
• opening of insolvency proceedings, noе later than 3 weeks after the onset of insolvency or over-indebtedness.

A managing director is sometimes also personally liable for any violations of the law by the GmbH. Control mechanisms such as the “four-eyes principle” are available. The number of managing directors is not limited.

The managing director’s power of representation can be limited by a shareholders’ agreement, a resolution of the shareholders’ meeting or an employment contract between the GmbH and the managing director. According to § 37 (2) GmbH-Law, such a restriction is ineffective externally and towards third parties. If the managing director should therefore exceed his power of representation and conclude a transaction, he/she shall be liable to the GmbH for damages.

If the managing director is also a shareholder and exercises economic powers in the company, he/she shall be regarded as a self-employed person (no employment contract). As a rule, a service contract is signed in this case. An external manager who is also bound by instructions can be hired with an employment contract and is therefore subject to labor law. In this case, he/she is subject to social security and income tax.

For reasons of property protection, there is no general protection against dismissal of a managing director – he/she can be dismissed at any time with compensation. The dismissal takes place by a resolution of the shareholders’ meeting.

 

SHAREHOLDERS AGREEMENT

For the foundation a notary needs a foundation contract, also called “articles of incorporation”. This contract regulates the most important points for founding and contains all necessary information about the new GmbH. There are two possible approaches to preparing the foundation contract / articles of incorporation.

The first option is to sign a standard foundation contract with the help of a notary (model articles of incorporation). The notary provides a template that only needs to be filled in with minimum information. This option saves costs and time but does not offer any room for special agreements and special procedures. The template cannot be changed.

The second option is an individual foundation contract. Therefore, there are no limits for legal design. If there are more than three shareholders, the individual foundation contract is mandatory.

In addition to the minimum information, a foundation contract may include the following:

• profit distribution,
• entry and exit of shareholders from the company, including the sale of shares,
• several directors,
• exclusion of self-dealing,
• transactions subject to approval and much more.

The minimum information about a GmbH in the foundation contract is provided by law and shall include:

• name of the company including its legal form,
• legal address of the company,
• type of activity of the company – this will be visible in the trade register and also will determine the scope of the management’s powers,
• share capital,
• information about shareholders (name, date of birth, place of residence),
• shares held by shareholders,
• authorization to represent (management).