The act for modernisation of the Limited Liability Company Law and for the combating of abuses (known in German as MoMiG for short) entered into force on 1 November 2008. This marked a comprehensive reform of the Limited Liability Company Law.
The Gesellschaft mit beschränkter Haftung (in the following: limited liability company, GmbH) and the Unternehmensgesellschaft (in the following: UG, entrepreneurial limited company (limited liability)) are joint-stock companies with their own legal identity (= legal entities), for which liability is limited to the company's assets.
GmbH and UG (limited liability) act autonomously – represented by the executive management – during business transactions, are able to file lawsuits and are themselves subject to lawsuits, are able to acquire property and possess their own assets. They are independently subject to taxation. The particular rights and obligations of the GmbH and UG (limited liability) exist autonomously from those of the shareholders and the executive managers.
Both the GmbH with a capital stock of 25,000 Euros and the UG (limited liability) are companies with limited liability. The provisions concerning the GmbH, namely the GmbHG (Limited Liability Company Act), apply for both forms.
The capital stock of the GmbH totals – as before – 25,000 EurosThe UG (limited liability) represents an entry-level model for the GmbH for enterprises, especially start-ups, with a low capital endowment. The capital stock of a UG (limited liability) amounts to at least 1 Euro!
The UG (limited liability) offers an alternative to foreign legal forms with a low capital stock where founders of a start-up have to subject themselves to unfamiliar legal provisions (the English Limited, for example).
Apart from the difference in capital stock, the UG (limited liability) largely equates with the GmbH. The UG (limited liability) can, however, work its way up to become a GmbH. The UG (limited liability) is obligated, every year, to place one quarter of the annual surplus (minus loss carryforward) in the reserves. Once these reserves have reached the capital stock of 25,000 Euros, the entrepreneurial limited company will be able (but not obligated), by means of a capital increase without change of legal form, to become a GmbH.
The limitation of liability arises once the GmbH or the UG (limited liability) has been entered in the trade register (=Handelsregister). Limitation of liability means that not the shareholders– personal fortune, but the company's assets will be liable for the obligations of the GmbH or the UG (limited liability). Owing to the strict separation between private and company assets, in the event of a crisis the shareholders thus bear only the risk that the investment agreed in the articles of association will be lost. If the investment is not yet fully paid in, the shareholders must, if need be, pay the outstanding difference in full.
It should be clarified that the company is liable strictly with its assets as a whole (therefore, not only up to the sum of the capital stock). An example: a GmbH has been founded with a capital of 25,000 Euros. If this capital is used up as a result of bad investments, there will not be any more company assets available as recoverable assets, either. If, on the other hand, this same GmbH has company assets of 100,000 Euros, it will be liable with these in full. The exceptions from this limitation of liability are, for example, typical cases of abuse or delayed filing of insolvency, along with missed social contribution payments. In these cases recourse may be sought privately against the shareholders and executive managers.
Exkursus: To hedge a loan agreement with a GmbH or a UG (limited liability) banks often conclude a guarantee with the shareholders/founders of a GmbH or a UG (limited liability). That guarantee is usually directly enforceable against the shareholders. In theses cases the shareholders have to keep in mind that they are liable for the due loan of the GmbH or a UG (limited liability) in full on the basis of the agreed guarantee, if they are party of that guarantee and their GmbH or a UG (limited liability) fails to provide payments for the loan.
The GmbH (or UG (limited liability)) is started up by the shareholders. The first step on the way towards a GmbH or UG (limited liability) is the conclusion of articles of association – also known as bylaws – between the shareholders. They must be signed by all shareholders and certified by a notary. Representation is possible if any shareholder is unable to attend in person at the signing of the articles. In that event, the proxy must present authorisation which has been accredited by a notary.
The shareholders conclude the articles of association, make the capital stock available to the GmbH or UG (limited liability) and, corresponding to the nominal value of their business share, are able to participate in the distribution of profits or, respectively, to decide upon utilisation of the profits. The shareholders also appoint the managing director.
A GmbH or UG (limited liability) can be founded by one (one-person limited liability company or one-person private partnership (limited liability)) or a number of shareholders. In addition to natural persons, shareholders can be other companies too. Foreigners or foreign companies may become shareholders of a GmbH or UG (limited liability) also, without requiring special approval for this (see also numeral 5 g concerning foreign managing directors).
For both the 25,000 Euro GmbH and the UG (limited liability), the shareholders can choose between two start-up options. They can found the company by means of a straightforward notarial formation report containing minimum bylaws, or by means of an individually compiled notarial formation agreement.
The more cost-effective formation report may be opted for only if the minimum content, as prescribed by law, of articles of association is sufficient for the start-up. Individual bylaws certified by a notary will allow the shareholders to formulate regulations going beyond this minimum content.
The shareholders will be able to start up the GmbH or the UG (limited liability) by using the prescribed formation report. This report must be certified by a notary. Entry in the register will then be applied for upon signature – certified by the notary – by the executive management. The electronic forwarding of the registration, including the formation report, to the district court (trade register) will then be performed via the notary. The legislator will provide, on the one hand, a sample report for starting up a one-person company and, on the other hand, a sample report for starting up a multi-person company with up to three shareholders.
Pre-requisites for use of the formation reportThe founding party will be able to opt for start-up using the more cost-effective formation report only
According to the Limited Liability Company Act in its former version, the consent of the GmbH through the executive management was necessary for the sale of business shares. This pre-requisite has been dispensed with. Any business share can now be sold to unknown or even undesirable persons. Only via the use of bylaws individually certified by a notary can this be regulated otherwise.
Articles of association can also be tailored individually to the needs of the GmbH or UG (limited liability) and certified by a notary. Entry in the trade register will then be applied for upon signature by the executive management, certified by the notary. Electronic forwarding of the registration including the bylaws to the district court (trade register) must be performed via the notary.
Reasons for individual, notarial articles of associationThe company name of the GmbH, or UG (limited liability), respectively, can be constituted in the form of a person's name (featuring the name/s of the shareholder/s), objective company name (information about the business purpose), a purely imaginary company name or of a combination of these options. The constant requirement in the process is that the company name be identifiable and conducive to an informed decision. By way of example, a purely descriptive objective company name, such as ”Textiles GmbH–, would not be permissible due to a lack of identifiability. Additionally, the company name must not contain information which is likely to mislead on the subject of business circumstances which are essential for the addressed target groups. It is also important that the company name contain either the legal form suffix ”Gesellschaft mit beschränkter Haftung– or the abbreviation ”GmbH– or, if the entry-level variant has been opted for, the legal form suffix ”Unternehmergesellschaft (haftungsbeschränkt)– or the abbreviation ”UG (limited liability)–.
In order to avoid cost-intensive alterations to the articles of association afterwards, we recommend discussing the company name with the responsible chamber of industry and commerce. In this context it can also be checked whether a company name that is likely to be confused with your company name exists already at the same location or, respectively, in the same municipality.
Any political municipality in Germany can be chosen as the location for the company head office. Irrespective of its head office location, GmbH's or UG's (limited liability) can also have their administrative head office – the location, therefore, where the main administrative activity is performed – outside of Germany. However, relocation of a German GmbH or, respectively, UG (limited liability) abroad is not possible.
The purpose of the enterprise can be consulted in the trade register and must provide information about the business activity of the GmbH. Additionally, the purpose of the enterprise limits the executive management's scope of action internally. The intended activity of the company can be defined precisely. Additionally, all areas of the activity can be enumerated and the focus of the enterprise's activity formulated clearly.
Innovation concerning activities requiring mandatory permissionFor an enterprise purpose which also comprises activities requiring mandatory permission (for example, real estate brokerage, skilled trades), it is no longer a requirement that permission be proven straight away, therefore upon entry in the trade register. This results in a speeded-up registration process. It is sufficient if the required permission is in place when the activity requiring mandatory permission is commenced. Proof of it must be provided upon registration of the business.
The statutory minimum capital of a GmbH, also known as capital stock, is 25,000 Euros. It is made up of the individual business shares of the shareholders. The nominal value of each business share must be expressed in full Euros. One shareholder can assume a number of business shares. The nominal values of the individual shareholders can exhibit different totals. The only requirement is that the total of all nominal values equate with the capital stock. The business shares must be numbered consecutively so that a clear overview can be gained of the number of business shares.
Contributions in cash or kindThe capital stock can consist of contributions in cash or in kind. In the case of formation in cash, one quarter of the investments – at least, however, half of the statutory minimum capital (=12,500 Euros) – must be paid in. The shareholder in each case will be liable for the difference up to the amount of his investment. An open receivable on the part of the GmbH towards the shareholders is involved here. In practice, cash formation is performed by way of the opening of an account which is at the free disposal of the enterprise at a bank on the part of the GmbH. For the trade register entry, the managing director must provide assurance that the investment is at his disposal. The district court will be able to demand pieces of evidence in the event of substantial doubts regarding the correctness of this assurance, for example by means of a paying-in receipt or of a bank account statement of the GmbH.
In the event that contributions in kind are rendered – therefore, instead of money, movable or immovable objects, for example cars or enterprises – two special characteristics exist:
On the one hand, the contribution in kind must always be rendered at the full amount; on the other hand, the value of the contribution in kind must be proven in a report on non-cash contributions. In the event of substantial doubts pointing to a not insignificant over-evaluation of the contribution in kind, the district court will be able, in order to prove the intrinsic value, to demand an expert appraisal, whereby corresponding costs will be incurred. To this extent, formation in cash may be easier.
Alteration in the case of a one-person GmbHThese regulations now apply for one-person GmbH's as well. It is no longer a requirement to provide a guarantee for the non-paid in component of the capital stock (in the case of minimum capital stock, one half) upon formation by one person.
The capital stock of the UG (limited liability) must total at least one Euro. It must be paid in at the full amount prior to registration. The only option available for UG's (limited liability) is formation in cash. Contributions in kind are not possible in the case of UG's (limited liability).
Special characteristic of capital stock for a UG (limited liability)! The UG (limited liability) must form a statutory reserve on an annual basis.The loss carryforward from the previous year will be deducted from the annual surplus. One quarter of the remaining surplus will then be placed into the reserve. This reserve can be used only to increase the capital stock.
In the event that the capital stock of the UG (limited liability), together with the formed reserved, then reaches 25,000 Euros, the UG (limited liability) will be able, in the context of the capital stock increase from these company resources, to transform itself into a GmbH. The enterprise will be able to retain its name – apart from the legal form component – in the process.
The UG (limited liability) can, however, also retain the legal form UG (limited liability). Without the transformation into a GmbH, though, the obligation to form the statutory profit reserves will remain in place for UG's (limited liability) with a larger capital endowment.
Attention for 1 Euro capital stockWhen capital stock is extremely low, the risk of the company's becoming over-indebted very quickly is very high. Added to this is the criminal law risk associated with delayed filing of insolvency.
The first and last name, date of birth and place of residence of every shareholder must be listed individually with the nominal value of his or their business share/business shares.
The nominal values of the business shares in the GmbH and UG (limited liability) must be expressed in full Euros. One shareholder may also hold a number of business shares of equal or differing amount. The total of the business shares must be identical to the capital stock.
The bylaws must establish who is going to represent the company in the public domain and how the executive managers may represent the company usually. The executive management must, for example, perform the application for entry in the trade register. In the notarial articles of association it is established whether one or a number of executive managers with sole or joint executive management authority are appointed.
Who appoints the executive manager/s and what majority is required for this?As part of the company start-up process the shareholders of the GmbH or UG (limited liability) must appoint their managing director/s. This is done by means of a resolution. The resolution concerning the appointment of the managing director requires a straightforward shareholder majority and may be taken by way of private written correspondence. Application for entry of the managing director in the trade register requires the signature, certified by a notary, of the managing director/s.
Who is entitled to become a managing director?Any natural person may be appointed managing director. Both external third parties and shareholders can be elected to the role of managing director.
In the case of a one-person GmbH or, respectively, in the case of a one-person UG (limited liability), the sole shareholder appoints himself sole managing director.
Foreigners, too, can essentially be appointed managing director of a GmbH. If the executive management is performed from Germany, attention must be paid to the required residence permit or work permit, respectively, or, respectively, cancellation of the trade inhibition. If it is performed from abroad, the respective immigration law stipulations and problem-free opportunities to arrive in Germany must be taken into consideration. In some circumstances, the appointment of an additional managing director within Germany may be required.
As the representatives of the GmbH, managing directors have numerous statutory obligations to comply with, as well as the duties of diligence developed by jurisdiction. Managing directors assume a personal liability risk in the event of accusable breaches of obligation.
Managing directors must provide written assurance that no circumstances prevail which oppose their appointment (for example, a legally effective conviction owing to an insolvency crime or a prohibition on the pursuit of business activities) and that they have received instruction concerning their unlimited duty to provide information in respect of the court.
Additional reasons for excluding managing directors are a legally effective convictionConvictions abroad owing to crimes which are comparable with the crimes listed above will likewise lead to the exclusion of the managing director.
It is incumbent upon the managing director to manage the company. To this end, he has third-party asset interests under his trusteeship and the duty to ensure a smooth, efficient and profit-oriented course of business. The managing director is subject to various liability risks at the same time. Just to mention some of the most important of these:
Liability in respect of the company may arise from the managing director's position of trust, for example during speculative dealings.
One of the managing director's most important tasks is orderly bookkeeping and preparation of balance sheets. In the event of a breach of obligation in this area the managing director must assume personal liability in respect of the company and of the creditors and will even, potentially, render himself punishable by law.
If the GmbH recruits employees, the managing director will assume the tasks of an employer and must submit advance wage tax and turnover tax statements on a monthly basis, as well as withhold wage tax on the behalf of the employee and pay it to the tax office. The same applies for turnover tax. If these obligations are breached, the managing director will face both liability under asset law according to §§ 69 ff AO (German Employment Regulations) and consequences under criminal law according to § 370 I or § 378 I AO.
Duties arising from social law also concern managing directors. The employees working at the GmbH must be registered with a health insurance institution and the withheld contributions to health insurance, pension and unemployment insurance paid into the health insurance fund concerned. The managing director is liable personally for withheld and non-paid employee contributions to the social insurance premiums and renders himself punishable by law in addition.
In the event of impending insolvency – in the event, therefore, of the company's over-indebtedness or illiquidity – the managing director will be obligated, within three weeks, to make a request for the opening of insolvency proceedings. If he fails to do this in a timely manner, he will face criminal law consequences according to § 15a Abs. 4 InsO (German Insolvency Code).
If the managing director continues to activate payments once the enterprise is ready for insolvency, he will be liable to the company for these payments personally.
Potentially, he will be in breach of fraud and insolvency laws in addition.When payments are made to shareholders, the managing director's liability is now shifted to the foreground as far as these payments led necessarily to the company's illiquidity, unless this had not been discernible from the viewpoint of a diligent managing director.
The start-up costs are dependent upon the capital stock and the value of the business, and upon whether the more cost-effective formation report or individual articles of association are being used. As far as they have been overlooked according to the stipulations so far, the costs are incurred as follows:
a) With a capital stock of 25,000 Euros and individually devised articles of association, the following notary costs can be anticipated:
- Certification of the articles of association 187 Euros - Certification of the managing director appointment 187 Euros - Application for trade register entry and accreditation approx. 62,50 Euros - List of shareholders 96 Euros - Outlay approx. 35 Euros - plus 19 % VAT The costs are reduced in the case of a one-person GmbH.b) For the certification of a 25,000 Euro GmbH with the formation report approx. 181 Euros are incurred, while the remaining costs stay the same:
- Certification of the formation report (incl. list of shareholders and appointment of managing director) 168 Euro, (for a one-person GmbH only 84 Euro)
- Application for entry in the trade register and accreditation approx. 42 Euros - Outlay approx. 35 Euros - plus 19 % VATc) For the formation of an entrepreneurial limited company (limited liability), for which the capital stock can amount to 1 Euro, with underlying capital stock of 1 Euro and use of the formation report the following notary costs will be the result:
- Certification of the articles of association for the one-person UG (limited liability) 20 Euros for the multi-person UG (limited liability) 30 Euros - Application for entry in the trade register and accreditation approx. 10 to 15 Euros - Outlay approx. 35 Euros - plus 19 % VATd) Without a formation report the costs of forming a UG (limited liability) will be exactly as high as for a GmbH without a formation report. The fee for entry of a company in the trade register is approximately 100 Euros.
Added to these are costs for publication of the entry in the German Federal Gazette and potentially in other bulletins. A sum of the magnitude of 100 to 300 Euros per publication should be considered in this context too. This calculation does not include costs for additional support for certain formulations by the notary and for consulting a lawyer (for the purpose of compiling articles of association, for example). With regard to the compilation of articles of association in particular, it is advisable to address the cost issue in advance, as the fees incurred are not subject to collective agreement.
Once the capital stock has been paid in, entry of the company in the trade register must be applied for by the managing director/s.
When applying for entry of the GmbH in the trade register, managing directors must provide written assurance that no circumstances (grounds for exclusion – see above) prevail which oppose their appointment. Alongside this, it must also be declared whether the services agreed in the bylaws have been effected on the capital stock and whether the capital stock is ultimately at the free disposal of the managing directors.
It must be remembered that the GmbH and the UG (limited liability) will not come into existence until entry in the trade register. Two phases can be distinguished until time of entry in the trade register, namely the pre-start-company and the pre-incorporated company phases (also described as Vor-GmbH, GmbH in Gründung or GmbH i. G.).
A pre-start-up company exists where agreements have been made between the founders with the aim to conclude a GmbH contract or UG (limited liability) bylaws. Legally speaking, a pre-start-up company is to be qualified as a company constituted under civil law. Therefore, during this phase there is also a personal liability risk for obligations which are entered into in the interest of the company yet to be founded. Any release from liability would have to be agreed expressly with the contract shareholders.
Vor-GmbH is the term used once the GmbH contract has been certified by a notary (see numeral 8). A Vor-GmbH is not governed by law, but is recognised by jurisdiction as a company in its own right. A Vor-GmbH can bear rights and obligations: for example, it is competent to assume a name or a trade name. Therefore, a Vor-GmbH is permitted to act under its trade name even prior to entry in the trade register. However, in that case it must carry the adjunct in Gründung or i.G. – undergoing establishment, as otherwise this would constitute impermissible use of a trade name. The persons dealing prior to entry of the GmbH are jointly and severally liable. This promoters– liability will terminate with entry in the trade register. Independently of this, the shareholders will also be liable for the obligations of the Vor-GmbH.
Amortisation payments on shareholder loans are not prohibited payments. Shareholder loans and equivalent payments are not to be treated as liable equity. Any shareholder loan will be of secondary importance in the event of insolvency.
Cash poolingReturn to a balance-sheet approach to corporate assets: any payment made by the company to a shareholder cannot be classified as a prohibited payment from the corporate assets if this is a straightforward active exchange, therefore the company's claim to counter-performance or reimbursement against the shareholder covers the payment and is full-value in addition. The intention behind this is to back the cash pooling which is customary in group funding internationally and to place it on a reliable legal basis.
Shareholders– liability during appointment of managing directorsIf, deliberately or gross negligently, the shareholders have appointed a managing director who – according to the grounds for exclusion – should not have been appointed managing director, they will be liable for the damage arising from this.
Shareholders– insolvency application dutiesThe changes in the GmbH law also provide for an expansion of the insolvency application duties and of entitlement to submit insolvency applications. According to the changes (in the case of a GmbH and of a UG (limited liability)), if the executive management is absent any shareholder will be entitled, but not obligated, to submit an application for the opening of insolvency proceedings.
List of shareholdersLists of shareholders – in detail, with corresponding consequences under liability law – are gaining in significance, as the acquisition in good faith of business shares is also becoming possible in certain cases.
Approved capitalIn the bylaws, shareholders can authorise managing directors to increase the basic capital. This opportunity is more in line the German Stock Corporation Act.
Electronic trade registerDue to the introduction of an electronic trade register, the required start-up documents can be submitted to the trade register in electronic form only, and indeed by the notary, who will send application and additional documents to the registry court's electronic PO box; the data can be added to the register directly from there.
This online information can only provide you with a very summarized overview of these topics and does not claim to be complete. If you need more information, you can visit our Commerzbibliothek (Library of Commerce) where you will find all the usual legal literature such as legislation, legal commentaries, collections of judicial decisions, periodicals, and monographs. The Commerzbibliothek is located on the ground floor of the Hamburg Chamber of Commerce at Adolphsplatz 1 in 20457 Hamburg. It is open Monday to Thursday from 10 am to 8 pm and on Friday and Saturday from 10 am to 3 pm.
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