There is no straight answer to which legal form is best for you. Based on the particular situation (company size, one or several entrepreneurs and their qualifications under trade law, financing through participation, extent of liability, etc.), you need to consider the pros and cons that the various legal forms have for the efficient management of your business from a civil law, social insurance law and tax law perspective. The choice of a certain legal form will thus usually be a compromise.
There is also no legal form that will be beneficial over the long term: the various factors that led to its choice in the beginning may change considerably sooner or later. Basically, a business can be established either as a sole proprietorship or as a company.
In sole proprietorships the proprietor raises the entire capital himself or herself, he or she manages the business himself or herself and bears the entire risk as well. That individual is liable with his or her private assets for paying any business debts. A sole proprietorship is usually established when the business activity is taken up; it does not have to be officially founded. A sole proprietor who holds a trade licence must be insured with the Social Insurance Institution for Trade and Industry (SVA).
When two or more individuals join to set up a business, this is considered a company. Various types of companies are possible, depending on the size of the business, the qualifications and intentions of the partners or shareholders with regard to trade law, the extent of the capital participation and assumption of risk, contribution to the business’s management, etc.
If you opt for a partnership, you may choose between a general partnership (Offene Gesellschaft – OG) or a limited partnership (Kommanditgesellschaft – KG). A partnership can only be established if at least two partners enter into a partnership agreement. A partnership agreement neither requires a certain form nor does it have to be written out by a notary public or lawyer. However, it should contain all rights and obligations among the partners and with regard to the company. This includes the management and representation of the company, profit and loss sharing, voting ratio for important decisions, rules in case a partner dies or leaves the company, liquidation of the company, etc.
The limited liability company (Gesellschaft mit beschränkter Haftung – Ges.m.b.H.) is the second most frequent legal form after sole proprietorships. Liability is limited to the company itself. This legal form is particularly suited for associating partners who work for the company but wish to limit their risk to their capital contribution. To establish a Ges.m.b.H. a partnership agreement is required, which must be concluded by a notarial deed. The company is established only upon entry in the companies register. Any trade can therefore only be registered after the company has been entered in the companies register, by presenting an extract from the companies register to the trade authority. For this purpose, the Ges.m.b.H. must name a managing director under trade law.
In the case of a cooperative, liability is usually restricted to the share in the cooperative and at least one additional equal amount. This legal form, particularly suited for cooperation, is characterised by a flexible membership structure and the possibility of joining and leaving at any time and with no formalities. To establish a cooperative, a cooperative agreement (articles of association) is required. No notarial deed is required. The cooperative is established upon entry in the companies register. Any trade can therefore only be registered after the company has been entered in the companies register, by presenting an extract from the companies register to the trade authority. For this purpose, the cooperative must name a managing director under trade law.
The summary chart (taken from the 2009/2010 Business Guide) provides a brief overview of the legal forms in German.
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