Limited liability company

Limited liability company - GmbH

June 06, 2024

The German limited liability company (GmbH) is the most common form of company in Germany and the second most common form of company after the sole trader. Its legal basis is standardised in the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung - GmbHG). The GmbH consists of at least one shareholder who is only liable for the company's liabilities with his capital share, but not personally.

In contrast to partnerships such as the the German civil law partnership (GbR), the German commercial partnership0 (OHG) or the the German limited partnership (KG) , the GmbH is a corporation, i.e. a company in which membership is based on capital participation in the company and not on the personal co-operation of the partners. Corporations are legal entities and therefore have legal capacity, their shareholders are not personally liable and can freely sell their shares in the company. GmbHs are always trading companies and are therefore deemed to be (formal) merchants within the meaning of the German Commercial Code (HGB).

Formation and termination

A GmbH is formed by the conclusion of a partnership agreement between the shareholders, which is also known as the articles of association. The articles of association must contain at least the legally prescribed contents, namely the company name (i.e. the name of the company), the registered office, the object, the amount of the share capital and the capital contribution to be made by the shareholders. The GmbH is normally founded in notarised form, Section 2 (1) GmbHG, i.e. the articles of association are notarised. Since 2022, however, a GmbH can also be founded online by means of a video conference (Section 2 para. 3 GmbHG).

The share capital of a GmbH must be at least EUR 25,000, Section 5 para. 1 GmbHG. The share capital can be paid in cash and/or in kind. At the time of formation (entry in the commercial register), at least half of the legally stipulated share capital, i.e. contributions totalling EUR 12,500, and at least a quarter of the contributions stipulated in each case must be paid in, § 7 Para. 2 GmbHG. If contributions in kind are made, these must always be made in full and their value must be proven.

When the shareholders' agreement is notarised, the application for entry in the commercial register is also notarised by the notary. The entry is then made by the competent registry court once all the necessary documents have been submitted.

The GmbH becomes a legal entity upon entry in the commercial register. Until then, it is a founding company, the GmbH i.G. (‘in formation’), to which only certain provisions of the GmbHG apply. In particular, the limitation of liability to the company's assets only applies from the time of registration, before which the shareholders are personally liable.

The company is dissolved in accordance with Section 60 GmbHG, for example by a resolution of the shareholders (usually with a majority of 75%), a court judgement as part of an action for dissolution or the opening of insolvency proceedings. After dissolution, the liquidation of the GmbH begins, which is usually carried out by the liquidators, usually the managing directors.

Position of the shareholders

Only the person entered in the list of shareholders is the owner of the share in relation to the company, § 16 Para. 1 S. 1 GmbHG. The list of shareholders, in which the shareholders must be listed, must be submitted to the commercial register, as must any changes to the list, for example in the event of a change of shareholders. Shareholders can be natural persons, but also a partnership or another legal entity.

The shareholders have a fiduciary duty towards the company, according to which they must give due consideration to its interests. Depending on what is provided for in the articles of association, the shareholders may also be subject to ancillary obligations.

A shareholder can transfer his share in the company or resign for good cause and thus leave the GmbH or be excluded by means of the redemption of his share or by exclusion for good cause.

Management and representation

The executive bodies of the GmbH are the managing director(s) and the shareholders' meeting. Under certain circumstances, there must also be a supervisory board in accordance with § 52 GmbHG, e.g. if the company has more than 500 employees.

The managing director(s) [LINK] are the legal representatives of the GmbH, Section 35 GmbHG, and are responsible for its business management. They are appointed by a resolution of the shareholders' meeting. The office of managing director can also be exercised by shareholders. On the one hand, the managing director is an organ of the company and is appointed as such; on the other hand, he is also bound by a contractual relationship with the company. Internally, the managing directors are bound by the instructions of the company, i.e. the shareholders - but externally, i.e. towards third parties, their power of representation cannot be restricted.

If the GmbH has no managing director, it is represented by the shareholders.

The shareholders' meeting consists of the shareholders of the GmbH and its responsibilities are set out in § 46 GmbHG. The shareholders generally pass the necessary resolutions at this meeting, for example on the appropriation of profits.

Liability

From the time of entry in the commercial register, the liability of a GmbH is limited to the assets of the company, i.e. the share capital (§ 13 Para. 2 GmbHG), so that the shareholders are not personally liable to creditors of the GmbH, i.e. with their own assets. The primary obligation of the shareholders is to pay their capital contribution. If they have not done so in full or have paid out some of this later, they are personally liable for the amount of the shortfall in the share capital.

However, personal liability of the shareholders may arise under strict conditions, e.g. if a shareholder gives third parties the impression that they are acting as or on behalf of a person with unlimited liability (see § 35a GmbHG), or in the event of abusive interference with the company's assets.

If a managing director breaches certain duties, this managing director may be personally liable both to the company (for damages) and, under certain conditions, to third parties, for example in the event of a breach of the duty to file for insolvency, the duty to provide information or the duty of loyalty or misappropriation of company assets.

Special forms

A special form of GmbH is the entrepreneurial company (UG) [LINK], for which Section 5a GmbHG contains partially deviating provisions. Accordingly, a UG can be founded with a share capital of just one euro, for example, and the UG is therefore subject to special obligations to build up reserves (Section 5a (3) GmbHG).

If the purpose of the company is charitable, it is possible to establish a charitable GmbH (gGmbH), Section 4 sentence 2 GmbHG. In contrast to a non-profit organisation, a gGmbH still aims to operate commercially, but uses the profits generated for a charitable purpose. For example, museums, hospitals or day-care centres are often run as gGmbHs. The non-profit status leads to tax relief in accordance with the German Fiscal Code (AO). The general provisions of the GmbHG apply to the formation and management of the company.

For whom is the GmbH the right type of company?

Due to the limitation of liability to the company's assets, founders should choose the GmbH if their priority is to protect their private assets. As a legal form, the GmbH is particularly suitable for medium-sized and family businesses. In particular, the great flexibility that the GmbH offers, for example with regard to the authorised purpose of the company, the number of shareholders and the possibility of transferring the management to third parties, is a major advantage. The disadvantages of this legal form are the relatively high amount of capital required to set up the company and the high costs associated with both setting up the company and managing it (e.g. bookkeeping and accounting obligations).