Formation of a company in Germany – which legal form?

Before the actual founding process begins, it must first be clarified which legal form is the most suitable. The decisive factor here is, who will be the shareholder of the German company. There are different options for private owners than for companies.

In case the founder is an American company, it has the possibility to either set up a subsidiary in Germany, or to found a German company with its own legal presence.

Does the American company merely have the set up of a subsidiary in mind, then there are two possibilities: the one of an independent subsidiary (“selbständige Zweigniederlassung”) or the other possibility of a dependent subsidiary (“unselbständige Zweigniederlassung” or “Betriebsstätte”). 

However, does the American company prefer founding a German legal entity, various legal forms are possible. The most common legal form is the “GmbH”. The bigger “AG” is for most SMEs not an option, due to its high foundation costs and also the running costs are much higher compared to a GmbH. For the UG, the minimum capital is one euro only. This on the one hand represents a low entry hurdle, but on the other hand has contributed to an extremely poor image of the UG, which is why INDIPA does not support the establishment of a UG.

Here is an overview of the three most common types of foreign company establishment described above:

The GmbH is comparable to the LLC. A GmbH is not publicly owned, but the shares are privately held. Hence, the shares are not freely tradeable. The shareholder benefits from a limited liability. To set up a GmbH, a starting capital of at least € 25,000 is required. Of this € 25,000, at least half has to be deposited at the time of the foundation (normally paid into a bank account).

The GmbH is formed in presence of a notary and is based on a formal deed of formation (“Gesellschaftsvertrag”), in which e. g. place of business, business purpose, shareholders and directors are mentioned.

If the founder is a private person, the company-form can be a GmbH, a UG, an AG, and also a sole proprietorship (“Einzelunternehmen”). The significant difference between a GmbH and a sole proprietorship is, that the founder of a sole proprietorship is liable with all its personal assets. A further difference is, that a sole proprietorship does not require the foundation executed by a notary, and no starting capital of 25,000 € is required. Also an “Einzelunternehmen” has to be a real person, meaning that an “Einzelunternehmen” cannot be formed or exist out of a company. 

The sole proprietorship must be registered in the town where it has its place of business. As the sole proprietorship is directly linked to the business owner, they should genuinely carry out their business at the registered office and should be mainly on-site there. No obligation exists to enter the sole proprietorship in the trade register, however, it is possible. In case of registration, the company name would be supplemented with “e.K.” (“eingetragener Kaufmann”/registered sole trader) . This gives a reliable and professional impression.

Please contact us here, in case you have any questions regarding the foundation of a company in Germany. Or just continue reading here, to see how INDIPA can support you in setting up your German company.