What is a legal form?

Interestingly, a legal definition of the legal form does not exist. However, the term is mentioned in § 125a of the German Commercial Code (HGB), which regulates, among other things, formalities of business letters. Apart from this, the legal form forms the legal framework of a company. It is linked to legally defined characteristics, obligations and rights. Examples are the share capital, the liability of the entrepreneur, accounting obligations or tax aspects. The choice of legal form should therefore be well considered.  

What are the legal forms?

In addition to the classic GmbH or KG, numerous other legal forms exist. Not all of these legal forms make sense for start-ups or small and medium-sized enterprises (SMEs). For example, the stock corporation (AG) is more suitable for startups with strong external investors or internationally operating companies with high capital requirements. To give you a good overview, we present the legal forms commonly used in Germany for startups and SMEs.

Sole proprietorship

At around 70 percent, sole proprietorships are by far the most common legal form in Germany. As the name suggests, these companies are founded by a single person. Examples of typical sole proprietorships are retail stores and other small businesses. Freelancers such as freelance graphic designers, artists or coaches are also sole proprietors. If you start a sole proprietorship, the business belongs to you alone. Since there is no requirement for a certain start-up capital , this legal form is very popular among founders.

Civil law partnership (GbR)

The GbR is the basic form of partnership. At least two partners who join together for a common entrepreneurial purpose are required for the formation. Practice partnerships and law firms, but also music bands, marketing agencies or tenants' associations are typical examples of a GbR as regulated in the German Civil Code (BGB). Partnerships such as the GbR or the limited partnership (KG) account for around 11 percent of companies in Germany.

Registered merchant e.K.

Is your company growing? From about 250,000 euros annual sales, a so-called business operation exists. Then, in addition to the business registration, an entry in the commercial register should be made. The number of business relations, the amount of business assets or the number of employees can also be a reason for the legal form registered trader e. K.. Important: This legal form can only be chosen if a single person manages the company. As soon as you add other business people or establish the company together with business partners , the e. K. becomes a general partnership (OGH).

General partnership (OHG)

If two business partners establish a trading company, a general partnership is formed. A minimum capital is not specified here. Both partners are liable for the debts of the company to the full extent of their private and business assets. Curiously, a general partnership can be established without a written contract - virtually on a handshake. However, this is not recommended. Because properly drafted contracts ensure clarity and can prevent possible conflicts. Small and medium-sized companies in retail, trade and industry are often founded as general partnerships.

Limited partnership (KG)

The KG is actually a special form of the OHG. Here, too, at least two business partners join forces for a common entrepreneurial purpose. One of these partners is the general partner. This partner is personally liable, manages the company and also represents the KG externally. The other business partner is called the limited partner. He or she is only liable to the extent of his or her contribution and is not part of the management. The general partner therefore bears the higher risk, but in return he or she also takes over the management of the company.

Limited liability company (GmbH)

As a corporation, the GmbH is considered a legal entity. This means that the company has its own rights and obligations. Since it cannot exercise these itself, it requires managing directors who represent the GmbH. The GmbH can be founded by individuals as well as by several partners. One of the requirements is a share capital of at least 25,000 euros. In addition, the articles of association must be notarized. Incidentally, a simple form of GmbH has been established in the form of the Unternehmergesellschaft (UG). This can be founded with only one euro, but in principle has the same rights and obligations as the GmbH. But: 25 percent of the annual profit must be set aside as a reserve. If this reserve exceeds 25,000 euros one day, the UG is converted into a GmbH and the reserve is used as the GmbH's share capital.

When is the legal form important for my business?

The legal form has a significant impact on the development of your business. And not only when you start your business. Even if your business changes, the legal form plays a role. Maybe you want to hire employees, bring business partners on board or buy shares in other companies. You may also need to downsize or you and your co-founder may go separate ways one day. In all these cases, the legal form is of crucial importance. As already shown, the legal form also has an impact on the following aspects:

• The taxation of your company
• Accounting and bookkeeping
• Liability issues
• Capital employed and capital raised
• Contracts to be drawn up

Our tip: If you set up a GbR, KG, OHG or GmbH together with a partner, the considered choice of this partner is at least as important as the actual legal form. People who get along well in private life can still fall out in business. This can not only be unpleasant, but also very expensive.

Who advises me on choosing the right legal form?

Your business is unique. That's why you need advice that takes a close look at the requirements, characteristics and goals of your business. This applies to the choice of legal form as well as to the cash register system. In addition to good tax advisors, lawyers for corporate law and notaries are a good place to start. Most chambers of industry and commerce (IHK) or chambers of skilled crafts (HWK) also offer advice on the legal form. By the way: We have summarized what you as a business founder or store owner should bear in mind in a separate article on opening a business . We wish you success in choosing the right legal form and are happy to assist you with our modern cash register system and other solutions!

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