The Limited Liability Company under German Law (the GmbH). Dr Alexander Schröder-Frerkes
uncommon as an investment vehicle for foreign entities in Germany. The same applies to limited partnerships. In these kinds of companies, the liability of at least one shareholder is limited to the contribution he or she has undertaken to pay – as set down in the articles of association and entered in the commercial register (Kommanditeinlage).6 Additionally, a limited partnership requires at least one general partner whose liability towards a third party is unrestricted as is the case in a general partnership. Like the general partnership, the limited partnership is therefore not the preferred vehicle for foreign investments in Germany. Moreover, both kinds of partnerships are associated with tax disadvantages and may give rise to complicated tax compliance issues compared with a corporation such as a GmbH.
In the case of a GmbH & Co. KG, it is possible to combine a limited partnership (KG) with a GmbH. In principle, such a company is a limited partnership. The GmbH is the general partner, which is fully liable towards the debtors of the GmbH & Co. KG. However, since the liability of a GmbH itself is limited to its assets and not the assets of its shareholders, the liability of the general partner in a GmbH & Co. KG is as a matter of fact limited to the assets of the GmbH. Aside from this, the (limited) liability of the limited partner in a KG remains unaffected. There is no minimum amount which the limited partner must undertake to contribute and thus his or her liability in the KG may be as low as just €1.00. A GmbH & Co. KG is a company form which is typically chosen when the founders wish to avoid the applicability of certain Co-Determination laws or if potential company founders wish to attract a large number of investors. The investors typically acquire the status of a limited partner, thus bypassing the strict regulations which apply to a stock corporation (so-called capital investment entities – Kapitalanlagegesellschaften).
3. Advantages of the GmbH
A GmbH under German law combines two important advantages: adaptability and limited liability. As for adaptability, the body of regulations applying to a GmbH is much more flexible than in the case of a stock corporation (Aktiengesellschaft). The articles of association of a GmbH may be adapted to the particular needs and requirements of the shareholders, especially regarding the division of powers between the shareholders’ meeting and the managing directors. The Act on Limited Liability Companies also allows the establishment of additional corporate bodies such as a supervisory or advisory board.
Finally, as a corporation, the GmbH protects its shareholders from being personally liable for the obligations of the corporation. With very few exceptions,7 creditors may only have recourse to the assets of the GmbH itself as a means of satisfying the company’s obligations. In contrast, the partners of a general partnership or a limited partnership may be held personally liable for the obligations of their entities. The GmbH thus combines adaptability to the needs of the shareholders with the protection of a corporate veil. These two elements make the GmbH by far the most successful legal form under German law.
4. Statistics
In the year 2015, the total number of GmbH registrations in Germany amounted to 529,268, compared with approximately 7,862 stock corporations (AG).8 The second most popular legal form, with numbers far below those recorded for the GmbH, is the limited partnership, with approximately 240,000 registrations. These figures clearly show that the GmbH is by far the most popular legal form for business and non-commercial purposes in Germany.
1Gesetz betreffend die Gesellschaft mit beschränkter Haftung (GmbHG) (Act on Limited Liability Companies) 1892, s13, para. 1 (FRG).
2Gesetz betreffend die Gesellschaft mit beschränkter Haftung (GmbHG) (Act on Limited Liability Companies) 1892, s13, para. 2 (FRG).
3Gesetz betreffend die Gesellschaft mit beschränkter Haftung (GmbHG) (Act on Limited Liability Companies) 1892, s11, para. 1 (FRG).
4For details see Sections 141–156.
5For the exception with regard to the so-called Unternehmergesellschaft, see Section 34.
6Handelsgesetzbuch (HGB) (German Commercial Code) 1897, s171, para. 1 (FRG).
7For details on these exceptions, see Sections 65–70.
8Statistisches Bundesamt für das Jahr 2015. Approximately 40% of all exisiting companies.
II. Company formation: establishing a new GmbH
5. The regular GmbH and the Unternehmergesellschaft in general
Under German law, there are two basic types of limited liability companies. The ‘regular’ GmbH is a company which has a stated share capital of at least €25,000.1 In addition, by means of The German Act to Modernise the Law Governing GmbHs and Combat Abuses (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen – MoMiG), effective as of 1 November 2008, the so-called Unternehmergesellschaft (haftungsbeschränkt) (entrepreneurial company with limited liability) was established as a (sub)form of GmbH. The Unternehmergesellschaft is an entity to which all regulations of the Act on Limited Liability Companies apply, with the exception of certain regulations relating to share capital. Further details will be outlined in Section 34.
6. General
A GmbH is only effectively established once it is registered in the relevant commercial register.2 Prior to registration, a distinction can be drawn between two different phases in the company creation process: the phase between the decision of the shareholders to establish a GmbH and the notarisation of the articles of association (pre-formation phase), and the stage between the notarisation of the articles of association and the entry of the GmbH into the commercial register (pre-registration phase).
7. Pre-formation phase (Vorgründungsgesellschaft)
In the period prior to the notarisation of the articles of association, the GmbH does not yet exist as a legal entity. At this point in time, the existing entity is a Vorgründungsgesellschaft. The Vorgründungsgesellschaft either takes the legal form of a civil law association under the German Civil Code (Gesellschaft bürgerlichen Rechts – GbR) or of a general partnership, depending on the scope of the activities and the purpose the entity is pursuing (aside from establishing a GmbH). During this phase, neither the representation of the entity nor the liability of the shareholders are governed by the principles pursuant to a GmbH, but by those pertaining to a civil law association or a general partnership. In other words, the shareholders are jointly and severally liable for any and all obligations which arise in the company’s name at this point in time. The company is managed and represented jointly by all shareholders, in so far as there is no agreement to the contrary already existing at this point in time. If,