GmbH

Aufsichtsrat of a GmbH – Board of Directors

What is this Aufsichtsrat? Another board to make German bureaucracy more insurmountable?

This is usually another supervisory organ of the company. It is optional. It is only common among large companies and when the articles determine it. If the shareholders wish they can have such body. The members of this board can only be physical persons which are nominated by the shareholders’ assembly. The Aufsichtsrat has widespread information rights.
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That sounds so cute what you’re talking of, but I lead a one-man GmbH. Does that rule still apply to me?

Of course not, silly! If you are the company and the company is you, what sense does it make to create a third alter ego? But if you wish so expressly, your wish should be fulfilled.
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Capital Sustenance

I heard that from friends that they funded their GmbH with only 12.5 k€. They all insisted that it was legal and cheaper than what other lawyers told them. Can this be?

Yes, this can be. However, they only know a half truth. Both are correct: The minimum capital is 25 k€. You can start your company with 12.5 k€. When you fund the company only with half of the statutory capital you are still running a risk of personal liability until the company has received full funds. That is the difference!
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That’s cool. I don’t have to fully fund the company and get away with half. Neat! Um, can this be?

Nice idea. Legally you will not get away with half. Practically, nobody checks if the company has been funded with the second 12.5 k€ – with one exception: the bankruptcy manager. When a company goes bust, the first thing the bankruptcy manager does is to check if the founders paid the capital stock in full. If not, he will collect – without any time limitation.
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I fully funded the company. May I not use that capital stock? You know it is so much money; it’s a crying shame to have so much money just lying around for nothing.

Sure you can use the money! When founding the company, law expects that you fund the company with starting capital. During day-to-day business, the main thing is that you do not lead the company towards bankruptcy and do not return money to the shareholders. Keep reading. There is more to know!
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What do you mean shareholders are not to be reimbursed for the capital? It’s their money anyhow.

Sorry, but you got it all wrong! The founding shareholders gave up their personal money for the benefit of the GmbH. The GmbH itself is a new and different legal entity having its own rights and duties. As you founded a GmbH, it was like marrying your spouse. The spouse has – next to its own identity – also and especially its own wallet!
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Okay. How much may I spend?

Generally, you have to make sure that the stock capital is always available – either in cash or in kind. The shareholders may not receive dividends or a salary if this endangers the stock (§30 I 1 GmbHG).
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Well my shareholders insisted that they get a loan from the company and accept their personal guarantee. That sounds reasonable, will I, as the managing director, have an issue with this concept?

Not really. The law (§30 I 2 GmbHG) now explicitly permits that the shareholders receive funds back if they are secured by an adequate collateral. Such adequate collateral can be the personal guarantee of the shareholder or something valuable. Make sure you get an adequate security or you might be held personally liable.
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My shareholder came up with the idea that I might waive his repayment of the granted loan. I don’t know. I don’t like the idea so much. What do you think?

That is a good idea to listen to your stomach. This is absolutely prohibited (§30 I 3 GmbHG). The money belongs to the company and you may not just push it down a shareholder’s throat.
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Increase in Capital

My corporation is standing a bit meager among our competitors; I guess I would like the GmbH to look more prosperous. How do I increase the capital stock? Just put more money into the account?

Not really. There are two ways to raise the share capital:

  1. per capital contribution
    or
  2. from company funds.

The first alternative brings new, fresh money into the company, while the second only transfers reserves.
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Neat! And how do I actually raise the statutory funds? Aren’t there any formalities attached to it or do I just write a “one-liner” to court instructing it?

Nope. You may not effectively personally communicate with the court. You must visit a notary because the Act on GmbHs demands that public form be observed when you change the “law” of your company: articles of association. But that is the second formality. In other words, this answer puts the cart before the horse. You already mentioned the first formality: a shareholders resolution. However, the law also provides a possibility that the CEO may raise the capital (§55a GmbHG, “sog. genehmigtes Kapital”, so-called approved capital). The last formal step will be that the shareholders formally take over the new capital. Once these formalities have been taken care of to the consent of the notary, he will apply to the commercial registry to let the changes come into effect. The changes come into effect when they have been published in the Federal Gazette. To wrap it all up: first comes the board resolution, then the visit at the notary or both simultaneously and after this has been entered into the Commercial Registry the company officially has the higher capital.
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Image of UG in Daily Business Life

The UG was introduced to German law on November 1, 2008. Germans typically do not embrace new concepts instantly. They first need to draft a compelete business plan and have another expert critize this (first) plan and both plans need to be discussed until they finally come up with the "final (= ready for implementation)" plan. The concept of the mini-GmbH stems from the strong competition coming from the UK Ltd only needing one Pound Sterling to exempt private liability. However, very many Germans wanted to have limited liability but could not afford to put down the "serious amount" 25 k€. Though absolutely legal, a Limited in Germany gave lawyers and judges tremendous headaches determining which law would be when applicable and for what. The Ltd is a UK company constructed under UK law and its branch works in a foreign jurisdiction. The worries are about debtor protection and prestige of GmbH. The GmbH symbolizes economic potency, tradition, and seriousness. Presumably, you can imagine what a contribution of one Euro in comparison resembles. Eventually, business participants decide.

Persons not in business are not very familiar with this company form. Not until you say "mini-GmbH", they will have an idea. Acceptance otherwise depends on your line of business and the risk involved. If your business is corporate, and will be making a six digit profit per anumn, go straight for a GmbH when deciding if or not a UG. Otherwise you will only lose your face! Conservative Germans will frown on you: "They are so broke that they cannot come up with a serious contribution (of 25 k)." or "Wanting to make six digit profits but only putting down € 1; this cannot be serious business." If your business strongly depends on suppliers it might be best to have a GmbH. If you are freelancer and want to appear bigger, then the UG is perfect and your business can grow up to become corporate.

So on the bottom line, what do you have with a UG? You have a legal construction suitable for smallest to smaller medium businesses. Do make sure to refer to your company on your letterhead correctly! It is important to add the legal suffix "(limited liability)".

Limited Liability Corporation: Gesellschaft mit beschränkter Haftung

The Gesellschaft mit beschränkter Haftung (GmbH) is the most popular legal form among the corporations, as it combines high flexibility with relatively few obligations. If you are in a hurry and want and / or need to get started quickly then its best to start with a standard construction (especially cash founding) and later fine tune all details. When you later fine tune, you can start earning money to cover the further costs.

Want to do real business in Germany without personal liability – tell me something about that. What is needed to found a GmbH?

These are the requirements:

  • € 25,000 capital funds or equivalent non-financial assets and proof thereof, (however at the time of registration  half of the minimum capital is enough),
  • at least one founder (be it a physical or juristic person),
  • line of business (Gesellschaftszweck),
  • a notarized board resolution providing evidence of the decision to set up the company / branch (Gesellschafterversammlung zur Gründung einer Gesellschaft / Zweigstelle), which will be held at the notary during notarization,
  • a notarized list of shareholders and the quota of their shares,
  • notarized articles of association (Gesellschaftsvertrag),
  • ID of the founders.
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What does it cost to found a GmbH?

The fees for notary and commercial registry are around € 1,500. On top of that are costs for lawyers and / or tax consultants respectively, and eventually for translators.
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This sounds like I can do it all of myself, do I really have to hire a notary?

Yes, you do! There is no way around it because §2 I GmbHG requires this. Elementary decisions regarding the corporation must pass a notary as he has the double function of creating the required  public form and warning that a major legal transaction is to take place. The notary will document and apply for the entry into the commercial registry. The registry has the final word on its entries.
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Heck, 25 k is a bunch of cash that I don’t have so readily at hand. You mentioned that we can use non-financial assets to finance the company. How does that work?

Generally, you can use anything that has a market value for funding in-kind. In order to officially become a part of the capital stock, you have to prove the value of that asset. The easiest example is real estate because there will be a notarized contract. However, be careful because if you funded the company with only one piece of land and sell it later, then you are practically liquidating the company! In order to generally prove the value, you will have to hire an auditor (Wirtschaftsprüfer) to verify that the value of the property actually corresponds to the specified counter value of the contribution to the corporation. Note, that you have the option of only contributing half of the legal funds, i.e. € 12,500.
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You mentioned that I can only fund the company with half of the statutory funds? Isn't that illegal?

No, it is not illegal. The law provides this possibility (§7 II 2 GmbHG).
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Okay, I will go that way and fund the company with half of the legally needed money. When do I have to prove that I fully funded the company?

The lawmaker expects you to do this asap. On the other hand, practice shows that nobody cares if the company has received 12.5 k€ or 25 k€. However, once the company busts, the bankruptcy manager will demand and enforce the non-contributed funds.
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For which line of business may I found a GmbH?

The GmbH can be an attractive form of company for practically any profession – be it freelance, trade. However, some professions like those “chambered” (i.e. attorney, physicians, accountants, auditors, etc.) will have encounter some restrictions.
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Rights and Duties of Shareholders

What rights do I have as a shareholder ?

The most prominent right of a shareholder is his right of participation in the profit after taxes or – when the company is being dissolved – what remains after winding up. You have the right to participate in any and all shareholder assemblies. Your voting rights depend on the votes you are entitled to in accordance to the articles. In other words, read the articles of association.
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Do I have any duties?

Sure, everybody has duties – more or less. The general concept of a shareholder is to let somebody work with your funds (on behalf of the company) and just watch him do so. There are no general management duties of the shareholder. The general duties are:

  • funding the company,
  • action in case of loss of director,
  • action in case of indebted or bankrupt company,
  • general duty of trust and loyalty.
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What is so difficult about funding a company? Don’t I just put money into the account and that’s it?

You have the financial duty to make your contribution and “retain” it with the company. So your thoughts are generally correct. Of course you can use the funds but the company also has to be able to raise the statutory capital at all times (so called liability to cover losses and credits) during the period after visiting the notary and until entry into the commercial registry.
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What do you mean with action in case of loss of director?

§6 I GmbHG provides that the company must have one or more managing directors. So if your one and only director quits for whatever reason, you as the sole shareholder have to quickly find a replacement!
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Am I to become active if the company is about to bust? Isn’t the director responsible to file for bankruptcy? What do I have to do?

In the event where it seems impossible that the company cannot fulfill its commitments, you have three weeks time to apply for bankruptcy (§15a III InsO). Of course, this provides that the shareholder has a concrete knowledge of this situation. Non-compliance is subject to criminal prosecution (§15 Abs. 4 InsO). In this situation it is wise to contact your accountant and a bankruptcy lawyer to discuss your situation.
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Goodie goodie gumdrops, I’m supposed to remain loyal to the company. Your talk is as if I would purposely want to ruin my business. What are you actually hinting at?

It might be that you(!) take care of your company but not everybody has and does. This is something to discuss looking at the individual case. Okay, I understand your eyes are rolling. Let me describe it this way: Behave so your mother would not be disappointed in you! If such is the case, you are safe.
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Some dork told me that shareholders do have liability for the debts of the company. This cannot be true because everyone knows that shareholders don’t participate in liability and aren’t you always preaching that the company is another legal person? Why should I pay for someone else’s debts?

Well. On the bottom line, you both are correct. On a day-to-day basis, shareholders are not responsible for the debts of the company that is true so far. As a rule of the thumb, the corporate veil will be pierced and personal liability exists (in German “Durchgriffshaftung”) if damages from misuse of the structure arise.
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Can you give me an example? What kind of misuse are you referring to?

Sure. The most common case is to blur the financial situation of you personally and the company (in German: Vermögensverwischung). This is the case when based on the accounting it cannot be determined what belongs to whom. This situation can only arise in a 1-man-GmbH or with a dominant shareholder. Minor shareholders are typically not in the situation to “cook the books“. Another typical thing is the “existential interference” (BGH judgment of July 16, 2007, re II ZR 03/04). Such interference, that leads to the company’s bankruptcy or a comparable situation and so hinders the creditors of collecting their debts, will be considered as an “existential interference”. Ín other words, if the company’s creditors do not get their money because you wrongly lead the company in order to prevent their payment, the managing director respectively the shareholder will be the loser. They will be liable with their own funds and assets. If the company went bankrupt then this will not be an exemption for the malicious director because the bankruptcy manager will file a suit in court against the shareholder (§§30, 31 GmbHG).
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