Choice of legal structure

You want to start a business and need to decide which legal structure to adopt:

• Which legal structure fits best your plans?
• How does the choice of legal structure affect you and your business?

Unincorporated firm (excerpt)

• Sole proprietorship (1 person)
• Civil-law partnership (GbR) (2 or more people)

Liability

Partners in unincorporated firms are fully liable with all the private and company assets.

Start-up expenses

Registering your business with the trade office costs about EUR 50 per founder. In the case of civil-law partnerships (GbR), it is advisable to prepare a written partnership agreement.

Accounting

Single-entry bookkeeping (i.e. preparing a net income statement) is sufficient up to annual revenues of EUR 600,000 and annual profits of EUR 60,000. However, if your business exceeds  either of these limits, the tax office will notify you that you must use double-entry bookkeeping (with annual balance sheet and income statement) and prepare a balance sheet. Single-entry bookkeeping is easier and less expensive, whereas double-entry incurs much higher running costs for tax consultation and accounting.

Good to know:
Even as a sole proprietor you can employ staff.

Incorporated firms (excerpt)

• Limited liability company (GmbH) (1 or more persons)
• Provisional company with limited liability (Unternehmergesellschaft haftungsbeschränkt, UG) (1 or more persons)

Liability

At incorporated firms, liability is limited to the company assets. However, if due diligence requirements are violated, liability is no longer limited and and recourse can be made to the  manager’s private assets, too. One issue is frequently underestimated: Where bank loans are taken out, the need for collateral often leads to personal liability, e.g. if the partner gives  personal guarantees. This can also apply to rental contracts.

Start-up expenses

Compared to an unincorporated firm, the cost of setting up a limited liability company (GmbH/UG) is relatively high. The costs include notarial certification of the partnership agreement and entry in the commercial register, plus any fees paid to lawyers to draft the partnership agreement. A limited liability company also requires capital stock of at least EUR 25,000, of  which at least 50% (i.e. EUR 12,500) must be paid in when the entry is made in the commercial register. Once this entry has been made, you are free to work with this capital.

Accounting

Double-entry bookkeeping (with an annual balance sheet and income statement) is always compulsory for incorporated firms, regardless of their revenue and profit levels. That means higher running costs (e.g. for accounting and tax advice) on top of higher start-up expenses.