Setting up a business - Ways to self-employment

Which legal structure is the right one for your company?

A legal structure is like a fixed platform for your company. You can select the right structure from various options. You have a choice between sole proprietorships, non-incorporated and incorporated firms.

Before deciding on a legal structure, you need to clarify the following issues:

  1. Am I a setting up my business alone?
    If so, you should consider a sole proprietorship or a one-man GmbH or an Unternehmergesellschaft (haftungsbeschränkt).
  2. Are you setting up a joint enterprise with one or more partners?
    If so, you should consider a non-incorporated or incorporated firm.

If you are setting up your business alone

The following options are available to you:

  • sole proprietorship
  • one-man GmbH or a variation of the GmbH:
  • Unternehmergesellschaft (haftungsbeschränkt) - UG

Sole proprietorship
A sole proprietorship is automatically created when you register a trade with the Trade Office and manage the company alone. The same applies to freelancers who apply to the local tax office for a tax number, thus making themselves self-employed.

As a person conducting a trade (rather than a freelancer) you have to register yourself in the commercial register if your company necessitates a “business established as a commercial operation”. Entry in the commercial register automatically makes you into a businessperson.

Exempted from this are persons conducting small trades with very simply structured and transparent business relationships. This may frequently be the case at the beginning of your self-employment. Persons conducting small trades can but do not have to register themselves in the commercial register.

If your company is registered in the commercial register, you must observe the following points:

  • The company’s name, legal structure (registered sole proprietorship, registered businessperson), principal place of business, court of register and commercial register number must be stated on all business letters.
  • You must keep your accounts according to the rules of the German Commercial Code (HGB).

One-man GmbH
The GmbH must be authenticated and entered in the commercial register by a notary public. As a rule the GmbH may only be founded by persons conducting a trade rather than by freelancers. There are however exceptions to this. Please contact your chamber of commerce for more information. These co-called one-man GmbHs combine the advantages of a sole proprietor with those of the GmbH.

  • As an employed manager you conduct the transactions in your company
  • The liability for the company’s debts vis-à-vis business partners is equivalent to the amount of the capital deposits (25,000 euros). You are, however, liable with your personal assets in the event of criminal infringements and infringements of the German Product Liability Law.
  • The GmbH is subject to the provisions of commercial law.
  • This does not apply to liability to banks. In such case you are also liable with your personal securities.

Unternehmergesellschaft (haftungsbeschränkt)
The UG (limited liability) is a suitable structure for people setting up small firms, and service providers in particular, who wish to limit their liability and whose company can survive with little equity.

  • The nominal capital amounts to at least one euro. The equity should always be oriented to the specific need.
  • The UG can be set up on the basis of a standard text which must be authenticated.
  • 25 percent of the profits must go into a statutory reserve until the minimum nominal capital of € 25,000 has been generated.
  • The authenticated standard text must exist for the company to be registered in the electronic trade register.
  • The liability rules of the GmbH Act apply.

You are setting up your company with partners

If so, you should first know the difference between:

  • non-incorporated firms and
  • incorporated firms

Non-incorporated firms
A typical feature of non-incorporated firms is that the partners bear liability for the debts of the firm with their personal assets. The partners do not need to provide minimum capital, and are not only owners, but also directors of their firm. Types of non-incorporated firm are:

  • Gesellschaft des bürgerlichen Rechts (GbR)
  • Kommanditgesellschaft (KG)
  • Offene Handelsgesellschaft (OHG)
  • Partnerschaftsgesellschaft (PartG)
  • GmbH & Co. KG.

Incorporated firms
Depending on the sector, the limitation on liability can be an important reason to structure your company as an incorporated firm. The partners or shareholders are liable for commercial activities – with exceptions – only to the amount they have invested. However, for larger projects, the obtaining of the necessary capital also plays a role. Partners or shareholders provide capital but are not necessarily actively involved in the running of the company. Types of incorporated firms are:

  • Gesellschaft mit beschränkter Haftung (GmbH)
  • GmbH variant: Unternehmergesellschaft (haftungsbeschränkt)
  • Aktiengesellschaft (AG).
  • private company limited by shares (Ltd.)

The decision in favour of a certain legal structure has financial, tax and legal consequences. You should therefore certainly involve your tax adviser and lawyer in the decision.

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