Choice of Legal Form for a German Business

What determines the choice of legal form

The choice of legal form depends on several factors that are rarely assessed in isolation.

Liability: Those wishing to limit personal liability exposure will typically need to consider a limited-liability company or a liability-limiting structure. Capital requirements: The GmbH requires €25,000 share capital (§ 5 GmbHG), the UG allows a start from €1, while the GbR, OHG and KG themselves have no statutory minimum capital. A GmbH & Co. KG nevertheless requires a separate general-partner GmbH, which is subject to the GmbH minimum share-capital rules. External profile: Not every legal form sends the same signal to clients, banks and potential partners. Tax treatment: Corporations such as the GmbH and AG are separate taxpayers for corporate income-tax purposes and are generally also subject to trade tax. Partnerships are usually treated transparently for income- or corporate-tax purposes, with profits attributed to the partners according to their legal and tax status. Where the partnership carries on a trade, the partnership itself is generally liable for trade tax. The tax consequences should be assessed separately with a tax adviser. Governance: Those working with partners or investors need clear rules on voting rights, profit distribution and exit.

In practice, the choice of legal form is often driven by tax considerations — with the result that corporate-law complications only become apparent later. Choosing the GmbH without putting governance, exit mechanisms or succession provisions in place leaves founders without a solid basis at the first dispute. Choosing the GbR because it is quick and inexpensive underestimates the unlimited personal liability of all partners. The choice of legal form is a strategic decision — not a matter of filling in a form.

Legal forms at a glance

The table below shows the principal business forms by liability and statutory minimum capital. The tax treatment and suitability for specific projects must be assessed individually.

Companies with limited liability — GmbH, UG and AG

The GmbH is one of the most widely used corporate forms for business activity in Germany. It generally limits shareholder liability for company obligations to the company’s assets and offers a flexible shareholder structure. It is suited to a broad range of projects — from a sole formation to a Mittelstand company with several shareholders. Further detail is available on the GmbH formation page.

The UG (haftungsbeschränkt) under § 5a GmbHG offers liability limitation with low initial capital. It must allocate one quarter of its adjusted annual surplus to a statutory reserve. At formation, contributions in kind are excluded; the share capital must be paid in full in cash. The change to the GmbH designation is possible once the share capital has been formally increased to at least €25,000. Further detail is available on the UG formation page.

The AG (Aktiengesellschaft) requires minimum share capital of €50,000 (§ 7 AktG), a management board, a supervisory board and a considerably more elaborate organisational structure. For start-ups and typical Mittelstand companies it is rarely the first step — but for companies planning a stock-exchange listing or seeking large investor circles it may become relevant.

Partnerships and sole traders

The sole proprietorship (Einzelunternehmen) is the simplest form: no articles of association, no notarial execution, full personal liability. For freelancers and sole founders with limited risk exposure it is a common choice.

A GbR (Gesellschaft bürgerlichen Rechts) is created where two or more persons agree to promote a common purpose in the manner defined by their agreement. The partnership agreement need not always be written and may arise through the parties’ conduct, but the mere existence of a shared interest does not automatically create a GbR. Since the MoPeG, the BGB expressly distinguishes between a legally capable GbR that participates in legal transactions in its own name and a non-legally capable internal partnership. The legally capable GbR can be registered as an eGbR in the partnership register. For obligations of a legally capable GbR, the partners are generally personally and jointly and severally liable under § 721 BGB.

The OHG (Offene Handelsgesellschaft) is the commercial partnership for partners with unlimited liability (§§ 105 et seq. HGB) — all partners are personally and unlimitedly liable. The KG (Kommanditgesellschaft) separates general partners (Komplementär, unlimited personal liability) from limited partners (Kommanditist, whose direct liability to creditors is in principle limited to the registered Haftsumme and who bears no further external personal liability to the extent the agreed contribution has been made, though liability may revive under §§ 171 and 172 HGB if the contribution is repaid) — a flexible form for family-owned and Mittelstand structures.

The GmbH & Co. KG combines both: the GmbH acts as the personally liable general partner, but its liability is confined to its own corporate assets. Natural persons participating as limited partners remain subject to the statutory Haftsumme rules, including the risks arising from unpaid or repaid contributions. Additional personal liability risks — for example arising from management activities, guarantees or breach of duty — remain to be assessed separately. This structure is widespread in the German Mittelstand and in family-owned companies; it is legally complex and requires careful tax structuring.

The PartG (Partnerschaftsgesellschaft) is available to members of the liberal professions within the meaning of the applicable professional and partnership law — such as doctors, lawyers, tax advisers and architects. The partnership and, in principle, the partners are liable; for professional errors, only the partners involved in handling the relevant engagement are generally personally liable alongside the partnership. The PartGmbB (Partnerschaftsgesellschaft mit beschränkter Berufshaftung) enables a limitation of liability for damages arising from professional errors, provided the legally prescribed professional indemnity insurance is maintained. The limitation does not generally extend to other obligations such as rent, employment liabilities, taxes or ordinary contractual debts. The PartGmbB is available only where the applicable professional law permits this structure and prescribes the required professional indemnity insurance. Both forms are not available to commercial founders.

MoPeG 2024 and the GbR register

The Partnership Law Modernisation Act (MoPeG) has been in force since 1 January 2024. Since that date, the BGB expressly distinguishes between a legally capable GbR that participates in legal transactions in its own name and a non-legally capable internal partnership (§§ 705 et seq. BGB, new version). The legally capable GbR can be registered as an eingetragene Gesellschaft bürgerlichen Rechts (eGbR) in the partnership register. Registration is generally voluntary. It is, however, a legal precondition for certain register-dependent transactions: a right may be entered for a GbR in the land register only if the GbR is registered in the Gesellschaftsregister, and a GbR can also be entered or changed in a GmbH shareholder list only if it is registered.

An existing GbR does not have to register merely because the MoPeG entered into force. Registration should, however, be reviewed before a real-estate transaction, the acquisition or transfer of GmbH shares or another transaction requiring an entry or amendment in a public register.

Advice rather than a template

Standard forms are available online for almost every legal form. What they do not provide: an assessment of which form suits the specific project, shareholder structure, liability profile and tax position. And above all: the provisions for disputes, succession and exit that are typically absent precisely when they are needed.

We advise on the choice of legal form — as a preliminary step before formation, but also for existing companies reviewing their structure. In German and English.

Advice is provided by Alexander Kagan, admitted as a German Rechtsanwalt and a member of the Hanseatic Bar Association Hamburg (Hanseatische Rechtsanwaltskammer Hamburg).

The content of this page is general information only and does not constitute legal advice. The choice of legal form depends on the circumstances of the individual case.