So Many Forms so Little Time: Choosing the Company Form that is Right for You
by David Polacek
The first thing to think about before diving into the depths of German bureaucracy is the legal form of your venture. Thinking about a start-up already narrows down the alternatives, but let's take a look at what Germany has to offer to eager entrepreneurs like yourself. (Heads up: the following part will feature a number of those infamous 20-letter German words. So please, bear with me.) Aside from sole proprietorships (Einzelunternehmen) there are two categories of company forms in Germany: partnerships (Personengesellschaft) and corporations (Kapitalgesellschaft). Partnerships are fairly easy to set up, require no initial capital and the reporting requirements are a piece of cake (in comparison to other company forms...). In terms of taxation, partnerships are transparent, meaning that the partnership itself does not pay tax on its profit, only the partners do. You were waiting for the "but" and here it comes: Partnerships require most partners to take on unlimited liability, meaning that they will have reach deep into their pockets if the you-know-what hits the fan. Corporations, the second major company form, are entities on their own, thus preventing the aforementioned recourse to the shareholders' private capital by creditors (once registered in the German Trade Register (Handelsregister). Since nothing in life is free, this privilege needs to be payed for by either raising a certain amount of capital upfront (oftentimes around EUR 25,000) or by reserving 25% of all profits until this capital is raised. Germans love official seals so, naturally, the foundation of any corporation needs to be notarized, which is also a cost factor. Also, corporations have hefty reporting requirements. Taxes are levied on the level of the corporation as well as on the level of the shareholders upon dividend payouts. Thinking about a start-up (especially in the online space) narrows down your options quite a bit. The single most preferred company form among start-ups is the GmbH (Gesellschaft mit beschränkter Haftung), a medium-scale corporation with limited liability. If your savings are enough to get hammered at MELT! Festival but you fall short of meeting the minimum founding capital of a GmbH (EUR 25,000), you may want to consider incorporating an Unternehmergesellschaft (UG), also known as "Mini-" or "Ein-Euro-GmbH". The UG is the German response to foreign limiteds. Similar to say a UK-based limited, the German UG can be founded with less capital than the usual EUR 25,000 for a proper GmbH. If UG is the way to go, the ultimate objective should be to eventually raise the full EUR 25,000 so that the UG can be converted into a GmbH. Until then, the UG has to reserve 25% of its profits. Interested in learning more? More information on UGs can be found here. A general overview of company forms in Germany can be found here.
Frontline Experience: iversity GmbH
The iversity GmbH was incepted in 2008 as a sole proprietorship (Einzelunternehmen). The procedure was fairly straightforward: iversity's founder Jonas Liepmann paid a visit to his local administrative office for citizens (Bürgeramt), just to walk out ten minutes later with iversity officially founded. The subsequent growth of the iversity platform and a successful funding round with the BFB Frühphasenfonds Brandenburg and bmp media investors were the main drivers behind the change of the company form into a GmbH. In mid-2011, iversity was reorganized into a GmbH in order to benefit from a larger corporate scope as well as for the obvious advantages of limited liability. iversity was aided greatly by its investors in establishing the GmbH.