What is the legal form of a company?
Definition: The legal form defines the legal structural features of companies and determines their legal framework. The relationship between the partners is regulated by law through the company forms and security in legal transactions is ensured. Business partners can, for example, see to what extent the shareholders are liable for the company’s obligations from the company name.
The choice of legal form, which sets the legal framework for a company, results legal, financial, tax and personal consequences for the partner (s). Based on its structural characteristics, it determines how to operate in the market and how business can be carried out. A partnership or corporation can be considered as the legal form for founding a company.
To start a business you need the Decision for one of the legally provided legal forms. It must be determined before the start of business activity and communicated to the tax office and the competent chamber. The right legal form depends on the type of company, the number of planned employees and founders and the planned turnover. Once the decision for a legal form has been made, it will continue to exist with its advantages and disadvantages until the company is dissolved.
Which legal form do you choose for a business start-up? – and why? This is one of the most important questions to ask before opening a business. The legal form can be changed at any time after the start-up phase – according to business development.
The legal form decides on elementary things such as start-up capital, business assets and liability. If several people found the company together, the legal form also decides on management and decision-making issues as well as the form of cooperation.
As small entrepreneurs or SME founders, entrepreneurs often opt for the legal forms sole proprietorship or other partnerships (e.g. GbR) as well as the corporations UG, GmbH or the AG, which is particularly popular in Switzerland.
- See also the following explanatory video “How do you set up a company and which legal form should you choose?”
The legal form sole proprietorship
Anyone who does not set up one of the companies listed below from the outset will automatically work as a sole trader from the time the business is opened. The sole proprietorship can be a freelancer or small business owner, but also a full merchant with accounting obligations. He is the sole owner of his business, does not require any minimum or share capital and enjoys full freedom of choice. However, he is fully liable with his private assets.
- See also the following explanatory video “Corporate Legal Forms Part 1: The sole proprietorship simply explained”
The legal form GbR (society under civil law)
Anyone who wants to work with other founders or business partners can set up a GbR. Regardless of whether he is a full commercial merchant, freelancer or small business owner. No minimum capital is required for a GbR. However, it is advisable to regulate questions of partnership, liability and company assets by contract. After all, the partners are liable both with the company’s assets and with their private assets.
What is a general partnership?
An open trading company (OHG) can only be founded by full merchants, but not, for example, by small businesses. Similar to a GbR, they do not require a minimum capital. You are just as liable privately as with corporate assets. An essential difference to the GbR (civil law partnership) lies in the amount of liability that customers and business partners expect. Since an OHG is formed by fully qualified merchants, both business volumes and liability are rated higher. OHGs are considered to be more trustworthy.
Limited partnership: legal form for general partner and limited partners
In a limited partnership (KG), the general partner is the sole managing director. However, in order to generate further capital, the general partner brings partners, the so-called limited partners, on board. You are involved, but do not “lead”. You are liable with your contribution, but remain unmolested with your private assets. The general partner, on the other hand, is fully liable – with a contribution plus private assets.
The mixed legal form GmbH & Co. KG
In a GmbH & Co. KG, the personally liable general partner is not a natural person, but a legal one: the GmbH. The limited partners are partners and partners in the GmbH. You are liable like a GmbH partner, that is: only with the business assets.
The partnership company – PartnG for short
The legal form partnership company can be chosen for certain liberal professions. In it, the members work together as partners, but as entrepreneurs they remain independent. A company asset is formed with which the partners are liable.
- See also the following explanatory video “Corporate Legal Forms Part 2: The Partnership Simply Explained”
Establishing a GmbH: the advantages
The GmbH (limited liability company) is one of the most popular legal forms for setting up a business in Germany and Austria, while in Switzerland, with its special AG law, the stock corporation is preferred. For a GmbH in Germany, at least 25,000 euros of share capital must be invested by the shareholder (s) (in Austria: 35,000 euros). The share capital can be increased depending on the business development. It is the business capital with which the partners are exclusively liable (they are only liable with their personal assets in the event of incorrect or criminally relevant acts).
Why found a UG?
The UG (limited liability) simplifies business start-ups. It is also called “small GmbH” and is common in start-up companies. The abbreviation UG stands for entrepreneurial society. Similar provisions apply to liability as for the GmbH: the partners are generally only liable with the company’s assets. When founding the UG, each partner only has to make a deposit of one euro, but more is possible. The UG is obliged to make an annual reserve of at least 25% of its annual profit. If the resulting share capital reaches 25,000 euros, the legal form can be changed to GmbH or the UG can be retained. The disadvantage of a UG is the lower level of trust that customers and business partners could place in it – due to the potentially lower liability amount.
Why found an AG (stock corporation)?
Founders of an AG plan on a larger scale. You get additional equity in your company through shares that you sell to investors – be it on the stock exchange or not in public. In addition to private or institutional investors, share certificates can also be issued to employees as employee shares. However, the entrepreneur can also be the sole shareholder and hold the position of the board of directors himself. However, its management is monitored by a supervisory board. Start-ups in Germany and Austria rarely choose the legal form of an AG – especially since a supervisory board is required and a higher minimum capital contribution is required than with a GmbH. In Switzerland, on the other hand, the legal form AG is very widespread due to more liberal legislation.
eG – the registered cooperative
As members of an eG, the entrepreneurs run their business together in the form of a cooperative, with limited liability and bound by the statutes. You are only liable in the amount of the cooperative contributions. The minimum number of EG members in Germany is three.
- See also the following video “Cooperatives simply explained”
In addition to that