TYPES OF ENTERPRISES

Establishing a company is usually advisable. The following sections present the main types of German companies without giving a comprehensive statement of the law. All the companies listed must be entered in the Commercial Register (Handelsregister).

1) Joint stock corporation (Aktiengesellschaft = AG)

An AG is a joint stock corporation governed by a special and very strict law, the Joint Stock Corporation Act (Aktiengesetz). Only the shares of an AG may (but need not) be quoted on stock exchanges. The minimum share capital of an AG is € 50,000, which must be divided into shares with a minimum nominal value of € 1.00.

An AG must have a managing board (Vorstand), empowered to decide all matters relating to the operation of business and appointed by and answerable to the supervisory board (Aufsichtsrat). The shareholders of an AG exercise their power to control its policies at regularly scheduled general meetings (Hauptversammlung).

An AG must prepare an annual profit and loss statement , balance sheet and notes and submit them together with detailed information in an annual report to the Commercial Register. Large corporations must publish their annual accounts and reports.

The articles of organization of a proposed AG legally must contain a minimum of certain rules and must be composed and signed before a qualified notary public. The application to register the company must then be made jointly in the names of the supervisory and managing board members and the company's founding members. It has been permissible for one person to establish an AG since 1994.

2) Limited liability company

(Gesellschaft mit beschränkter Haftung = GmbH)

A GmbH is a limited liability company, and its formation is governed by a special law, the Limited Liability Company Act (GmbH-Gesetz).

A GmbH must be set up with a minimum capital of € 25,000 in cash or non-cash contributions or both. Each member must subscribe a minimum of € 100. The company may also be established by one person, who, as in the case of the AG, may be another company.

Shares in a GmbH are not embodied in certificates and cannot be quoted on stock exchanges but may nevertheless be transferred by way of properly notarized documents.

A GmbH is required to file its annual report with the local Commercial Register. The report must include a profit and loss statement, a balance sheet, and other information depending on the size of the company. Large companies must publish their annual accounts and reports.

A GmbH must appoint one or more managing directors (Geschäftsführer), who may also be shareholders of the company. The managing directors are the only persons entitled to represent the company. They are responsible for the conduct of the company's ongoing business.

Shareholders' decisions can only be reached at a meeting of the shareholders (Gesellschafterversammlung). Through the adoption of resolutions, instructions of any kind may be issued to the managing directors, but without restricting their power to represent the company externally. The meeting of the members thus has a stronger status in comparison with the general meeting of an AG. The articles of organization may provide that a GmbH have a supervisory board.

The company's articles of organization must be signed by the shareholders and be recorded by a qualified notary public. The shareholders may be represented by other persons. The articles must contain some obligatory rules. In contrast to the AG, however, which is subject to the strict and often formalistic Joint Stock Corporation Act, the GmbH offers much greater maneuvering room for the arrangement of company relationships. It thus exhibits substantially more flexibility and is therefore the most common type of company in Germany.

A GmbH must be entered in the Commercial Register, at which point its full legal existence begins. Liability for prior activities is borne initially by the shareholders and acting managing directors.

3) General partnership (Offene Handelsgesellschaft = OHG)

An OHG is a general partnership, the liability of whose partners is unlimited, in contrast to the AG and the GmbH, and whose formation is governed by a special section of the German Commercial Code (Handelsgesetzbuch). Every partner in the company is legally obliged to participate actively in operating the business unless the partnership agreement (Gesellschaftsvertrag) specifically assigns this task to one or several partners.

In that case, each partner to whom the task of operating the business is assigned may act individually on the firm's behalf insofar as the transaction involved is not unusual. Alternatively, the partnership agreement may provide for joint action by all partners of the OHG. The Commercial Code provides that decisions should be made unanimously for internal matters, but partnership agreements usually allow for decisions by a majority of votes. The OHG must be entered in the Commercial Register. The application must be made jointly.

The OHG is an association that can sue or be sued in a court of law. Not least because of the unlimited liability involved, the OHG is only suitable for enterprises oriented to natural persons. Great liberty may be taken, however, in formulating the partnership agreement.

4) Limited partnership (Kommanditgesellschaft = KG)

A KG is a limited partnership, and its formation is also governed by a special section of the Commercial Code. It is basically a partnership in legal respects but also provides for a limitation of liability by having two types of partners.

1. The general partner (Komplementär), whose liability is unlimited and extends to their personal assets.

2. The limited partner (Kommanditist), whose liability is limited to their nominal holdings in the firm.

There is no limit to the number of partners of either type that a KG may have. The sole right and obligation to manage the firm rests with the general partners. The limited partners are explicitly excluded from operating the business but may object to actions taken by general partners that go beyond the firm's purpose and normal business activities. Further rights may be granted to the limited partners in the partnership agreement.

The official published notice of registration only includes the number of the limited partners and not the nominal value of their respective shares.

4.1) Limited partnership with a limited liability company as general partner (GmbH & Co. KG)

A GmbH & Co. KG combines a limited liability company with a limited partnership by making the former the sole general partner of the latter. In legal respects, it thus remains a partnership. In respect to liability, however, the limited partners are, as in the case of all KGs, only liable to the extent of their registered holdings, while the general partner, as a GmbH, is responsible for business debts only to the extent of its assets, thus not committing its shareholders beyond their capital contributions. In this way, none of the participating persons is liable without limit. The tax privileges allowed to this type of company have become less significant.

5) Branch operations (Zweigniederlassungen)

German law permits branch operations to be established by foreign enterprises. In contrast to a subsidiary, a branch is not a separate legal entity distinct from the parent enterprise. The branch has no rights or obligations in itself but rather derives them from the parent.

It is necessary to register a branch in the Commercial Register if it is sufficiently self-sustaining and capable of operating independently of the head office. Applications to register a branch must contain the enterprise's name, place of registration, purpose, and details of its legal and financial structure and must be recorded by a qualified notary public.

Registration is basically not required for a smaller branch that cannot be regarded as self-sustaining and independent (e.g. a liaison office). The startup of such a business operation, however, must be reported to the local Office of Business and Standards.

It is usually required that a branch of a foreign enterprise maintain complete accounting records and supporting documentation in Germany. It is possible that non-resident limited enterprises will not be recognized in Germany. In order to register a branch in Germany, it is necessary to produce evidence that the head office actually exists in its home country, i.e. the enterprise must be conducting business operations and have premises and employees there; commercial registration alone is not sufficient. Mere "mail-box firms" are not recognized by the German courts and tax authorities. Persons acting on behalf of such a firm are treated as personally liable.

It is advisable to form a German subsidiary if business activity exceeds a certain scale.

	TYPES OF ENTERPRISES Establishing a company is usually advisable. The following sections present the main types of German companies without giving a comprehensive statement of the law. All the companies listed must be entered in the Commercial Register (Handelsregister). 1) Joint stock corporation (Aktiengesellschaft = AG) An AG is a joint stock corporation governed by a special and very strict law, the Joint Stock Corporation Act (Aktiengesetz). Only the shares of an AG may (but need not) be quoted on stock exchanges. The minimum share capital of an AG is € 50,000, which must be divided into shares with a minimum nominal value of € 1.00. An AG must have a managing board (Vorstand), empowered to decide all matters relating to the operation of business and appointed by and answerable to the supervisory board (Aufsichtsrat). The shareholders of an AG exercise their power to control its policies at regularly scheduled general meetings (Hauptversammlung). An AG must prepare an annual profit and loss statement , balance sheet and notes and submit them together with detailed information in an annual report to the Commercial Register. Large corporations must publish their annual accounts and reports. The articles of organization of a proposed AG legally must contain a minimum of certain rules and must be composed and signed before a qualified notary public. The application to register the company must then be made jointly in the names of the supervisory and managing board members and the company's founding members. It has been permissible for one person to establish an AG since 1994. 2) Limited liability company (Gesellschaft mit beschränkter Haftung = GmbH) A GmbH is a limited liability company, and its formation is governed by a special law, the Limited Liability Company Act (GmbH-Gesetz). A GmbH must be set up with a minimum capital of € 25,000 in cash or non-cash contributions or both. Each member must subscribe a minimum of € 100. The company may also be established by one person, who, as in the case of the AG, may be another company. Shares in a GmbH are not embodied in certificates and cannot be quoted on stock exchanges but may nevertheless be transferred by way of properly notarized documents. A GmbH is required to file its annual report with the local Commercial Register. The report must include a profit and loss statement, a balance sheet, and other information depending on the size of the company. Large companies must publish their annual accounts and reports. A GmbH must appoint one or more managing directors (Geschäftsführer), who may also be shareholders of the company. The managing directors are the only persons entitled to represent the company. They are responsible for the conduct of the company's ongoing business. Shareholders' decisions can only be reached at a meeting of the shareholders (Gesellschafterversammlung). Through the adoption of resolutions, instructions of any kind may be issued to the managing directors, but without restricting their power to represent the company externally. The meeting of the members thus has a stronger status in comparison with the general meeting of an AG. The articles of organization may provide that a GmbH have a supervisory board. The company's articles of organization must be signed by the shareholders and be recorded by a qualified notary public. The shareholders may be represented by other persons. The articles must contain some obligatory rules. In contrast to the AG, however, which is subject to the strict and often formalistic Joint Stock Corporation Act, the GmbH offers much greater maneuvering room for the arrangement of company relationships. It thus exhibits substantially more flexibility and is therefore the most common type of company in Germany. A GmbH must be entered in the Commercial Register, at which point its full legal existence begins. Liability for prior activities is borne initially by the shareholders and acting managing directors. 3) General partnership (Offene Handelsgesellschaft = OHG) An OHG is a general partnership, the liability of whose partners is unlimited, in contrast to the AG and the GmbH, and whose formation is governed by a special section of the German Commercial Code (Handelsgesetzbuch). Every partner in the company is legally obliged to participate actively in operating the business unless the partnership agreement (Gesellschaftsvertrag) specifically assigns this task to one or several partners. In that case, each partner to whom the task of operating the business is assigned may act individually on the firm's behalf insofar as the transaction involved is not unusual. Alternatively, the partnership agreement may provide for joint action by all partners of the OHG. The Commercial Code provides that decisions should be made unanimously for internal matters, but partnership agreements usually allow for decisions by a majority of votes. The OHG must be entered in the Commercial Register. The application must be made jointly. The OHG is an association that can sue or be sued in a court of law. Not least because of the unlimited liability involved, the OHG is only suitable for enterprises oriented to natural persons. Great liberty may be taken, however, in formulating the partnership agreement. 4) Limited partnership (Kommanditgesellschaft = KG) A KG is a limited partnership, and its formation is also governed by a special section of the Commercial Code. It is basically a partnership in legal respects but also provides for a limitation of liability by having two types of partners. 1. The general partner (Komplementär), whose liability is unlimited and extends to their personal assets. 2. The limited partner (Kommanditist), whose liability is limited to their nominal holdings in the firm. There is no limit to the number of partners of either type that a KG may have. The sole right and obligation to manage the firm rests with the general partners. The limited partners are explicitly excluded from operating the business but may object to actions taken by general partners that go beyond the firm's purpose and normal business activities. Further rights may be granted to the limited partners in the partnership agreement. The official published notice of registration only includes the number of the limited partners and not the nominal value of their respective shares. 4.1) Limited partnership with a limited liability company as general partner (GmbH & Co. KG) A GmbH & Co. KG combines a limited liability company with a limited partnership by making the former the sole general partner of the latter. In legal respects, it thus remains a partnership. In respect to liability, however, the limited partners are, as in the case of all KGs, only liable to the extent of their registered holdings, while the general partner, as a GmbH, is responsible for business debts only to the extent of its assets, thus not committing its shareholders beyond their capital contributions. In this way, none of the participating persons is liable without limit. The tax privileges allowed to this type of company have become less significant. 5) Branch operations (Zweigniederlassungen) German law permits branch operations to be established by foreign enterprises. In contrast to a subsidiary, a branch is not a separate legal entity distinct from the parent enterprise. The branch has no rights or obligations in itself but rather derives them from the parent. It is necessary to register a branch in the Commercial Register if it is sufficiently self-sustaining and capable of operating independently of the head office. Applications to register a branch must contain the enterprise's name, place of registration, purpose, and details of its legal and financial structure and must be recorded by a qualified notary public. Registration is basically not required for a smaller branch that cannot be regarded as self-sustaining and independent (e.g. a liaison office). The startup of such a business operation, however, must be reported to the local Office of Business and Standards. It is usually required that a branch of a foreign enterprise maintain complete accounting records and supporting documentation in Germany. It is possible that non-resident limited enterprises will not be recognized in Germany. In order to register a branch in Germany, it is necessary to produce evidence that the head office actually exists in its home country, i.e. the enterprise must be conducting business operations and have premises and employees there; commercial registration alone is not sufficient. Mere "mail-box firms" are not recognized by the German courts and tax authorities. Persons acting on behalf of such a firm are treated as personally liable. It is advisable to form a German subsidiary if business activity exceeds a certain scale.
[ HOME ] [ ABOUT ] [ ADVANTAGES ] [ SERVICES ] [ GERMANY ] [ CONTACT ]
[ © by Bauer&Merkel ]