The choice of legal structure (Rechtsform) when starting a business determines how a founder is liable, what start-up capital is required and which formalities must be completed before commencing operations. Those starting alone and without capital requirements can usually manage with a sole trader structure (Einzelunternehmen), whereas founding teams choose between a civil law partnership (GbR) under §§ 705 et seq. of the German Civil Code (BGB) and capital companies (Kapitalgesellschaften) such as the limited liability company (GmbH) or entrepreneurial company (UG (haftungsbeschränkt)) under the German Limited Liability Companies Act (GmbHG), depending on their desired level of liability.
The central legal foundations are the German Civil Code (Bürgerliches Gesetzbuch) for partnerships (Personengesellschaften), the German Commercial Code (Handelsgesetzbuch, HGB) for merchants and commercial partnerships, and the GmbH Act (GmbHG) for capital companies. Since the reform of partnership law (Gesetz zur Modernisierung des Personengesellschaftsrechts, MoPeG) on 1 January 2024, new provisions in §§ 705 to 740c BGB apply to the civil law partnership (GbR), which have, among other things, introduced a voluntary partnership register (Gesellschaftsregister). Anyone choosing a legal structure should therefore not only consider formation costs, but above all liability, accounting obligations and the future scalability of the business.
Sole Trader (Einzelunternehmen): The Classic Starting Point
Anyone who starts a business alone automatically becomes a sole trader (Einzelunternehmer) as soon as a self-employed, permanent activity with the intention of making a profit is commenced. No special formation procedure is required; what matters is the actual commencement of the activity. Persons carrying on a trade must register their business (Gewerbe) with the competent local authority (Gemeinde) pursuant to § 14 of the German Trade Regulation Act (GewO), and must do so without delay before commencing the activity.
Freelancers (Freiberufler) within the meaning of § 18 of the German Income Tax Act (Einkommensteuergesetz), such as doctors, architects or many consultants, do not require a trade registration but register directly with the tax office (Finanzamt). The advantage of the sole trader structure (Einzelunternehmen) lies in its straightforward, low-cost formation without any minimum capital requirement. The disadvantage is that the entrepreneur is personally liable with their entire private assets for business debts; no limitation of liability is provided for under this legal structure.
Civil Law Partnership (GbR) and Partnerships for Founding Teams
Where several persons join together without forming a capital company, a civil law partnership (Gesellschaft bürgerlichen Rechts, GbR) under § 705 BGB is typically created. Since the MoPeG reform, the GbR is expressly recognised as having legal capacity if it participates in legal transactions, and may voluntarily register as a registered civil law partnership (eingetragene GbR, eGbR) in the new partnership register (Gesellschaftsregister). If the partnership carries on a commercial business (Handelsgewerbe) within the meaning of § 1 HGB, it automatically becomes a general commercial partnership (Offene Handelsgesellschaft, OHG) under § 105 HGB.
Personal liability is the key distinction between the GbR and OHG on the one hand and capital companies on the other. Under § 721 BGB, the partners (Gesellschafter) of a GbR are jointly and severally liable (gesamtschuldnerisch) and without limitation for the partnership's obligations with their private assets; in the case of the OHG, comparable liability arises from § 128 HGB. For teams of freelancers who wish to achieve a degree of limitation of liability, the limited liability partnership (Partnerschaftsgesellschaft mit beschränkter Berufshaftung, PartGmbB) under § 8 para. 4 of the German Partnership Act (PartGG) offers an alternative, whereby liability for professional errors can be limited to the partnership's assets and professional indemnity insurance.
GmbH and UG (haftungsbeschränkt): Limiting Liability Through Capital
The limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) is the classic capital company for founders who wish to separate their private and business assets. Pursuant to § 5 para. 1 GmbHG, the minimum share capital (Mindeststammkapital) is 25,000 euros. Prior to registration in the commercial register (Handelsregister), at least half of this amount, i.e. 12,500 euros, must actually have been paid in when the company is formed by cash contribution.
For founders with limited capital, § 5a GmbHG provides for the entrepreneurial company (Unternehmergesellschaft (haftungsbeschränkt), UG), colloquially referred to as the UG, with a minimum share capital of one euro. In return, § 5a para. 3 GmbHG requires that at least 25 per cent of the annual surplus be allocated to a statutory reserve (gesetzliche Rücklage) each year until the standard GmbH minimum share capital of 25,000 euros is reached. Only then may the UG convert into a regular GmbH by way of a change of legal form.
Comparing Liability: What Really Matters
For most founders, the question of liability is the decisive criterion when choosing a legal structure. An overview of the most important scenarios clearly illustrates the differences:
- Sole trader (Einzelunternehmen): unlimited personal liability with all private assets
- Civil law partnership/general commercial partnership (GbR/OHG): unlimited, joint and several liability of all partners under § 721 BGB and § 128 HGB respectively
- Limited partnership (KG): personal liability of the general partner (Komplementär), limited liability of the limited partners (Kommanditisten) up to the amount of their contribution pursuant to § 171 HGB
- GmbH/UG: in principle, liability limited to the company's assets pursuant to § 13 para. 2 GmbHG
Tax and Organisational Differences
In addition to liability, the choice of legal structure affects the tax burden and accounting obligations. Sole traders and partnerships have their profits taxed through the income tax (Einkommensteuer) of the individual partners, whereas capital companies are subject to corporation tax (Körperschaftsteuer) at 15 per cent plus the solidarity surcharge (Solidaritätszuschlag) and trade tax (Gewerbesteuer). Profit distributions (Gewinnausschüttungen) to shareholders of a GmbH are additionally subject to withholding tax (Abgeltungsteuer) or the partial income method (Teileinkünfteverfahren), which can in practice result in a double tax burden.
Merchants (Kaufleute) within the meaning of § 1 HGB, as well as the GmbH and UG, are required to maintain double-entry bookkeeping (doppelte Buchführung) and prepare accounts (Bilanzierung) pursuant to §§ 238 et seq. HGB. Small traders (Kleingewerbetreibende) and freelancers, by contrast, can often use the simpler cash-basis accounting method (Einnahmen-Überschuss-Rechnung) under § 4 para. 3 of the German Income Tax Act (EStG), provided that certain turnover and profit thresholds under § 141 of the German Fiscal Code (Abgabenordnung, AO) are not exceeded.
Typical Mistakes When Choosing a Legal Structure
In practice, many founders opt hastily for a civil law partnership (GbR) or sole trader structure (Einzelunternehmen) on grounds of cost, without realistically assessing the extent of their personal liability. Particularly in the case of substantial investments, borrowing or contracts with suppliers, unlimited liability exposure can pose an existential threat.
Another common mistake is underestimating the formalities involved in forming a GmbH: if the notarial authentication of the articles of association (Gesellschaftsvertrag) required under § 2 GmbHG is missing, or if the minimum capital is not fully paid in, registration will be delayed and the founders will in the meantime remain personally liable through the pre-incorporation company (Vor-GmbH) liability.
How Kanzlei Ertogan Can Help
The right legal structure is not merely a formality, it is the legal foundation upon which the entire business will subsequently rest.
Kanzlei Ertogan in Köln advises founders on selecting the appropriate legal structure, reviews articles of association (Gesellschaftsverträge) and assists with registration at the commercial register (Handelsregister), trade office (Gewerbeamt) and tax office (Finanzamt). For existing companies, the firm also provides advice on questions relating to changes of legal form (Formwechsel), shareholder liability (Gesellschafterhaftung) and disputes between founding partners.