How to find the Right Legal Form for your Business in Germany
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If you want to start your own business in Germany, one of the first steps you need to take is to choose a legal form for your new company. The right legal form is an extremely important question for all company founders. This is because it determines the legal framework in which their company operates and has several legal, financial, structural, and personal consequences – for example, in terms of liability, share capital, and taxes.
There are many different legal forms for business structures in Germany, but they can all be roughly divided into 3 main types:
- Sole proprietorship (Einzelunternehmen)
- Partnerships (Personengesellschaften)
- Kapitalgesellschaften (Corporations)
Which legal form is best for you depends directly on the type of business you are starting (e.g. a freelancer (more on this later) will choose a different legal form than an entrepreneur with a large start-up loan).
Let’s take a closer look at the main business forms in Germany:
Sole proprietorship
Recommended and popular among freelancers are sole proprietorships, which are usually founded by one person and are liable for all debts of the business.
Partnerships
Partnerships consist of at least two „legal entities“ (either two individuals or companies/organizations). Usually, both partners are personally and unlimitedly liable for the debts of the business, except for the so-called limited partnership.
Types of partnerships:
- Partnership under civil law (GbR)
- Limited partnership (KG)
- General partnership (OHG)
- Limited liability company & Compagnie limited partnership (GmbH & Co. KG)
- Partnership company (PartG)
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Corporations
These legal forms can be formed by one to five people. Corporations require some start-up capital and also protect your assets from business debt. Corporations must be registered with the Chamber of Commerce and also pay higher business taxes.
Types of corporations:
- Limited liability company (LLC)
- Provisional limited liability company (UG or mini-GmbH)
- Non-profit limited liability company (gGmbH)
- Joint-stock company (AG)
Note that it is a legal requirement that the name of your company identifies the legal form (e.g. by adding GmbH, OHG, or AG) so that everyone automatically knows what form of a company it is.
Knowing if you are a Freiberufler or a Gewerbetreibender
This question comes up with the background of the tax status, so here you should be sure: Are you a freelancer (Freiberufler) or a trader (Gewerbetreibender) in Germany?
Especially later, when you register your business with the tax office, it is important to understand this distinction:
„Gewerbetreibende“ must obtain a trade license and pay the trade tax. They also have to register in the commercial register and follow other, further accounting rules. It is essential to do these things before registering your trade with the tax office.
Bureaucratically, on the other hand, life is much easier for „Freiberufler“, but not every Freiberufler is a Freiberufler! This title only applies to certain professions. Engineers, architects, doctors, and teachers, for example, can be Freiberufler. Ordinary jobs like food deliveryman or tour guide are not considered freelancers, but trades.
You should look up the distinction within the professions again for your industry!
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