If you wish to form a company you should first choose the appropriate type of business organisation. The law differentiates between sole proprietorship, partnerships and joint-stock companies. In the case of a sole proprietorship or a partnership the sole trader or partners are usually required to have full liability by law. This is not so in the case of joint-stock companies. Here liability is limited to the size of the capital contribution. The question of which type of business organisation most suits your needs depends on your company goals and must be decided by each person individually.
As long as you run your young business on a scale whose annual turnover and business dealings do not require you to register it as a company, you are regarded as a small trader. As a small trader you do not have to prepare an annual balance sheet. You simply need to present a calculation of surplus revenue to the tax office. This list contains your income (net price) minus costs. Since you do not need to have an entry in the commercial register, the registration formalities are simple and come at a low cost (20 €). Responsible for this kind of registration is the local government authority in the district in which you run your business. You then appear on the market simply with your first and last name. Your letter head can also state the purpose of your business.
You can be registered by a notary in the commercial register at the magistrates’ court, if, for example, you would like to use a business name (as opposed to just the proprietor’s name) on your letter head. You are then a registered businessman/businesswoman. Only in this case are you allowed to use a business name. You are however required to do double-entry bookkeeping and to draw up a balance sheet.
Here are a few examples of company names for registrations as a businessman/businesswoman in the commercial register:
- Schulze, eingetragener Kaufmann/-frau (registered businessman/businesswoman)
- Frank Schulze e.K. (registered businessman/businesswoman)
- ABC Cloth Trade e.K. or e.Kfr. (registered businessman/businesswoman )
Any company letter must contain the following information: the business name, the complete address, the relevant registration court and the corresponding company registration number.
If you intend to enter the market on a much larger scale then you must get registered in the commercial registry. A larger scale can be defined as taking out loans, achieving higher levels of turnover (for example, more than approx. 175,000 euros per annum, or in the case of commercial agents annual income from commissions of more than approx. 76,000 euros) and cultivating business relationships with a wide range of suppliers and clients. However, the classification of the term ‘larger scale’ depends on the individual circumstances. So even with smaller turnovers one might be obligated to get registered in the commercial registry.
As a sole proprietor, you alone decide what is done. However, you also bear all the risk alone and are liable with all your personal assets.
If you do not have enough capital to get your business off the ground you can involve a partner. Insofar as a partner is not visible in any of the company’s external business dealings, you remain in a sole proprietorship (with a dormant partner) in the eyes of commercial law. This partner can share profit and loss with you, but otherwise does not get involved in the conduct of your business.
If you run your business with at least one partner, you form a company constituted under civil law (Gesellschaft bürgerlichen Rechts – GbR). On your business documents you must give your own first and last name and those of your partner. Terms like Winfried Schulze and Partner or Winfried Schulze & Co. are not allowed. If the partners in a company constituted under civil law register with the commercial register then the company turns into an unlimited partnership (OHG) or a limited partnership (KG).
The complete address, the competent registration court and the company registration number are also important. In the case of a limited partnership (GmbH & Co. KG) the names of the companies involved in the partnership must be provided.
In an unlimited partnership (Offene Handelsgesellschaft - OHG) there are usually a number of partners involved. These partners do not only provide capital but are liable with all their personal assets. For the capital contributions a fixed rate of interest is agreed on. Each partner receives a share of the remaining profits just as s/he is liable for any losses. The unlimited partnership must also be entered into the commercial register by a notary. On the business letters of an unlimited partnership the type of business must be shown. For example:
- Frank Schulze OHG or
- ABC Cloth Trading OHG or
- Retros OHG
The limited partnership (Kommanditgesellschaft – KG) is a special type of unlimited partnership. Here too, a number of providers of capital are members, but with different levels of risk. One group – the personally liable partners (also called unlimited partners – Komplementäre) – is fully liable in the same way as partners in an unlimited partnership (OHG). Another group – the limited partners (Kommanditisten) – is only liable to the extent of their capital contribution. The limited partners share the profit and loss of the partnership in proportion to their capital contributions and are excluded from the company´s management decisions. It is not obligatory to include the partner’s names in the company name, but if you like to do so at least the personally liable partners’ names have to be included. For example:
- Müller & Co. KG or
- Retros KG
- ABC Cloth Trading KG
You must provide the company name, the complete address, the competent registration court and the company registration number on your letter head.
The personally liable partner in a limited partnership (KG) can also be a company with limited liability (GmbH) – see below. In this case liability is restricted to the share capital of the limited company and the capital deposits of the limited partners. Possible company names are:
- Müller GmbH & Co. KG (limited partnership with limited liability) or
- ABC Cloth Trading GmbH & Co. KG (limited partnership with limited liability)
In addition to the usual information (the complete address, the relevant registration court and the company registration number) the name of the limited liability company must also be given on the letter head.
2. Joint-stock companies
For people starting their own business the company with limited liability (Gesellschaft mit beschränkter Haftung - GmbH) is particularly relevant. The difference to partnerships is that the members are personally liable only to the extent of their capital contribution. The limited company (GmbH) is liable to creditors with its company assets. The ordinary share capital must amount to at least 25,000 euros. When the company is formed at least 12,500 euros must be paid into the company account. Instead of cash tangible assets of equivalent value can be contributed. To make good for possible losses a duty to make additional payments can be agreed on. This is done in the memorandum and articles of association, which must be signed in the presence of a notary. The management of a limited liability company can be entrusted to a member or a managing director employed by the company.
Possible company names are:
- Müller GmbH
- Müller & Meyer GmbH (as long as they are both members of the company)
- Retros GmbH
- Müller Cloth Trading GmbH
3. Advice from the Chamber of Industry and Commerce
The types of business most often chosen by entrepreneurs are the sole proprietorship or the company with limited liability. In many cases people starting their own business opt for the limited liability company because they wish to restrict their liability. In doing so, they accept the high formation costs (400-700 euros), as well as the high accountancy costs of drawing up the annual balance sheet. At the same time it should not be forgotten that the usual forms of security still have to be provided against bank loans and that liability is limited to the capital contribution only in respect of liabilities to suppliers. In cases of product liability the personal risk of the managing director is often unlimited because s/he must prove that s/he fulfilled his/her duty of care sufficiently.
However, the limited liability company can have tax advantages:
In the case of high profits, the amount of trade tax to be paid can be reduced because the managing director can count his/her salary against profits. Alternatively, the managing director can make his/her salary subject to social insurance contributions. This means that the profits of the limited company must be high enough so that the amount of trade tax that is saved is higher than what is payable in social insurance contributions. It is best to talk about these matters in more detail with your tax adviser.
Whether you form a sole proprietorship or a limited liability company depends on your business goals. Inform yourself thoroughly about the advantages and disadvantages of both these types of business. The Chamber of Industry and Commerce is happy to advise you in these matters.
4. Entry into the Commercial register
As a self-employed business person you must register your trade/business with the relevant district council. If you are not a small trader, you are required to enter your company into the commercial register. The commercial register is kept at the competent registration court (magistrates’ court). The registration must be certified by a notary. The company name that you register may not be such as to be potentially misleading and must include the type of business (GmbH, OHG etc.)
The Chamber of Industry and Commerce will help you with these registration procedures. You are welcome to seek advice before you enter your company into the commercial register. You will be told what exactly you are allowed to write on your company sign, business documents etc. and what not. Since the regulations are very strict, you are protecting yourself from harm if you seek information at the appropriate time. This will not cost you more than a little time and effort.
As your company registration is published, the formation of your company becomes known to dubious operators of mailing lists. Often advertising material is sent to new businesses, which is made to look like a bill (for example, by including a bank transfer order). These letters are made to look as if they originated from an official institution like the tax office or the Chamber of Commerce and Industry. Please do not get tricked by this. Read such letters very carefully – including the small print!
If you realise that such a letter is simply an offer which you do not wish to accept, do not pay any money. Get in touch with the bank concerned and tell them about the dubious practices of their customer. The bank can then choose to freeze the account and to reimburse the sums of money paid into it.
For further information please contact us.