The choice of legal form (Rechtsform) when starting a business determines how a founder is liable, how much start-up capital is required and which formalities must be completed before commencing activity. Anyone starting alone and without capital requirements will usually manage with a sole proprietorship (Einzelunternehmen), while founding teams, depending on the liability they want, choose between a GbR under §§ 705 ff. BGB and corporations such as a GmbH or UG (haftungsbeschränkt) under the GmbHG.
The central legal bases are the German Civil Code (Bürgerliches Gesetzbuch) for partnerships, the German Commercial Code (Handelsgesetzbuch, HGB) for merchants and commercial partnerships, and the Limited Liability Companies Act (GmbH-Gesetz, GmbHG) for corporations. Since the reform of partnership law (MoPeG) on 1 January 2024, new rules in §§ 705 to 740c BGB apply to the GbR, which, among other things, introduced a voluntary partnership register (Gesellschaftsregister). Anyone choosing a legal form should therefore not only think about formation costs, but above all about liability, bookkeeping obligations and the company's future capacity for development.
Sole proprietorship: the classic entry point
Anyone who starts a business alone automatically becomes a sole proprietor (Einzelunternehmer) as soon as an independent, permanent activity with the intention of making a profit is taken up. No special form of incorporation is required for this; what matters is the actual commencement of the activity. Under § 14 Abs. 1 GewO, persons carrying on a trade must notify the competent authority of the commencement of their trade at the same time as taking up the activity, usually the municipal trade office (Gewerbeamt).
Members of the liberal professions (Freiberufler) within the meaning of § 18 of the Income Tax Act (Einkommensteuergesetz), such as doctors, architects, lawyers or tax advisers, do not need a trade registration (Gewerbeanmeldung) but register directly with the tax office (Finanzamt). The advantage of the sole proprietorship lies in its simple, inexpensive formation without minimum capital. The disadvantage: the proprietor is liable with their entire private assets for business liabilities; a limitation of liability is not provided for in this legal form.
GbR and partnerships for founding teams
If several persons join together without forming a corporation, a civil-law partnership (Gesellschaft bürgerlichen Rechts) under § 705 BGB regularly arises. Since the MoPeG reform, the GbR has expressly had legal capacity when it participates in legal transactions and can voluntarily register as a registered GbR (eGbR) in the new partnership register. If the partnership carries on a commercial business within the meaning of § 1 HGB, it automatically becomes a general partnership (Offene Handelsgesellschaft, OHG) under § 105 HGB.
Personal liability is the central difference between the GbR and OHG on the one hand and the corporation on the other. Under § 721 BGB, the partners of a GbR are jointly and severally and unlimitedly liable with their private assets for the partnership's liabilities; for the OHG, comparable liability arises from § 126 HGB. For teams of liberal professionals who want a certain limitation of liability, the partnership company with limited professional liability (PartGmbB) under § 8 Abs. 4 PartGG offers an alternative, in which liability for professional errors can be limited to the partnership's assets and professional liability insurance.
GmbH and UG (haftungsbeschränkt): limitation of liability through capital
The limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) is the classic corporation for founders who want to separate private and business assets. Under § 5 Abs. 1 GmbHG, the minimum share capital (Stammkapital) is 25,000 euros. In the case of a cash formation, at least half, i.e. 12,500 euros, must actually have been paid in before the application for registration in the commercial register (Handelsregister).
For founders with little capital, § 5a GmbHG offers the entrepreneurial company (Unternehmergesellschaft (haftungsbeschränkt)), colloquially UG, with share capital from one euro. In return, § 5a Abs. 3 GmbHG stipulates that each year one quarter of the annual net profit, reduced by any loss carried forward from the previous year, must be allocated to a statutory reserve. This obligation only ends when the company increases its share capital to at least 25,000 euros. This can be done from the reserve or at any time through new contributions; a change of legal form is not required for this (§ 5a Abs. 5 GmbHG).
Liability compared: what really matters
For most founders, the question of liability is the decisive criterion when choosing a legal form. An overview of the most important constellations clearly shows the differences:
- Sole proprietorship: unlimited personal liability with all private assets
- GbR/OHG: unlimited, joint and several liability of all partners under § 721 BGB or § 126 HGB respectively
- KG: personal liability of the general partner (Komplementär), limited liability of the limited partners (Kommanditisten) up to the amount of their contribution under § 171 HGB
- GmbH/UG: in principle, liability limited to the company's assets under § 13 Abs. 2 GmbHG
Tax and organisational differences
In addition to liability, the legal form affects the tax burden and bookkeeping obligations. Sole proprietors and partnerships are taxed on profits through the income tax of the owners; in the case of commercial activity, trade tax (Gewerbesteuer) is also payable, which is partly credited against income tax. Corporations pay corporation tax (Körperschaftsteuer), currently 15 percent plus solidarity surcharge, as well as trade tax. Under current law, the corporation tax rate will fall gradually from 2028 to 10 percent in 2032. Profit distributions to shareholders of a GmbH are additionally taxed with the flat-rate withholding tax (Abgeltungsteuer) or under the partial income method (Teileinkünfteverfahren), which can in effect lead to double taxation.
GmbH, UG and commercial partnerships are always obliged to keep double-entry books and prepare balance sheets under §§ 238 ff. HGB. Sole traders (Einzelkaufleute) are exempt from this as long as they do not exceed 800,000 euros in sales revenue and 80,000 euros in annual net profit on two consecutive balance sheet dates (§ 241a HGB). Traders without merchant status may use the cash-basis income statement (Einnahmen-Überschuss-Rechnung) under § 4 Abs. 3 EStG until they exceed these thresholds and the tax office requires them to keep books under § 141 AO. Members of the liberal professions can use the cash-basis income statement regardless of turnover and profit.
Typical mistakes when choosing a legal form
In practice, many founders opt hastily for a GbR or a sole proprietorship for cost reasons, without realistically assessing personal liability. Particularly in the case of larger investments, borrowing or contracts with suppliers, the unlimited liability risk can threaten one's very existence.
Another common mistake is underestimating the formalities involved in forming a GmbH: without notarial recording of the articles of association under § 2 GmbHG, the agreement is invalid, and if the minimum payment required by law under § 7 Abs. 2 GmbHG has not been made, the company will not be registered. In the meantime, the founders remain personally responsible through the liability of the pre-formation company (Vor-GmbH).
How Kanzlei Ertogan provides support
The right legal form is not a mere formality, but the legal foundation on which the entire company will later stand.
Kanzlei Ertogan in Köln advises business founders on the choice of a suitable legal form, reviews articles of association and partnership agreements and assists with registration with the commercial register, the trade office or the tax office. For existing companies, the firm also provides support on questions of change of legal form, shareholder liability and disputes between founding partners.