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Legal forms of companies: overview and criteria
1. What are the legal forms?
A legal form creates the legal framework for entrepreneurial activity. The choice of legal form influences, for example, tax and bookkeeping obligations, liability or the external appearance with a company name. The type of legal form determines the formalities involved in setting up the company as well as the way in which investors and banks assess the company. The regulations for the individual legal forms of companies result from the BGB, the HGB or the GmbHG.
The term corporate form is synonymous with the term legal form. Legal forms for founding in a team are also called corporate forms, because the team founders join together as shareholders.
Important legal forms of companies
The following table gives an overview of the individual legal forms. We have highlighted those that are particularly popular with founders. With the division into legal forms for commercial companies and freelancers, we already make an important distinction.
Legal form test
With our interactive legal form test, founders, entrepreneurs and freelancers will find the best legal form for their company.
To the legal form test
2. Frequently asked questions about the legal forms of companies
A basic distinction is made between legal forms for sole proprietorships and partnerships and corporations. Sole proprietorships can be:
- Small business owners
- Kaufmann e.k. as a full businessman under commercial law.
In the case of partnerships, there are:
- Civil Law Society (GbR)
- Open trading company (OHG)
- Limited partnership (KG)
The corporations include:
- the UG (limited liability) as a mini GmbH
A new legal form for corporations is the Societas Europea (SE), a stock corporation under European law.
By far the most common legal form is the sole proprietorship. The bigger a company gets, the more often corporations can be found. With a company size of 10 employees or more, corporations dominate. This has to do with the advantage of limited liability and easier access to investor capital and the ability to set up the management in a professional manner. Here are the figures from the current publication of the Federal Statistical Office.
Total number of companies:
- Sole proprietorship: 62%
- Partnerships: 11%
- Corporations: 21%
- other: 10%
Companies with 10 or more employees:
- Sole proprietorship: 18%
- Partnerships: 18%
- Corporations: 54%
- other: 10%
The legal form creates the legal framework for the actions of a company. The legal form defines management authority, liability of the company, accounting obligations, the type of annual financial statements and tax obligations. The legal form as a company form also serves to define the rights and obligations as well as liability risks of the shareholders. Even with regulations on shareholders' meetings, a legal form intervenes deeply in the structure of a company.
That also depends on the individual case. There are a total of 9 essential criteria according to which entrepreneurs can choose a legal form:
- Sole proprietorship or company with several owners?
- Limited or unlimited liability?
- Regulations on seed capital
- Tax rules?
- Effort in registering your company?
- Freedom in choosing the company name?
- Obligation to disclose business figures?
- Attractiveness for investor capital?
- Opportunity to run a non-profit company.
No advantage without a disadvantage. The advantage of limited liability comes at the price of more effort when setting up the company, the obligation to publish business figures and complicated legal rules with regard to the articles of association. It makes sense for a good entrepreneur to take a legal form test when choosing a legal form or seek competent advice from tax advisors or business lawyers.
The question "which legal form to choose" cannot be answered across the board and always depends on the individual situation of the company. Since startups are often geared towards growth, founders need the ability to easily raise capital from investors. Therefore, growth-oriented start-ups are often founded in the form of a corporation, preferably a GmbH.
Sole proprietorship is anyone who sets up and runs a company on their own. Several legal forms are possible here. Companies can choose between:
- Freelancers, provided the entrepreneur's professional qualifications permit.
- Small business owner
- Kaufmann e.K.
- 1-person corporation: 1-person GmbH, 1-person UG, 1-person AG
In schools and universities, the doctrine is that the sole proprietorship is a natural person. However, since a sole proprietor can also become self-employed with a corporation as a legal form, it is possible that the sole proprietorship can also be a legal entity. You can choose from the 1-person GmbH, 1-person UG (limited liability) and 1-person AG.
There are no regulations on a specific legal form for restaurateurs. Basically, however, it requires a commercial legal form. In the area of sole proprietorship, these include small businesses and Kaufmann e.K. Among the corporate forms, the restaurateur can choose a partnership or a corporation such as the GmbH.
As soon as more than 1 person starts a company, it is called a company. The simplest form of company is the GbR, also known as the BGB society. A start-up team can get off to a good start with this, especially if the business risks are manageable. Because with the GbR the partner has unlimited liability. If the company grows, the founding team can switch to an OHG. In a sense, the OHG is the logical successor to the GbR. If the founding team wants to limit liability from the outset, then the UG (limited liability) or the GmbH come into question as alternatives.
Commercial legal forms require a registration with the trade office. The size of the company and the level of turnover determine whether the commercial company is classified as a small business or as a full merchant. The small business legal forms include:
- Small traders as sole proprietors or sole proprietors
- GbR for team formation
Full merchants are subject to the rules of the Commercial Code (HGB). The full commercial legal forms include:
- Kaufmann e.K. as a sole proprietorship
- Partnerships OHG, KG and GmbH & Co. KG
- All corporations
Company forms are legal forms for starting a team. They are divided into partnerships and corporations. The GbR is a possible form of business for small businesses within the partnerships. Full merchants choose the OHG or the KG as the type of company. These companies are entered in the commercial register and are subject to double-entry bookkeeping. The same applies to all corporations such as the GmbH, the UG (limited liability) or the AG. A special form of partnership is the GmbH & Co. KG, a variant of the KG with a GmbH as the fully liable partner.
The UGmbH means the entrepreneurial company or UG (limited liability). The name UGmbH is rather unusual, in business transactions a UG operates as follows: NAME + UG (limited liability) or NAME + Unternehmergesellschaft (limited liability).
The UG (limited liability) is a variant of the GmbH. The main difference is that the UG (limited liability) only requires start-up capital of € 1.
The company name as a brand name can be an important part of a company's marketing strategy. If this is the case, the entrepreneur must choose a type of company that allows a free choice of name. These are all full merchants according to HGB, i.e. the company forms Kaufmann e.K., OHG, KG, GmbH, UG (limited liability), AG.
A GmbH is a commercial legal form in which an entrepreneur pays trade tax. The advantage of the freelance status is precisely that you do not have to pay any trade tax. In practice there are actually cases in which freelancers set up limited liability companies. This has to do with the fact that freelancers want to limit their liability entirely to company assets. In return, they accept the disadvantage of trade tax.
Only corporations are suitable for investors. Only with corporations there are legal regulations for the formation of will in the company, for example about the shareholders' meeting at the GmbH or the general meeting at an AG. In addition, the investor is only liable with the capital he has brought in.
3. Choice of legal form: factors and legal form test
Every entrepreneur asks himself the question: What is the best legal form for self-employment or your own company? The following graphic shows nine criteria that you should consider when choosing the legal form of a company. The central questions include liability, start-up capital, the formation formalities as well as bookkeeping and taxes.
9 criteria for the choice of legal form
The individual legal forms such as small business, UG or GmbH vary in their design of the respective criteria. The following table illustrates this:
|criteria||Key question||Options for the choice of legal form|
|# 1 number of owners|
Set up individually or in a team?
* Kaufmann e.K .: 1 owner
|# 2 liability||How high is the liability risk?||* Unlimited liability: GbR, OHG|
* Limited liability: GmbH, UG
|# 3 seed capital||Amount of start-up capital regulated by law?||* GbR: no regulations|
* UG: minimum capital of € 1
* GmbH: minimum capital of € 25,000.
|# 4 taxes||Special features for tax issues?||* Freelancers: no trade tax.|
* GmbH, UG: subject to trade tax.
|# 5 registration||Fast, informal formation?||* Freelancers: quick start-up, as only a tax office, no trade office|
* Small business: trade office
* GmbH: more extensive formalities, as there is also a notary and commercial register
|# 6 company name||Company name freely selectable? Important for marketing.||* Small business: No.|
* OHG: Yes
* GmbH: Yes
|# 7 transparency||Obligation to publish balance sheets?||* GbR, OHG: No.|
* GmbH: Yes
|# 8 search for investors||Suitable for venture capital?|
* GbR: unsuitable for investors
|# 9 Not for profit||Suitable for a non-profit business idea?||* GbR: basically conceivable|
* gGmbH, gUG: very suitable.
Legal form test helps with the decision
How do entrepreneurs find the best legal form? This works best with a legal form test. The legal form test offers:
- Targeted questions based on the legal form criteria
- Individual evaluation
- Limitation of possible legal forms of companies
Now do the legal form test
4. Legal forms in comparison
To compare the most popular legal forms of companies, the following table presents the most important individual aspects of the aforementioned 9 factors for choosing the legal form for the legal forms of small businesses, freelancers, GbR, UG (limited liability) and GmbH.
|Criteria for the choice of legal form||Solo founder of small businesses||freelancer||GbR||UG / Mini GmbH||GmbH|
|Number of shareholders|
|Founding alone possible|
|Founding in a team|
|Minimum capital required by law|
|Foundation without minimum capital|
|Contributions in kind possible|
|Taxes and accounting|
|Simple bookkeeping and EÜR|
|Opening balance necessary|
|Double bookkeeping, balance sheet and income statement|
|Business tax exemption|
|value added tax|
|Small business regulation possible|
|Notary appointment necessary|
|Entry in the commercial register|
|Registration trade office|
|Registration tax office|
|Business account required|
|Compulsory membership IHK or HWK|
|Details of the owner required|
|Sole fantasy name possible|
|Disclosure of annual financial statements|
|Ad changes society|
|Suitable for investors||depends on|
|Suitable for non-profit business models|
|Are there non-profit legal forms?|
|Legal form packages||To the package||To the package||To the package||To the package||To the package|
Which legal form should I choose? Answer 8 questions and you will get the right legal form.To the legal form test
Which legal forms are the most popular?
The Federal Statistical Office regularly collects the figures on the legal forms in Germany.
|legal form||up to 9 employees||10 to 49||50 to 249||from250|
|Number of companies in Germany||3.100.000||300.000||65.000||15.000|
|Share of sole proprietorships||67%||22%||4%||1%|
|Share of partnerships||10%||18%||20%||19%|
|Share of corporations||17%||51%||66%||65%|
|Share of other legal forms||5%||9%||11%||16%|
Two key findings:
- The most common legal form in Germany is that of the sole proprietorship.
- The larger the company, the more popular corporations are as a legal form.
5. Legal forms for individual and team formation
What legal forms are there for individual founders? In fact, there are a multitude of possible legal forms for sole proprietorships with which the founder can also reduce his entrepreneurial risk. In contrast, start-up teams set up so-called companies. Therefore, legal forms for teams are also called company forms. The most important corporate forms include partnerships and corporations. Liability for all shareholders can only be limited in the case of corporations. Partners in a partnership, on the other hand, are liable with their private assets.
The legal forms mentioned here are commercial legal forms. For freelancers, too, there are legal forms for individual formation and team formation.
Individual formation and team formation: advantages and disadvantages
Often the entrepreneur has no choice but to set up a business on his own.
Anyone who founds a company alone bears the sole risk and has sole decision-making authority or management authority. Those who found a team share with their partners, the co-shareholders. Often the sole proprietor has no choice but to found a business on his own. Nevertheless, he should know that going it alone is not all good. If you start a team, you share profits and risks with several partners. Management authority, rights and obligations of the owners or shareholders as well as the distribution of profits must be regulated.
Advantages of the sole proprietorship
- Sole decision-making authority
- 100% entitlement to the profit
- Quick action possible
Benefits of creating a team
- Broader know-how in the team
- Broader capital base through partners
- Better decisions possible
Disadvantages of the sole proprietorship
- Risk of wrong decisions
- Risk of overload
- Entrepreneur has to finance alone
Disadvantage of forming a team
- Minimum business volume required
- Risk of a shareholder dispute
- Establishment process more complicated
6. Freelance or commercial entrepreneur
Another fundamental factor influencing the choice of the legal form of a company is whether the entrepreneur operates a trade or whether he is self-employed.
Who is a freelancer
You are a freelancer because of your job. There is no option here.
A freelancer is an entrepreneur by virtue of his profession. Certain consulting professions and creative activities are part of the liberal professions. The list of professions is regulated by Section 18 of the Income Tax Act (EkSt). Professions such as lawyers, architects, tax consultants or auditors belong to these so-called catalog professions (§18 EkSt).
What legal forms are there for freelancers and commercial entrepreneurs?
The freelancer differs from the commercial entrepreneur in that he pays no trade tax. Companies with commercial legal forms need to register with the trade office and are obliged to pay trade tax and become members of the IHK or HWK. There are two types of commercial entrepreneurs, the small traders and the full merchants according to the commercial code.Full merchants are subject to stricter legal rules.
7. Legal forms for sole proprietorships
What legal forms are there for sole proprietorships? Sole proprietorship is anyone who sets up and runs a company on their own. The solo preneur can choose between different legal forms.
with unlimited liability
with limited liability
For solo preneurs in a freelance profession
|1-person UG (limited liability):|
The mini-GmbH with low requirements on the start-up capital
|Small business owners:|
Commercial independence with simpler legal regulations
A real GmbH with the sole founder as the sole shareholder
|Kaufmann e.K .:|
The so-called full merchant who is subject to the provisions of commercial law.
|1-person AG: |
A very complex form of company for the individual founder
8. Partnerships vs. corporations
What legal forms are there for team founders? Those who found a team can choose between the various forms of business within partnerships and corporations. A crucial difference between partnerships and corporations is the liability of the shareholders.
Advantages of partnerships
- Possible for freelancers and small businesses
- No statutory minimum capital
- No publication requirements
Advantages of corporations
- Limited liability
- Suitable for investors
- Managing director's salary is tax deductible
Disadvantages of partnerships
- Unlimited liability of the directors
- Unsuitable for investors
- high legal need for regulation
- Minimum capital required by law
- High foundation effort
- Great need for legal regulation
- Publication obligation
The need for legal regulation is high for all types of company, regardless of whether it is a partnership or a corporation. When founding a partnership or a corporation, a number of contracts are necessary.
Contracts for partnerships and corporations
We have put together essential information for you on the following contracts:
Overview: What are the legal forms of persons and corporations
9. Legal forms for non-profit companies
If you want to start a non-profit company, you have two legal forms available. Both legal forms allow you to limit your personal liability and take advantage of tax advantages. It is about:
10. Conclusion: Choose your legal form specifically
Sole proprietorships, partnerships and corporations are the basic alternatives when an entrepreneur is looking for the best form of business for him. In order to find the right legal form for your company, it is best to do a legal form test, which provides you with an initial pre-selection of possible company forms based on important decision criteria. The most important questions are certainly:
- Does the entrepreneur set up individually or in a team?
- Does he want to limit his liability?
- Does the entrepreneur want to be attractive to investor capital?
Final advice from a tax advisor or lawyer is advisable. The question of the optimal legal form of a company is of course not only relevant in the start-up phase. If a company grows, a change of legal form may be necessary as part of a conversion or merger. In any case, an entrepreneur should know the most important facts about the legal forms of companies.
Take the legal form test
As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.
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