If several people plan to become entrepreneurs together, the establishment of a joint company is the most common variant of implementation. The association of several people can pursue different intentions. Relevant reasons for founding a company are, for example, the possibility of division of labor or risk distribution. In addition, the financial requirements of a company can also be served by investors as co-partners. However, potential company founders have different social models to choose from, so the choice of the right legal form is regularly the first hurdle.

If a majority of people want to start a company, a basic decision must first be made. The future shareholders have the choice between establishing a partnership and establishing a corporation. Depending on the legal form, companies have different characteristics. This results in concrete advantages and disadvantages of each type of society. The future shareholders must therefore, depending on their special requirements in individual cases, choose the appropriate form of company.

As partnerships, the company civil law (GbR), the open commercial company (OHG), the limited partnership (KG) and their special form the GmbH & Co. KG are at their disposal. Typical for the partnerships is the close relationship between the partners and the company. In addition, they usually offer a high degree of flexibility in handling. Instead of a partnership, however, the choice can also fall on a corporation. Here the company with limited liability (GmbH) and its special form the entrepreneur company (UG), the stock company (AG) and the limited partnership on shares (KGaA) represent the options. Corporations are separate legal entities and as such are largely independent of their shareholders. Therefore, corporations act through their corporate bodies, in particular the directors and the shareholders’ meeting.

Essential Differences in the Forms of Society

The following explanations show some of the essential but not exhaustive differences between the respective forms of company.

2.1 Conclusion of the social contract

The conclusion of the social contract is an elementary part and prerequisite for the establishment of a company. In this case, partnerships enjoy the advantage that the conclusion of the social contract is in principle formally possible. Although this even offers the possibility of concluding an oral contract, the creation of a written social contract makes sense. The text form of the contract serves documentation purposes and promotes legal certainty for all parties involved. However, despite the basic form freedom of the social contract, a formal requirement may arise for other reasons. This is particularly the case if real estate or GmbH shares are transferred to the partnership within the framework of the conclusion of the contract.

On the other hand, the articles of association (or “statutes”) of a corporation must always be certified by a notary. This special formal requirement is enshrined in law for the individual corporations (§ 2 para). 1 GmbHG, § 23 para 1 AktG, § 280 para 1 AktG. Since the legislation is mandatory, the founders of the company cannot voluntarily deviate from it. Therefore, partnership agreements of a corporation which are not notarized are null and void according to § 125 BGB. Amendments to the articles of association generally require the form of conclusion of the contract. Nevertheless, a so-called pre-founding company already exists at a GmbH before the entry into force of the social contract.

An essential factor in the selection of the legal form in the context of a company formation is the liability of the shareholders. Based on the risk of the future company, the shareholders must decide whether personal liability should be excluded. In partnerships, the partners are in principle personally liable for the liabilities of the company. Therefore, the shareholders of a partnership can be called upon directly by the company creditors with their private assets. In high-risk companies, this represents a financial risk for the shareholders that should not be underestimated. Meanwhile, the limited partner of a limited partnership is an exception to this principle. Limited partners are liable with their private assets only limited to the amount of the deposit entered in the commercial register. If the limited partner has already paid the deposit in the registered amount, his personal liability is even completely excluded.

In contrast, corporations are generally liable exclusively with their own assets. Due to this limitation of liability, the partners are not liable with their personal assets. Therefore, corporations usually lend themselves to riskier ventures. Meanwhile, the principle of limitation of liability is breached in a few exceptional cases. These are mainly cases of destruction of existence and the mixing of wealth.

2.3. Divestment of shares

Due to different facts, it may be necessary or desired for a shareholder to separate from his company ("Exit"). On the other hand, co-shareholders can strive to avoid changes in shareholder status when a company is founded. Accordingly, the resaleability of the company shares also constitutes an essential factor if several persons set up a company. Typically, the participation in a public limited company (= share) is the easiest to sell. Shares are basically freely sellable and public trading on stock exchanges provides easy access to the market. Also GmbH shares (or UG) can usually be sold freely. However, they lack a comparable trade. Although this does not legally restrict the saleability, it actually restricts it. In addition, a legal restriction of the saleability is also permitted. This is done by means of so-called vinculation clauses, which the shareholders can voluntarily stipulate in the articles of association (cf. § 15 para 5 GmbHG, § 68 para). 2 AktG.

Although the legal transfer of shares in a partnership is now generally accepted, this is not initially foreseen. Due to the close personal ties of the shareholders of a GbR, OHG or KG, the sale of the shares is not permitted. Nevertheless, the shareholders can individually agree on the transferability of the shares in the articles of association. In individual cases, a transfer of the shares may also be permitted without explicit contractual regulation. However, this requires the approval of all other co-shareholders. In this regard, the articles of association may provide for further facilitation, for example a majority vote.

2.4.

The methods of decision-making within society also differ in the respective forms of society. The shareholders of a GbR, OHG or KG are as flexible as possible with regard to shareholder resolutions and management. The competencies can in principle be distributed to the shareholders or the managing directors depending on requirements. The same applies to the resolution of the shareholders. The framework conditions can be defined individually in partnerships. On the other hand, there are stricter legal provisions for corporations. While the decision-making process of an AG is distributed among different bodies, the primary decision-making process of a GmbH is the shareholders’ meeting. Shareholder resolutions are therefore to be made in it in principle. Written resolutions of shareholders are only admissible under special conditions. However, the shareholders of a GmbH can also individually influence the processes of decision-making through the social contract.