In Germany you know a whole series of different legal forms in which you can run a company. On the one hand, there are legal forms for companies that only belong to individual persons. On the other hand, there are also partnerships in which the ownership relationship is in several hands. In addition, legal forms have been established in this country which constitute a legal personality of their own; They are grouped together as corporations. Here the liability is limited to the own company assets. In all cases, the question of personal liability for a company’s business decisions is at the forefront of the definition of legal forms. However, the legal forms also have an impact on the type of taxation and thus on the level of taxes.

Entrepreneurs start businesses. What sounds as simple as this three-word sentence is actually much more complex. Sure, at the primary statement of this sentence, everything is and remains correct. But more precisely, it already contains one of many possible forms of company: (at least) an entrepreneur (at least) sets up a company. So this is the sole proprietorship.

What alternatives there are, however, beyond the establishment of this most simple form of company, can only be measured if you also deal with all other legal forms in which you can set up and run companies in Germany. Therefore, an overview of the different legal forms seems worthwhile to us. For details, reference is then made in each case to other points.

As for most aspects that affect the lives of people in Germany and their interaction with each other, there are also legal regulations in this country in terms of business. Therefore, a look at the legal framework for the legal forms existing in Germany makes sense as an introduction.

First of all, we would have the Commercial Code (HGB), which regulates a large part of commercial forms of enterprise. Further laws that supplement the HGB are the GmbH Act (GmbHG) and the Aktiengesetz (AktG). Among other things, the regulations on the two most important corporations take place here. In addition, one must also observe the Civil Code (BGB), because there are other legal forms included by definition. But we also find legal forms in other areas that are also suitable for entrepreneurial activities. The legal basis for this is, for example, the Partnership Company Act (PartGG), the Vereinsgesetz (VereinsG) and the Genossenschaftsgesetz (GenG).

Now in the case of legal forms one can first make a division into three groups. On the one hand, there can be companies with only one entrepreneur, but on the other hand also those where several people agree to operate a company as a joint project (partnerships). The third possibility, after listing the two previous ones, may seem remote from reality at first glance, but it still exists. In fact, there is a legal form that knows no external participation relationships. Instead, this special legal form is able to act independently as a company. In other words, it works for its own purpose. Which legal form this is, we will reveal later. Let’s see if you can guess which mysterious legal form may be meant here.

In the introduction, we have already said that the simplest way to start a business is with a sole proprietorship. As the term already reveals, here the entrepreneurial activity starts from only one person. This is a natural person. It is important here that a sole proprietor always acts at personal risk in his entrepreneurial activity.

However, you can run a sole proprietorship in two different ways. On the one hand, you can start this almost informally. For this you only need to register the trade with the municipality. However, if the sole proprietorship is so large that a commercially established business operation is required for its management, then according to the HGB by registration and thus by publication in the commercial register it must be announced that the company is managed in the legal form of a registered merchant or an e.K. merchant. However, one can also voluntarily decide to do so. This way you can choose a company for your company.

It is easy to understand in both legal forms that entrepreneurs personally bear the taxation of the profits of their individual companies. In principle, the company itself does not pay its own taxes. This principle of taxation is therefore also called the principle of transparency.

Partnerships go back on the one hand to the HGB and on the other hand to the BGB. The HGB distinguishes between the open commercial company (OHG) and the limited partnership (KG). The BGB flanks these two legal forms with the company civil law (GbR). In all three legal forms, personal liability is also a core element. Only at the KG can the liability be limited at least for some of the shareholders. These shareholders are called limited partners, while the personally liable shareholders of a limited partnership are called complementary partners. The difference between a GbR and OHG, on the other hand, is similar to the one we have described between a simple sole proprietor and registered merchants. Here, too, the criteria of the requirement of a commercially established business operation or voluntary registration in the commercial register are in the foreground. However, this also goes hand in hand with the prerogative to choose a company.

Further partnerships are the partnership companies, which are also subject to the obligation to register in the commercial register. Under joint management, the partners cooperating here can each claim the profits they have made themselves. Therefore, the responsibility and thus the private liability can be limited to individual partners. However, partnership companies are only freelancers to choose from.

When taxing partnerships, the principle of transparency must generally be observed. This also means that company profits are only included in taxation at shareholder level. For some partnerships, however, the legislature has also created ways to tax them instead with the corporate tax provided for corporation companies. This alternative is also called the option model for partnerships.

4.3.1. Corporations

After we have dealt with the companies in which the liability at least partially falls to the entrepreneurs or shareholders, there are also legal forms in which private liability is generally excluded. In particular, the company with limited liability (GmbH) and the stock company (AG) should be mentioned. In addition, there is also the entrepreneur company (haftungsbeschränkt) and the European company SE. Their main differences lie in the capital structure and in their administrative structure. As a result, however, they also impose different requirements regarding their establishment.

But we also see another important difference in these legal forms in terms of legal capacity. This is because corporations are independent legal entities. They are therefore also called legal entities. They therefore have their own rights, but also their own duties. This also includes tax liability. Indeed, corporations tax their profits themselves, subject to corporate tax law.

4.3.2. Other entities

In addition to corporations, other legal forms exist as corporations. On the one hand, we include the cooperative and the registered association. On the other hand, a foundation can also develop entrepreneurial activity. The Foundation is a special feature because it is an independent asset without participation; It belongs to itself and no one else (with which we now solve the puzzle previously indicated).

Furthermore, there are some mixed forms in which the characteristics of an exemption from liability on a private level are combined with those of a partnership. The most famous example of this is the GmbH & Co. KG, in which the unlimited liability accrues to a GmbH, which usually only serves this one purpose. In all other aspects, however, one depends on the regulations that apply to a KG. Likewise, as a mixed form, a UG (limited liability) can be combined into a KG (UG (limited liability) & Co. KG).

Another hybrid legal form is the limited partnership on shares (KGaA). Here, a limited partnership is also a partnership with a personally liable partner in the foreground, but in which the shareholding relationships of the limited partners are controlled via shares. Therefore, a KGaA is treated as a corporation in which the management is in the hands of a personally liable partner. In contrast to the GmbH & Co. KG, for example, the KGaA is therefore regarded as an independent legal entity; it is a legal person. Since the KGaA is therefore not a partnership, this therefore has an impact on taxation under the Corporate Tax Act. The special feature here is that the profit share of the general managers is deductible as operating expenses when taxed. In this way, an oversize taxation of the complementary parties is avoided.

On the basis of the KGaA, further legal forms can be realized. On the one hand, these are the GmbH & Co. KGaA and the UG (haftungsbeschränkt) & Co. KGaA. On the other hand, AG & Co. KGaA and SE & Co. KGaA are also suitable.

So as we can see, there is a great wealth of different legal forms in which you can run a company in Germany. The KG proves to be interesting because it is particularly suitable as a medium for combining with other legal forms. We also see similar connections in foreign hybrid legal forms, such as the LLC in the USA or in Dubai. The essential feature here is that taxation can be achieved as a partnership, although the liability relationships are basically more similar to those of a limited company.

In any case, the liability relationships are decisive when defining the legal forms in Germany. This is due to the fact that in Germany the protection of creditors enjoys a high priority. However, this also applies in other countries where creditor protection is subordinated to investor protection.

In addition to the great importance of liability relationships in the definition of legal forms, other factors are added. Thus, legal forms bring about both different taxation and a differentiated consideration of the regulations that have been adopted for keeping commercial records. Consequently, these rules also lead to different methods of determining a company's taxable profit.

The importance of legal forms is therefore very great in many respects. Therefore, before setting up a company, one should deal particularly carefully with the question of the most appropriate legal form. As a tax consultancy firm with a focus on corporate taxation, we know how enormously important this point is. Because such a decision can often have measurable financial consequences.