What are Limited Liability Companies

Limited Liability Company (GmbH) - What is a GmbH?

The company with limited liability (GmbH) is next to the AG the best known form of the corporation. The GmbH requires a share capital of 25,000 euros. It is one of several legal forms.

In our checklist for registering a business, you can find out how to register your GmbH with the trade office.

GmbH and their meaning

The limited liability company (GmbH) is a corporation that is also a trading company within the meaning of the Commercial Code (HGB). Due to the limited liability of the shareholders, it is an extremely popular form of company for medium-sized companies.

The legal form GmbH and its legal status

As a corporation, the GmbH is an independent legal person, i.e. it is the bearer of rights and obligations. The GmbH is also a trading company within the meaning of the HGB.

GmbH and Co KG

This abbreviation stands for limited liability company & Compagnie Kommanditgesellschaft (GmbH & Co. KG). In German law it is a limited partnership (KG), but in Austrian law it is a special form of a limited partnership (KG) and is therefore a partnership.

Establish a GmbH

At least one person is required to set up a limited liability company (GmbH) (1-person GmbH). The partners can be natural or legal persons. As a trading company, the GmbH only comes into being when it is entered in the commercial register.

As part of the establishment, a notarized articles of association must be concluded in which, in addition to the company name, seat and object of the GmbH, the amount of the share capital and the distribution of the share capital to the individual shareholders must be regulated.

The minimum share capital for GmbHs is € 25,000, half of which, i.e. € 12,500, must be paid in when the company is founded.

exception: For the establishment of an entrepreneurial company (UG), which is legally a special form of the GmbH, only € 1 share capital is required.

Bodies and GmbH management

Every GmbH must have one or more managing directors who represent the company externally. The managing directors can, but need not, be identical to the shareholders.

In addition to the management as the executive body, the shareholders' meeting exists as a decision-making body. Resolutions of the shareholders (partners) are decided in the framework of the shareholders' meeting.

GmbHs with more than 500 employees are also obliged to set up a supervisory board as a supervisory body.

Bookkeeping in a GmbH

A limited liability company (GmbH) is a formal merchant and is therefore obliged to keep double bookkeeping in accordance with the provisions of the HGB.

As a corporation, the GmbH is subject to disclosure requirements: The annual financial statements, if necessary with the balance sheet and income statement, must be published in the electronic Federal Gazette.

Distribution of profits and losses in a GmbH

As is usual with corporations, the profit and loss distribution is based on the business shares of the shareholders. The more shares a shareholder holds in the GmbH, the greater his profit sharing.

The shareholders' meeting determines the distribution of profits and the appropriation of profits. Part of the profit is usually not distributed, but used to build up reserves.

Liability for GmbHs

The limited liability of the GmbH is already evident from its name: The liability of a GmbH is always limited to the company's assets. In contrast to partnerships, the partners of corporations are not liable with their private assets.

Taxation of GmbHs

As a taxable subject, the GmbH itself is taxed, not the individual shareholders. Applicable tax types are:

Corporation tax: The corporation tax for GmbHs corresponds to the income tax for partnerships.

Capital gains tax: Profits that the GmbH pays out to its shareholders in the form of dividends are taxed in the form of capital gains tax.

Business tax: As a form merchant within the meaning of the HGB, the HGB is obliged to pay trade tax. In contrast to sole proprietorships and partnerships, there is no tax exemption for GmbHs.

value added tax: Like all companies, the GmbH is also subject to sales tax.

Advantages and disadvantages of a GmbH

The GmbH is a popular form of company, especially for medium-sized companies.

The advantages of a GmbH include:

  • Limitation of Liability to Company Assets
  • Own legal capacity
  • Problem-free change of shareholders
  • Low corporate tax rate

The disadvantages of a GmbH include the following aspects:

  • Notarial certification of the articles of association is necessary
  • Accounting obligation according to the requirements of the HGB
  • High capital contribution of € 25,000