GmbH and UG (haftungsbeschränkt) – Information on their Foundation

Status as at: October 2011

1. General
2. Limitation of Liability
3. Articles of Incorporation / Musterprotokoll (Sample Protocol)
4. Company Name
5. Object of the Company
6. Registered Office of the Company
7. Minimum Capital
8. Shares and Voting Rights
9. Raising of Capital
10. Managing Director
11. Application for and Registration in the Commercial Register
12. Gewerbeanmeldung (Application for Business Registration)
13. Start-Up Costs
14. Mandatory Information on Business Correspondence
15. Taxation
16. Articles of Incorporation

1. General

The Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG) (Act on the Modernisation of the German Limited Liability Company Law and the Combating of Malpractice) came into effect on 1 November 2008 and the new legislation has been valid since that day. It is the most comprehensive reform of German limited liability companies since 1892. The most important objective of the reform is to facilitate the foundation, to strengthen the international competitiveness and to impede the misuse of German limited liability companies. It implements many of the demands made by the Chamber of Industry and Commerce.

This GmbH reform introduced an option to enter a GmbH by way of founding an Unternehmergesellschaft (haftungsbeschränkt) (Entrepreneurial Company (with limited liability)), abbreviated to UG (haftungsbeschränkt). This is not a new legal form: the UG (haftungsbeschränkt) is a GmbH to which only certain special provisions in the GmbHG (Act on German Limited Liability Companies) apply. The most important difference is that the UG (haftungsbeschränkt) can be founded with a theoretical minimum share capital of one Euro.

The UG (haftungsbeschränkt) may also be used as a general partner of a Kommanditgesellschaft (German Limited Commercial Partnership) which is then named UG (haftungsbeschränkt) & Co. KG. It is, however, not possible to convert an existing GmbH into a UG (haftungsbeschränkt).

By creating the UG (haftungsbeschränkt), legislators intend first and foremost to facilitate entrance into a GmbH at a later date for founders who have only low capital requirements. It remains to be seen whether the UG (haftungsbeschränkt) will turn out to be a successful model and be accepted as a business partner. The high number of failed foundations of limited companies has shown that severely undercapitalised companies have a low survival rate, and this has in general also damaged the reputation of this legal form. Many founders ignored the actual capital requirements of their company in their desire to found a company at the lowest cost possible. In many cases, these people failed to appreciate the purpose of share capital. One major purpose is to provide companies with liquid funds in the start-up phase to enable them to participate in economic life, to raise investments for the purchase of goods, to cover fixed costs for the rent of offices, etc. Founders should also consider the fact that there are no marketing advantages to a company without capital. In practice, contractual partners will secure their financial default risk by requesting the shareholders to provide personal securities. The pros and cons of the UG (haftungsbeschränkt) and GmbH should be carefully weighed up.

As the UG (haftungsbeschränkt) is, apart from a few exceptions, subject to the same provisions as a GmbH, the following information applies accordingly to the UG (haftungsbeschränkt). Special features will be explained in the relevant sections.

The German limited liability company (GmbH) is a legal person having its own rights and duties. These rights and duties exist separately from those of the shareholders. The GmbH is, itself, able to sue others and can be sued; it may be the owner of movable assets and land plots and it has its own assets which are separate from the shareholders– assets.

The company may also be founded by one single shareholder. Foreigners are also able to found or participate in a GmbH without requiring special authorisation. A GmbH is founded as follows – please note that this is a very simplified representation:

• Preliminary considerations of the shareholders;
• Written Articles of Incorporation;
• Raising share capital;
• Notarial certification;
• Notarial application for registration with the Commercial Register Court;
• Examination procedure by the Register Court;
• Registration of the GmbH in the Commercial Register and announcement of the registration;
• Business registration.

Please note that a GmbH will only come into existence upon its registration in the Commercial Register. A distinction must be drawn between two different until the date of the company–s registration in the Commercial Register, namely between the Vorgründungsgesellschaft (Pre-Foundation Company) and the Vorgesellschaft (Pre-company):

• A Vorgründungsgesellschaft is established when the founders make a formless declaration of their intent to enter into a GmbH Agreement. From a legal point of view, it is to be classified as a Gesellschaft bürgerlichen Rechts (GbR – Company Constituted under German Civil Law). The founders therefore have personal liability risks in this phase for liabilities which have been entered into for the as yet not established GmbH.
• A Vor-GmbH comes into existence upon notarial certification of the Articles of Incorporation. The Vor-GmbH is not subject to special legal provisions, but it is recognised by legislation as a specific type of company. It can have rights and duties: for example, it may operate under its own company name prior to its registration in the Commercial Register. However, if it does so, the name must be supplemented by the words "in Gründung" (under establishment) or "i.G." for short, otherwise the use of the name would be inadmissible. The persons acting prior to the registration of the GmbH are personally, jointly and severally liable. This liability of the acting persons ends upon the company–s registration in the Commercial Register. Irrespective thereof, shareholders are also liable for the liabilities of the Vor-GmbH.
• The GmbH as a legal person – and its limitation of liability – only come into existence with its registration in the Commercial Register.

2. Limitation of Liability

A key advantage of the GmbH is the limitation of liability: the company–s entire assets, however not the personal assets of the shareholders, are liable for the company–s liabilities. In the case of a crisis, the strict separation between private and company assets means that shareholders will only bear the risk of loss of their contributions. However, it should be made clear that the company–s liability is not limited to the contribution made, for the entire assets of the company are liable. Depending on the economic situation of the company, the company–s assets might be many times higher – or lower - than capitalisation at the time of its foundation.

However, personal liability of the shareholders is possible in exceptional cases, for instance if the company with limited liability was misused. If the shareholders are also managing directors, the risk of personal liability arising from an infringement of the duty to take due care or breach of the law needs to be taken into consideration; for further information, please refer to item 10.

In addition, the GmbH Reform has introduced new duties for shareholders, the infringement of which might result in claims of recourse. For example, shareholders of a GmbH which has no managing director are obliged to file for insolvency if a reason for insolvency exists. Furthermore, shareholders of a GmbH without a managing director must act as the company–s representatives for the receipt of declarations of intent and other deliveries. There may also be a liability risk if shareholders appoint a managing director who may not accept this office due an exclusion criterion; for further information, please refer to item 10.

3. Articles of Incorporation / Musterprotokoll (Sample Protocol)

The company may be founded either by using individually designed Articles or by using the Articles of Incorporation attached as an Annex to the GmbH Act which is also part of the Sample Protocol. The various samples can be accessed from the link bar at the side.

While, in the first case, the individual Articles of Incorporation need to be certified by a Notary Public, in the second case not the sample articles but the entire Protocol of Incorporation must be certified.

The Sample Protocol (also referred to as Protocol of Incorporation) was introduced as part of the GmbH Reform to simplify simple standard company foundations. In addition to the Sample Articles it also includes the list of shareholders and the appointment of managing directors.

However, the Sample Protocol may only be used with restrictions:

• A maximum of three shareholders may be involved.
• The Sample Protocol only provides for one managing director. However, further managing directors may be appointed after the GmbH has been registered in the Commercial Register.
• Contributions in kind are not possible, only cash contributions.

The advantage of the Sample Protocol is that it combines the statutes, list of shareholders and the appointment of managing directors, and that lower notary fees will arise. However, these savings only have a noticeable effect in the case of the UG (haftungsbeschränkt); for detailed information please refer to item 13.

The Sample Protocol is especially attractive to Einpersonen-Gesellschaften (one-man companies), as the Articles of Incorporation do not have to include clauses on conflicts of interest. If, on the other hand, two to three shareholders are involved, the use of the Sample Protocol must be carefully considered, for the contents defined therein must not be amended, supplemented or otherwise adapted. Any amendment of the pre-defined standards of the Sample Articles results in the latter having to be treated as individually designed Articles of Incorporation and, as such, requiring certification by a notary public. The Sample Protocol thus does not provide for any leeway for individual wishes as regards form or for individual needs. Tailor-made contractual provisions are of particular importance in the case of a dispute between shareholders. For instance, the Sample Articles contain the mandatory provision that the management is exempted from the prohibition of Insichgeschäft (dealings on the shareholder–s own account) (Art. 181 BGB (German Civil Code)). A right of termination of the shareholders may not be agreed upon.

Founders should therefore seek comprehensive advice on the pro and cons of the use of the Sample Protocol.

4. Company Name

The name of the company may contain a personal name (including the name(s) of the shareholder(s)) or the object of the company (information on the company–s purpose) or be a pure invention or a combination of these options. In all cases, it is necessary that the name identify and distinguish the company. For example, a purely descriptive name stating the object of the company such as ”Textile GmbH– is not permissible as it lacks distinctiveness. In addition, the company name must not contain information which is liable to mislead the reader about the business relations essential for the company–s future partners or customers. For instance, the name ”Deutsche Energieversorgung GmbH– (German Energy Provision GmbH) for a small solar electricity operator would be misleading.

Furthermore, it must be noted that the name must be supplemented with the designation of the company–s legal form. In the case of the GmbH, this supplement is "Gesellschaft mit beschränkter Haftung" (”Limited Liability Company”) or a generally understandable abbreviation of this designation such as ”GmbH”. The name of an UG (haftungsbeschränkt) must be supplemented with this abbreviation or the designation in full, ”Unternehmergesellschaft (haftungsbeschränkt)".

The Register Court will officially examine whether the name is permissible. If it is not permissible, this constitutes an obstacle for registration. In order to avoid any complications, it is worthwhile to discuss the name of the company with the competent Chamber of Industry and Commerce. This can save time and expense. In this context, the Chamber of Industry and Commerce will also verify whether the name has already been allocated or is still available in the local Commercial Register.

5. Object of the Company

High requirements are set regarding the wording of the object of the company in the Articles of Incorporation. The concrete scope of activity of the GmbH must be stated as exactly as possible so that interested parties are able to get an idea of the focus of business activities. The exact description of the object of the company also serves to limit the managing authority of the managing director. If the latter acts beyond the specified field of business, he risks claims of recourse.

General wordings such as ”trade with goods of all kinds– or ”consultancy– are therefore not permitted, as they do not clarify what types of goods the company will trade in (foodstuffs? weapons?) or which type of consultancy services are provided (tax consulting? personnel consultancy?). However, wordings such as ”trade with textiles– or ”management consultancy– would be specific enough as the former describes the type of goods and the latter is a specific description of the sector. Finally, the object of the company must also reveal whether the company performs an activity which is subject to authorisation. Any unclear wording might trigger inquiries by the Register Court even though this office will no longer verify the existence of such an authorisation. The reason for this is that, since the GmbH Reform, the registration of a GmbH with a business activity subject to authorisation no longer depends on the relevant certificate of authorisation issued by the State being submitted to the Register Court. These official authorisation proceedings which in some cases took a long time to be completed are now performed separately from the registration procedure to speed up the process.

However, any type of business activity requiring authorisation may still only be begun if the competent body has granted authorisation. The managing director is responsible for complying with provisions under public law.

6. Registered Office of the Company

The registered office of the company must be specified in the Articles of Incorporation. The registered office (= statutory office) stated in the Articles of Incorporation must be in Germany. Deviating from the statutory office regulation, the GmbH Reform has enabled the specification of an administrative office which is different from the statutory office. The administrative office is located in the place in Germany or abroad where the GmbH–s business activity is exclusively or predominantly performed. The administrative office is therefore also decisive for the decision on which Financial Authority is to be competent for the company and for the place where the business must be registered. For instance, the company could have its statutory office in Stuttgart and its administrative office in Hamburg – or France. German companies may also become active exclusively in foreign countries by using branch offices established in a foreign country. If the administrative office of the company is in a foreign country, a business address in Germany must be specified to which effective deliveries can be made and which will be registered in the Commercial Register.

7. Minimum Capital

The legal minimum share capital of a GmbH is EUR 25,000. The reduction of the minimum capital to EUR 10,000 which had been discussed during the GmbH Reform was abandoned as it was no longer considered necessary due to the introduction of the UG (haftungsbeschränkt).

The share capital of the UG (haftungsbeschränkt) may, theoretically, amount to anything from EUR 1 to EUR 24,999. However, the amount of the share capital must in all cases reflect the capital required by the company for the intended business activity. If, for instance, a UG (haftungsbeschränkt) is founded with a share capital of just EUR 1,000, insolvency is almost bound to occur: fixed costs such as rent, electricity, insurance, etc. could soon result in the company being unable to meet its obligations, in which case the managing director of the company would have to file for insolvency. This reality is the reason why many limited company start-ups have failed.

8. Shares and Voting Rights

The number and nominal values of the shares must be specified in the Articles of Incorporation as must a list of which shareholder is to take over which shares. It is possible for one shareholder to take over several shares. The shares are identified by serial numbers. The sum of the nominal values of all shares must be equivalent to the share capital specified in the Statutes.

The nominal value of a share must be in whole Euros; the minimum nominal value of one share is thus EUR 1. The nominal values of the shares may differ.

The shareholders will take their decisions regarding company matters in the form of resolutions which will be passed by the majorities required. Unless the Statutes contain deviating regulations, each Euro of a share grants one vote.

9. Raising Capital

Different regulations apply to raising share capital for a GmbH from those applicable for a UG (haftungsbeschränkt):

1. GmbH

The share capital may consist of cash contributions and contributions in kind.

• Should a GmbH be founded by cash contributions, one fourth of the contributions but at least half of the legal minimum share capital (= EUR 12,500) must have already been paid in at the time of the company–s registration in the Commercial Register. The shareholder is liable for the outstanding difference to the amount of his contribution. Normally, companies are founded by way of cash contributions as follows: a bank account is opened for the GmbH which can be freely disposed of by the management. The bank statement for such an account suffices as evidence of payment of the contribution, evidence which needs to be provided to the Register Court.
• A new aspect is that securities for the outstanding amount need no longer be provided in the case of one-man GmbHs if only half of the share capital was paid in at the time of registration.

If contributions in kind are to be made – i.e. movable assets, licences, companies, etc. instead of money – two special aspects must be observed:

• The contribution in kind must always be made in full.
• The value of the contribution in kind must be evidenced in a Sachgründungsbericht (Report on Company Foundation with Contributions in Kind).

If only part of the share capital is to be raised as contributions in kind and the other part as cash contributions, the principles for the foundation with cash contributions and with contributions in kind both apply.

Examples:

1. The share capital for a company founded with cash contributions should amount to EUR 25,000 for company foundation. This means that a minimum of EUR 12,500 must be paid in.
2. The share capital should amount to EUR 25,000; EUR 5,000 thereof should be raised by a contribution in kind. The contribution in kind must be provided in full. As a minimum of one fourth (= EUR 5,000) of the cash contribution (EUR 20,000) must be paid in, however a total of at least EUR 12,500, another EUR 7,500 need to be paid in to achieve a total of EUR 12,500 together with the contribution in kind.
   If, on the other hand, contributions in kind with a value of EUR 10,000 are provided in this example, one fourth of the cash contribution of EUR 15,000 = EUR 3,750 suffices to achieve or exceed the required minimum contribution of EUR 12,500 (EUR 10,000 + EUR 3,750 Euro = EUR 13,750).
   When an application for the registration of the GmbH is filed, the managing director must give his assurance (!) that the cash contribution or the contributions in kind have been effected and are absolutely and definitively at the free disposal of the managing directors.

When a contribution in kind has been agreed upon, additional requirements apply:

• The object of the contribution in kind and the nominal value of the share to which the contribution in kind relates need to be specified in the Articles of Incorporation.
• The shareholders must prepare a Report on Company Foundation with Contributions in Kind which must set out the circumstances decisive for the adequacy of the contributions. This Report serves to explain the valuation of the contributions in kind to the Register Court and must be signed by all shareholders.
• The relevant agreements, the Report on Company Foundation with Contributions in Kind and documents proving that the value of the contributions in kind is equivalent to the nominal values of the shares taken over must be enclosed with the company–s application for registration.
• Prior to the company–s application for registration, any contributions in kind must be absolutely and definitively at the management–s free disposal. Assurances must be given to this effect when the company files its application.
• The Commercial Register Court may reject the registration of the company if contributions in kind have been overvalued to a material degree.

Warning: if shareholders and managing directors breach provisions regarding cash contributions and contributions in kind, they may be subject to fines and terms of imprisonment according to Art. 82 GmbHG. Typical liability traps are ”verdeckte Sacheinlagen– (undisclosed contributions in kind) and ”Hin- und Herzahlen– (return of paid-in funds):

Undisclosed contributions in kind

An undisclosed contribution in kind exists if a shareholder formally makes a cash contribution, but, on the basis of an agreement, the amount is then paid back to the shareholder as compensation for the provision of an object and thus does not remain permanently in the GmbH. Example: the company buys a car from the shareholder at almost the same time.

According to the new regulation in Art. 19 sec. 4 GmbHG, the agreement on the asset is fundamentally effective. However, the shareholder will not be exempted from his obligation to make a cash contribution. This obligation remains in effect and he may still be requested to meet it. The value of the asset at the time of the application of the GmbH for registration will only be set off against the contribution owed after (!) the company–s registration in the Commercial Register. This means that – unlike under former legal provisions – only the difference (agreed cash contribution less the value of the asset) must be paid in. If the value of the asset is equivalent to the agreed cash contribution, the shareholder will accordingly be freed from his obligation to pay the contribution owed after (!) registration of the GmbH. In this case, the shareholder must provide all necessary evidence.

According to the previously effective legal provisions, it was not possible to set off the value of the asset and this meant that the shareholder owed the full amount of the cash contribution. The new regulation thus relieves some of the burden of obligation on the shareholders, but at the same time gives the managing director the liability risk: the latter may not apply for registration for the GmbH if an undisclosed contribution in kind exists. As the undisclosed contribution in kind is only set off upon registration of the company in the Commercial Register, the managing director may not give his assurance that the agreed contribution has been made when applying for registration of the company.

Return of Paid-in Funds

This case exists if an agreement is made with the shareholder prior to the payment of the contribution that the company will provide a service (in return) to the shareholder. Example: the shareholder receives a loan from the GmbH at almost the same time. In accordance with the new regulation provided for in Art. 19 sec. 5 GmbHG, the shareholder is only exempted from his obligation to make a contribution as agreed in the Articles of Incorporation if the company has a full (!) repayment claim against the shareholder and this payment is due at any time or may become payable by termination without notice. In the absence of such a claim, the shareholder still owes his contribution.

The managing director must report such a service or agreement in the application for registration of the company in the Commercial Register. If the managing director fails to do this, he is in breach of his duties.

1. UG (haftungsbeschränkt)

No contributions in kind are permitted for the foundation of a UG (haftungsbeschränkt). In addition, the share capital specified in the Articles of Incorporation must be paid in, in full, at the time of registration.

Legislators– underlying aim when developing the idea for the UG (haftungsbeschränkt) was to facilitate the entry to a GmbH for founding entrepreneurs with low capital requirements. Art. 5a sec. 3 GmbHG states that the UG (haftungsbeschränkt) must create statutory provisions in its balance sheet which must include one fourth of the net profit for the year from which the loss carry-forward was deducted. This way, the company should gradually save money until it has built up the minimum share capital required for a GmbH and then be able to become a ”real– GmbH by way of a resolution to increase capital. After a relevant application has been filed with the Commercial Register, it could also add the supplement ”GmbH– to its name to identify the legal form of the company. However, no period of time or ”obligation to transform the company– has been specified for this purpose. It is therefore conceivable that a UG (haftungsbeschränkt) remain in this legal form forever.

These provisions may only be used for

• Capital increases from company funds;
• The compensation of a net loss for the year, unless it is covered by profits carried forward from the previous year;
• The compensation of losses carried forward from the previous year, unless they are covered by the net profit for the year.

Note:

If the shareholders breach their obligation to create such provisions, this will result in claims of recourse under civil law. It is also conceivable that rights of recourse be triggered by excessively high remuneration of the shareholder / managing director according to the principles of undisclosed profit distribution.

10. Managing Director

The managing directors represent the GmbH in its external relations. They are appointed by the shareholders and are subject to the shareholders– instructions. In principle, even foreigners may be appointed managing directors of a GmbH. If the company is managed from Germany, such persons must have the required residence and work permits. If a foreigner is to manage the company from abroad, that person may be appointed managing director if he is able to enter Germany at any time without the need for a visa.

In their capacity as the representative body of the GmbH, managing directors must comply with numerous legal duties to take due care as well as duties of care developed by the legislation. If the managing directors are guilty of breaching their duties, they are personally liable. The standard of due care applicable to managing directors is rather generally described in Art. 43 GmbHG as follows: In matters relating to the company, managing directors must work with the due care of a prudent and professional businessman. Typical legal obligations are, for instance, the payment of social security contributions, due and proper accounting, the annual publication of financial statements in the electronic Federal Gazette and the obligation to file for insolvency.

For the purposes of the application for the GmbH–s registration in the Commercial Register, the managing directors must assure the notary public in writing that no circumstances exist which might impede their appointment. Incorrect statements are punishable under law. Impediments are, for example, the prohibition of further trade activity or a legally effective conviction for an insolvency offence. The GmbH Reform has extended the list of reasons for impediment as defined in Art. 6 GmbHG; it now also includes a legally effective sentence to at least one year of imprisonment for fraud, embezzlement and withholding or misappropriating remuneration. Based on a temporary provision, these reasons for impediment do not apply to managing directors who were appointed prior to the date when the Reform took effect.

Note:

If the shareholders appoint a person as managing director in a grossly negligent manner although there are reasons for an impediment, they will bear the liability risk for damages for which the managing director is responsible.

11. Application for and Registration in the Commercial Register

If the capital contributions have been made to the agreed amount, the company can apply for registration before the Commercial Register Court in whose district it has its statutory office; this application must be certified by a notary. The following documents must be enclosed with such application:

• Articles of Incorporation
• Legitimisation of the managing director, unless he is appointed in the Articles of Incorporation;
• List of the shareholders signed by the person applying, which must state name, first name, date of birth and place of residence of the shareholders, as well as the nominal values and the serial numbers of the shares taken over by each of the shareholders;
• In the case of contributions in kind: agreements relating to the contributions in kind and a Report on the Company Foundation with Contributions in Kind, documents proving that the value of the contributions in kind is equivalent to the nominal value of the shares taken over with them;
• Assurance that the services for the shares have been effected and that the objects of the services are absolutely and definitively at the management–s free disposal.

Further information necessary:

• Assurance by each of the managing directors that there is no reason to preclude his exercising the activity of a managing director;
• Assurance of each managing director that they have received the instruction that they are subject to an unlimited duty of information to the court;
• Statement of the business address in Germany;
• Statement of type and scope of the managing director–s power of representation.

12. Gewerbeanmeldung (Application for Business Registration)

A GmbH is subject to the same reporting obligations as any other newly-founded business enterprise. After registration in the Commercial Register, the management must therefore file an application for business registration with the competent Amt für öffentliche Ordnung (Local Regulatory Office) or the Bürgermeisteramt (Mayor–s Office). The official form to be used for this purpose also contains copies for further reporting procedures, e.g. for the application to be made to the Finanzamt (Financial Authority) and the competent Berufsgenossenschaft (Professional Association).

13. Start-up Costs

Apart from the consultation costs, which vary according to the need and scope of consultation, notary public fees and Commercial Register charges will arise. The amount of the notary public fees is specified in the Kostenordnung (Regulation on Charges) and depends on the goodwill. Following the Reform, a distinction must be made between two options:

1. If the company is founded by way of individual Articles of Association, the goodwill is a minimum of EUR 25,000.
2. Foundation with a standardised Sample Protocol is, on the other hand, subject to preferential regulations as regards costs, as the goodwill depends on the amount of the share capital and thus no minimum goodwill applies.

As a GmbH must always have a minimum share capital of EUR 25,000, such preferential cost regulations regarding goodwill will only have a notable effect in the case of the UG (haftungsbeschränkt) as the latter is allowed to have a significantly lower share capital. However, as the Foundation Protocol draws together the Articles of Association, the appointment of the managing directors and the list of shareholders and this means that individual cost items do not exist, the GmbH also benefits from the use of a Foundation Protocol. Some examples:

Below are the main costs which arise if a GmbH is founded by way of cash contributions with a share capital of EUR 25,000 and individual Articles of Incorporation, as well as for the foundation of a UG (haftungsbeschränkt) with low share capital:

• Certification of the Articles of Incorporation – double charge according to Art. 36 sec. 2 KostO (Cost Ordinance): EUR 168;
• Certification of the appointment of managing directors – double charge according to Art. 47 KostO: EUR 168;
• Draft of the application for registration in the Commercial Register plus certification of the signature – half charge according to Articles 145 sec. 1, 38 sec. 2 no. 7 KostO: EUR 42;
• Preparation of the list of shareholders – half charge according to Art. 147 sec. 2 KostO: EUR 13;
• Expenses of the notary according to actual expenditure;
• Charge for registration in the Commercial Register – EUR 100 (Annex to Art. 1 HregGebV (Commercial Register Cost Ordinance), no. 2100).
• From 01/01/2009, no costs will be charged for the publication of registration in the print media as legislation only specifies the electronic Federal Gazette as the medium for publication. The lump-sum costs amount to EUR 1.

If the company is founded by one shareholder only, the charge for certification of the Articles of Incorporation is reduced to EUR 84.

If a GmbH is founded by cash contributions with a share capital of EUR 25,000 and using the Foundation Protocol, the following costs will arise:

• In the case of several shareholders, the certification of the Foundation Protocol costs EUR 168;
• The application for registration and the certification of the signature cost EUR 42;
• Notary fees according to actual expenses;
• Registration fees for the Commercial Register: EUR 100;
• From 01/01/2009, no costs will be charged for the publication of registration in the print media as legislation now specifies only the electronic Federal Gazette as the medium for publication. The lump-sum costs amount to EUR 1.

If only one shareholder is involved in the foundation of the company, the charge for certification of the Foundation Protocol amounts to only EUR 84.

The following costs will arise when a UG (haftungsbeschränkt) is founded with a share capital of, for example, EUR 5,000 using the Foundation Protocol:

• Certification of the Sample Protocol: EUR 84;
• Application for registration and certification of the signature: EUR 42;
• Notary fees according to actual expenses;
• Registration fees for the Commercial Register: EUR 100;
• From 01/01/2009, no costs will be charged for the publication of the registration in print media as legislation now only specifies the electronic Federal Gazette as the medium for publication. The lump-sum costs amount to EUR 1.

If only one shareholder is involved in the foundation, the charge for certification of the Foundation Protocol amounts to only EUR 42.

14. Mandatory Information on Business Correspondence

A GmbH–s business correspondence must contain certain information. In addition to the name of the GmbH, its legal form and the (statutory) office of the company, the Register Court of the (statutory) office of the company and the number under which the company is registered in the Commercial Register must be stated on business letters, as must all managing directors with first name and surname. If the company has a Supervisory Board and this has appointed a Chairman, the information mentioned above must be supplemented by at least the first name in full and the surname of the Chairman of the Supervisory Board.

Business letters should only be printed after the registration of the company in the Commercial Register as, prior to that time, it has often not yet been determined whether the company name is permissible; moreover no Commercial Register number has yet been allocated and this number must be printed on all letters.

15. Taxation

A distinction must be made between the following taxation levels for a GmbH:

§ Taxation of the profit or trade earnings at a GmbH level;

§ Taxation of payments, in particular those which are made to the shareholders in the form of profit distributions or remuneration of managing directors.

Taxation at a GmbH level: Three types of taxes are decisive for the taxation of earnings at a GmbH level: a) Körperschaftssteuer (corporation tax), b) Solidaritätszuschlag (solidarity surcharge) and c) Gewerbesteuer (trade tax).

1. Corporation tax: the profit of the GmbH is subject to a uniform corporation tax rate of 15 per cent (from 1 January 2008; previously 25 per cent). It applies irrespective of the appropriation of profits, i.e. irrespective of whether they are retained (accumulated) or distributed to the shareholders. In this respect, the corporation tax corresponds to income tax for natural persons. The profit must be determined by balance sheet comparison (double-entry accounting / balancing).
2. Solidarity surcharge: Furthermore, the GmbH, just like any natural person, is liable for the solidarity surcharge. The rate is currently 5.5 per cent of the corporation tax to be assessed.
3. Trade tax: Finally, the GmbH is subject to trade tax. The basis of assessment for this tax is the trade earnings which, in simplified terms, depend on the profit, but which are adjusted on the basis of certain additions and reductions. For instance, one fourth of interest and of comparable financing shares which are included in rents, lease payments, leasing, licences and which can be deducted as operating expenses when determining profit must be calculated back in when determining the tax assessment basis.

The trade tax rate differs from municipality to municipality as a result of the Kommunales Hebesatzrecht (Municipal Rate of Assessment Right). On average, it amounts to approx. 12 to 13 per cent.

Conclusion: all in all, the tax types mentioned above mean that a GmbH–s income is subject to a total taxation of approx. 30 per cent. Depending on the rate of assessment of the competent municipality, this figure may be slightly higher or slightly lower.

Taxation at a shareholder level: the following two key points must be noted for the taxation of shareholders: a) profit distribution, b) the salaries of shareholders who are managing directors.

1. Profit distributions: profit distribution payments made by a Corporation to its shareholders are also subject to income tax payable by the shareholders, as the profit distribution represents income from capital. Based on the previously defined taxation at a company level, the amount would be subject to double taxation. To avoid this situation, the so-called Halbeinkünfteverfahren (half-income assessment method) applies. According to this method, only half of the amount of the profit distribution payment made to the shareholder is included in the basis of assessment for determining the latter–s income. This method avoids the complete double taxation of profit distributions – on the one hand due to taxation at a company level of 15 per cent and, on the other hand, the taxation of the shareholder according to his individual tax rate.

Note: This will be subject to changes from 1 January 2009 on the basis of the Abgeltungsteuer (flat rate withholding tax) which has already been passed. Distributions from shares in a GmbH which are held in a shareholder–s personal assets will then be subject to an Abgeltungssteuer rate of 25 per cent (those with a lower personal tax rate will have the option of assessment). If shares are held in working capital (for instance in the case of a GmbH & Co.KG), taxation will follow the so-called Teileinkünfteverfahren (partial income method). The latter specifies that 60 per cent of the distribution must be included in the tax assessment basis, so that only 40 per cent is exempted from taxation compared to the 50 per cent exempted to date.

If the shareholder is a corporation, for example a GmbH, up to 95 per cent of dividends are exempted from taxation as multiple taxation would otherwise occur. As regards this regulation, there are no planned amendments as of 1 January 2009.

1. Salaries of managing directors: salary payments to shareholders who are managing directors in a GmbH are, as a matter of principle, recognised as operating expenses deducted from profit – just like payments made in other contractual relationships such as tenancy agreements. Accordingly, the managing directors must pay taxes on such payments as they represent income from employment. They are subject to wage withholding tax.

Warning: As a result of the tax deductibility of salary payments in a GmbH, this type of asset transfer from the GmbH to the shareholder is, contrary to profit distributions, not subject to trade tax. The Financial Authority therefore qualifies some inappropriate salary payments, under certain preconditions, as so-called undisclosed profit distributions which means that they are not recognised as GmbH operating expenses deductible before tax. The result is a correction of the GmbH–s assessed income. For details, please refer to the information leaflet from the Chamber of Industry and Commerce "Wieviel darf ein Gesellschafter-Geschäftsführer verdienen?" (What maximum salaries are allowed for shareholders who are managing directors?) This can be accessed from the link list at the side.

Umsatzsteuer (Sales Tax)

In addition to taxation on earnings, sales tax must also be taken into consideration. Services and deliveries made by the GmbH in the context of its business activity are currently subject to a sales tax of 19 per cent. A reduced tax rate of 7 per cent applies to certain services and deliveries, such as the delivery of food or books. Certain services and deliveries, in particular deliveries within the Community and export deliveries can be exempted from sales tax.

16. Articles of Incorporation

The Articles of Incorporation must be certified by a notary public and must be signed by any and all shareholders according to Art. 2 GmbH-Gesetz (GmbHG). According to the legal provisions in Art. 3 sec. 1 GmbHG, the Articles of Incorporation must contain, at least, the following clauses:

• Name and Office of the Company
• Object of the Company
• Amount of the Share Capital
• Number and nominal values of the shares which each of the shareholders takes over in return for a contribution to the share capital (capital contribution)

Should the company–s existence be limited to a certain period of time or should shareholders be subject to other obligations to the company apart from the provision of capital contributions, these regulatory provisions must, according to Art. 3 sec. 2 GmbHG, also be included in the Articles of Association.

Note: Rapid registration of a GmbH in the Commercial Register often fails due to an inadmissible name or a lack of sufficient detail in the description of the object of the company. Errors in this respect constitute an impediment to registration. Another delay in the registration of a GmbH might occur if post cannot be delivered to the business address specified. It is therefore mandatory to attach a clearly legible company name to the company–s letter box.