Many foreign entrepreneurs establish a subsidiary in Germany, frequently choosing a Kapitalgesellschaft (company) for liability and tax reasons. The most familiar forms of company in German law are the Aktiengesellschaft (AG), or public limited company and the Gesellschaft mit beschränkter Haftung (GmbH), or limited liability company. Both are autonomous legal entities that can exist independently and have their own company assets. But what, in fact, are the differences between the two?
Below is a brief outline of the main differences.
In Germany, a GmbH’s minimum authorised capital is €25,000; the minimum authorised capital of an Unternehmergesellschaft (haftungsbeschränkt) (entrepreneurial company with limited liability and very limited share capital) is €1. The Unternehmergesellschaft (haftungsbeschränkt) was introduced in 2008 in order to offer a form of company that would be attractive to entrepreneurs founding new businesses. The Unternehmergesellschaft (haftungsbeschränkt) must gradually save up the minimum capital required for an ordinary GmbH; it must not distribute all its profits but must set aside one quarter of the annual surplus in a statutory reserve until the statutory minimum capital of €25,000 is achieved. The company must use the ‘limited liability’ rider, so that it is clear to contracting parties that the company’s capital adequacy is low. This company is therefore quickly threatened by insolvency.
The GmbH’s authorised share capital is divided into capital contributions. The shareholders can furnish their capital contributions in cash or in kind. An increase or reduction in the company’s authorised share capital must be documented by a notary and submitted to the Commercial Register for registration.
An AG’s authorised share capital must be at least twice as much, i.e. €50,000 and is divided into shares. Cash contributions or contributions in kind are also possible for an AG. Shares, can, however, be informally transferred, i.e. by a verbal or written agreement, or by computerised trading. If the AG has issued registered shares, these can be transferred by endorsement.
Memorandum and Articles of Association
One of the great advantages of the GmbH is its flexibility. There is a great deal of scope when structuring the memorandum and articles of association. The regulations applied to the GmbH are less strict than for the AG. Establishment is less formalised and therefore easier and cheaper. A notary must establish both forms of company and draw up their memorandum and articles of association.
One or more shareholders may establish a GmbH or an AG. Shareholders may be domestic or foreign natural persons or legal entities and partnerships (oHG (ordinary partnership), KG (limited commercial partnership) and EWIV (European Economic Interest Grouping)).
The GmbH’s corporate bodies are the shareholders’ meeting and the managing director(s). A supervisory board may be appointed, but is only mandatory under certain conditions. The managing director(s) represent(s) the GmbH externally and manage(s) it. The articles of association may specify the areas in which the managing director(s) is (are) subject to instruction by the shareholders’ meeting. The managing director(s) is (are) largely bound by the instructions issued by the shareholders’ meeting.
In addition to ongoing management, the shareholders’ meeting is also competent to adopt the annual accounts and appropriate the profits, appoint and dismiss directors, take measures to supervise and monitor management, appoint authorised signatories and officers with general commercial power, to regulate legal relationships between the company and its shareholders, etc. The managing directors must immediately furnish every shareholder with information about the company’s business on request and allow inspection of the company’s books and documents.
The AG’s executive bodies consist of the shareholders’ meeting, the executive board and a supervisory board. The executive board has unlimited power of representation within the AG and externally. Unlike the GmbH, the shareholders’ meeting can only decide on management matters when the executive board asks it to do so. The shareholders’ meeting cannot instruct the executive board. The shareholders’ meeting only influences management in that it elects the shareholders’ representative on the supervisory board. The shareholders’ meeting also elects the auditor and takes resolutions on utilisation of any balance sheet profit. It grants discharge to the executive board and supervisory board.
Compared to the managing director of a GmbH, the executive board has extensive scope to manoeuvre. Unlike the shareholders, the members of a GmbH have the opportunity of intervening in management at any time, which shareholders cannot.
The supervisory board’s main role consists of appointing and dismissing the executive board and supervising its management (control function). The supervisory board can neither undertake management activities nor issue instructions to the executive board.
Neither the shareholders of a GmbH nor the AG’s shareholders are personally liable vis-à-vis creditors if the authorised share capital is fully paid up. If the authorised share capital is not fully paid up, the shareholders are liable up to the value of the share capital.
A GmbH’s managing directors, on the other hand, are at risk of being held liable in several cases. Some of the most important include liability vis-à-vis the company that may arise from the director’s particular position of trust; he is personally liable to the company and creditors for due and proper accounting, maintenance of the balance sheets, filing of income tax and VAT returns, payment of employees’ social insurance contributions; in the event of impending insolvency the director is personally liable for payments made after the company has been declared insolvent.
The members of the AG’s executive board are not liable to third parties for the company’s liabilities nor must they reimburse the company for internal losses incurred during their management of it. The company alone bears the entrepreneurial risk. The members of the executive board are, however, obliged by law to undertake transactions with the diligence due of a prudent businessman. If a member of the executive board violates this obligation in respect of the company, the company may have a claim for compensation. The member is not liable to the members of the executive board or third parties. The question of liability vis-à-vis third parties only arises if the members of the executive board have personally committed a tort.
The GmbH is equally suited to small enterprises, medium-sized family companies, or even large enterprises. By choosing the form of an AG, an enterprise can obtain large sums of capital and shares are easily transferable – via the stock exchange in the case of listed companies. The AG is the preferred form of company for large enterprises. With the introduction of the ‘kleine Aktiengesellschaft’ (small joint-stock company), the AG also became attractive to small businesses. The AG enjoys a better image externally, simply because it requires greater capitalisation. This is advantageous in dealings with banks, suppliers and customers. Considerable preliminary work is required, however, to enjoy these positive characteristics, because setting up an AG is more costly than setting up a GmbH and the capital contributions are at least twice those for a GmbH. The administrative expense is also greater, occasioned by the strict regulations in the German Joint-Stock Corporation Act (Aktiengesetz). Unlike a GmbH’s managing directors, the members of an AG’s executive board have more freedom to shape the form their management takes, as they are not subject to instructions from a supervisory board or shareholders. The difference between an AG and a GmbH also lies in the risks facing management: The boards have a greater duty of care, but any piercing of the corporate veil applies more quickly to a GmbH’s directors, which means they are also liable with their personal assets. Shares are much easier to transfer than investments in a GmbH, whose transfer must be authenticated by a notary. The difference between an AG and a GmbH lies in the AG’s opportunity to absorb new capital faster. The Aktiengesellschaft is also more independent of the owners. There are therefore advantages and disadvantages to both forms of company. Deciding which legal form to choose considerably depends on which activities the founders wish to perform with the company and on what scale, and to what extent shareholders’ influence is desirable.