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Legal structures

One of the first steps in forming a company is selecting a legal structure – sole proprietorship, partnership or corporation. Your choice of structure depends on a variety of criteria: taxes, liability, organisation, labour law, the flexibility of the shareholder structure and the consequences of a shareholder’s death.

The notary will educate you about the various legal structures and, together with your tax advisor, will ensure that you receive all the information you need.

The following legal structures are common:

1. Registered merchant

A merchant is anyone who conducts a business.

This covers any business establishment unless the nature or size of the enterprise is such that it does not require a commercial business organisation. In the latter case, a businessman becomes a merchant once his company is entered in the commercial register. Merchants are required to present the commercial register with an attested document identifying the company name and the location of the commercial establishment.

The merchant is personally liable for any and all liabilities originating from his business.

2. Partnerships

If several individuals have equity in the company, they can set up a general (OHG) or limited partnership (KG). Partnerships are characterised by a strong personal bond between the partners. All the partners, except for limited partners, are fully and personally liable. Only the partners can represent the company. Third parties may, at most, be given a special signing authority (Prokura).

a) General partnership (OHG)
The archetypal partnership is the general partnership (OHG). In a general partnership, several people come together to run a business. All the partners must register the general partnership with the commercial register through a notary. They are all personally liable for the company’s liabilities.

b) Limited partnership
A limited partnership (KG) differs from a general partnership in that it has both personally liable partners (general partners) and at least one partner whose liability is capped at the amount of his investment in the company (limited partner). Limited partners may not participate in the management of the company. However, the limited partner’s liability is unrestricted until he is entered in the commercial register. If he invests in the limited partnership prior to registration, he will be fully liable for any liabilities that the company may incur in the interim. For that reason, it is best not to officially form a limited partnership or add a limited partner to an existing limited partnership until the transaction is entered in the commer-cial register.

Some companies have a “GmbH & Co. KG” structure in which a limited liability company (GmbH) serves as the general partner. In this arrangement, personal liability is limited to the capital of the limited liability company serving as the general partner. Because the general partner often runs the partnership’s business, it is called a management or holding company.

3. Corporations

Typical corporations include the limited liability company (GmbH), the entrepreneurial company (UG) and the public limited company (AG). They are separate legal entities that do not depend on the existence of their shareholders. The shareholders are not personally liable, but are only liable to the extent of their investment in the company. Therefore, to protect creditors, corporations have to meet strict capital-raising and capital adequacy rules. A limited liability company’s share capital is at least EUR 25,000.00, while a public limited company has a minimum paid-in capital of EUR 50,000.00.

An entrepreneurial company has no legally prescribed minimum paid-in capital. However, one-quarter of the net profit for the year minus the loss carryforward from the previous year must be allocated to the reserves each year. This reinvestment requirement is designed to grow the equity base of the company. As soon as the paid-in capital reaches EUR 25,000.00, the entrepreneurial company can be converted to a regular limited liability company.

The capital must be paid in as cash during the formation of a company by cash subscription. However, the capital should not be paid in until the formation is recorded; up-front investments may not satisfy the contribution obligation. The shareholder then runs the risk of hav-ing to make the contribution again at a later time. The same consideration applies to capital increases.

For a limited liability company, at least 25%, but no less than EUR 12,500.00, must be paid in for each share unless contributions in kind are made.

For a public limited company, the called-up amount must be at least one-quarter of the minimum issuing amount, plus any difference between the actual issuing amount and the minimum.

An entrepreneurial company’s share capital is lower and must therefore be fully paid up.

It is not necessary to contribute the capital of a limited liability or a public limited company in cash. Shareholders may also make contributions in kind when the company is formed or during a subsequent capital increase.
However, they must provide separate proof of the value of their in-kind contribution.

Entrepreneurial companies cannot use non-cash capital contributions for their formation or capital increases.

The formation of a limited liability company, entrepreneurial company or public limited company must be recorded by a notary, along with subsequent changes to the memorandum and articles of association. Unlike the memorandum and articles of association of a limited liability company, which can be worded very flexibly, the law lays down very strict rules when it comes to the memorandum and articles of association of a public limited company. This is where a notary can help. He can draw up the right memorandum and articles of association for your company, record the formation and monitor the process until your company is entered in the commercial register. Only then does it come into existence.

A corporation is represented by the members of its management or executive board, not its shareholders. They – along with the chairman of the supervisory board, if applicable – must give assurances that the capital will be raised properly.

In a public limited company, the executive board is appointed by the supervisory board, which in turn is elected at the annual general meeting. Annual general meetings have to observe extremely strict rules.

To prevent annual general meeting resolutions from being subsequently challenged or invalidated, the agenda should be cleared with a notary early on. For large publicly listed companies, early, close cooperation between the notary, corporate counsel and professional AGM service providers will ensure your annual general meeting is conducted smoothly and successfully.