Corporate law
for small businesses and start-ups

No! You do not have to incorporate a GmbH (German limited liability company) to run a business in Germany. You can also pursue your business idea as a sole trader or in a partnership (GbR, OHG, KG). A GmbH or another type of corporation (UG, AG) mainly makes sense if you want to limit your personal liability or are looking for investors. You can also operate directly through a foreign company. In that case, you may have to appoint certain official points of contact for the authorities. A range of service providers offer this.

A GmbH often still inspires rather more confidence in the outside world, but UGs are now widespread and well accepted. Under German law, the UG is simply a special form of GmbH. If the share capital is later increased to EUR 25,000, the UG can change its name to become a ‘real’ GmbH. Anyone able or willing to raise this capital from the outset will therefore usually choose a GmbH straight away. But that should not put you off incorporating.

You can incorporate using the Musterprotokoll if the company has no more than three shareholders and only one managing director. The Musterprotokoll leaves no room for individual arrangements. It therefore makes sense mainly for a sole founder, for a holding company or for very simple, clear structures. As soon as several founders with different interests are involved, you should have tailored articles of association drafted.

Beyond the mandatory provisions, the split of shares and the organisation, co-founders should above all set out how they will deal with disagreements. What happens if someone leaves the founding team, contributes less or is no longer able to work? Who decides if there is a deadlock? Who gets which shares, and how (pre-emption rights, tag-along and drag-along rights)? Various instruments have become established for this, for example vesting, a ‘Texas shoot-out’ or ‘Russian roulette’, as well as tag-along and drag-along provisions. These instruments come in variants, each with its own advantages and disadvantages, which you should consider before incorporating. In addition, every agreement should contain rules on non-compete obligations, confidentiality and IP transfer. Further clauses may be advisable in certain scenarios.

Under German law, managing directors can become liable both to the company and to third parties. The standard for liability towards the company is generally ‘the due care of a prudent businessman’. Liability towards third parties and the state usually arises only where this is expressly provided for. Examples are taxes or social security contributions that were not paid over (also a criminal offence), payments made after grounds for insolvency have arisen, and delay in filing for insolvency. In compliance cases, liability can also arise if adequate precautions were not taken. D&O insurance can cushion some risks, but it is no substitute for managing the company properly.