Choosing the proper business structure
Whether you have recently graduated from university, finished your Ph.D., or battled through consulting or any other nerve-racking profession, setting up your own company is as exciting as it gets.
Choosing the proper business structure is essential for bringing your idea to life. You want to shield yourself from personal liability because otherwise, you risk getting in trouble when your venture goes belly-up. Which business structure you choose depends on whether you have money or investors.
There are two ways to separate your private assets from your startup. You can either set up a Gesellschaft mit beschränkter Haftung (GmbH) or a Unternehmergesellschaft (UG).
No money, no investors
If you are not dependent on investors, then a UG is often sufficient. This legal structure can be set up with as little as EUR 1, but we recommend raising at least EUR 1.000 to ensure that the company does not immediately become insolvent. Also, don’t forget to add (haftungsbeschränkt) behind UG. Otherwise, you will be held personally liable.
When using a model protocol, the UG notary costs range between EUR 250-300. This is only possible under three conditions:
- The UG has only one managing director,
- A maximum of three shareholders, and
- The company rules do not deviate from the Act on Limited Liability Companies (GmbHG).
If individual rules are desired, unique articles of association should be used. However, this will incur notary costs between EUR 600-1.000.
On the downside, 25% of annual profits must be retained as a reserve until the startup has accumulated equity of EUR 25.000. Then, the UG may be converted into a GmbH.
No money, but investors
If you have already found investors for your startup or plan to bring investors on board, you should set up a GmbH.
To do this, you need to:
- Make a notary appointment,
- Prepare your articles of association (AoA),
- Have your AoA certified by a notary,
- Open a bank account with the notarized documents,
- Pay in the share capital,
- Send the deposit receipt to the notary.
To set up a GmbH, EUR 25.000 share capital is required. However, the founders only need to contribute EUR 12.500 initially and can pay the other half later. Usually, the remaining EUR 12.500 must be paid within 12 months of formation.
Contributions can be paid in cash or in-kind (i.e., other assets than cash). Because contributions in kind require an audit report, contributions in cash are much more straightforward.
Next, the notary hands in the incorporation documents to the district court. The incorporation is completed when the GmbH enters the Commercial Register. Thereafter, the shareholders can no longer be held liable for the company’s liabilities.