A new type of company for Germany
By: Rechtsanwalt (Attorney) Carsten Lexa, LL.M.
In November 2008 Germany introduced a new type of company – the so-called “Business Company (with limited liability)” (“Unternehmergesellschaft (haftungsbeschränkt)” – UG). Essentially, this is a variation of the highly successful German “Limited Liability Company” (“Gesellschaft mit beschränkter Haftung” – GmbH), and therefore the regulations regarding the Limited Liability Company, set out in the “Limited Liability Company Law” (“GmbHG”), apply.
It can be discussed, whether this is really a “new” type of company or only a modified Limited Liability Company. However, the German legislator has also introduced new rules that govern the Business Company. Because these rules have a high impact on how to handle the Business Company compared with the regular Limited Liability Company, it is safe to say that the Business Company is something “new” in the area of German corporate law.
The intention of the German legislator for introducing the Business Company was twofold: On the one hand he wanted to counter the utilization of the English “Private Company Limited by Shares” (hereinafter: “Limited”) in Germany, on the other hand he wanted to provide a type of company to small businesses, that is easily set up, does not require huge initial capital, but does limited the personal liability of the shareholders.
Now, what did the German legislator to help small businesses by providing the Business Company?
First, the initial capital for the Business Company can be as low as one Euro. This must be compared with 25.000 Euro for the German Limited Liability Company (for the sake of completeness: it is possible, under certain conditions, to incorporate a German Limited Liability Company with 12.500 Euro).
Second, the time to establish the Business Company was reduced from 4 to 6 weeks to 2 to 3 days (this also applies now for the German Limited Liability Company).
Third, because the Business Company is only a variation of the German Limited Liability Company, the personal liability of the shareholders is limited to the assets of the company.
Of course, there are a few negatives aspects.
First, the company must have a mandatory name affix: “[Name of the Company] Unternehmergesellschaft (haftungsbeschränkt)”. Although it is hard to see why this is really a disadvantage, one can image that because in the area of German corporate law the Business Company is not common yet, people might be deterred from doing business with such a company because they don´t know how to handle it.
And second, the Business Company must set up a mandatory restricted reserve of 25% of the annual net income, until the Business Company has “saved” the initial capital of 25.000 Euro for becoming a regular German Limited Liability Company. This of course limits the dividend payments to the shareholders, because only 75% of the annual net income can be distributed to them. The justification for the restricted reserve was the following: The German legislator allowed small businesses to establish a form of limited liability company without the need for an initial capital of 25.000 Euro for a regular German Limited Liability Company. The price for this relief was the statutory request to save money until the Business Company fulfils the requirements of the regular German Limited Liability Company.
It is difficult to say whether the Business Company will be success or not. The experience in our law firm is that small businesses are fascinated with the possibility to limit the personal liability without having to supply 25.000 Euro to establish a German Limited Liability Company. When looking at the advantages, we hope the Business Company receives the attention it – in our opinion – deserves.
For inquiries please contact the author: kontakt@kanzlei-lexa.de
