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Legal Form Considerations

The choice of legal form has a wide range of effects on your company. The consequences of this are personal, financial, tax and legal.


Sole proprietorship / company


You can set up a company alone or together with several people. The sole proprietorship can only be founded by one person, while companies can be founded by several people or some companies (corporations) can also be founded by just one person. The sole proprietorship must decide whether he wants to or must be entered in the commercial register as a small business owner or as a merchant.


Partnerships / corporations


If a company is to be founded, there is a choice between partnerships and corporations. Partnerships can only be established by more than one person. With corporations there is the possibility of one-man formation. The decision depends on the one hand on whether one attaches importance to a limitation of liability because of a high liability risk, or whether one or the other legal form is more suitable for tax reasons. The main difference between a partnership and a corporation is the different liability of the partners. In a partnership, with few exceptions, the partners are personally liable with their entire private assets for the company's liabilities, while in a corporation, liability is limited to the company's assets.


Partnerships are geared towards the person of the individual shareholders. The company shares are generally not freely transferable. The personal cooperation of the shareholders is characteristic. Many small businesses are operated in the form of partnership. In the case of medium-sized companies, it is predominantly family businesses that organize themselves as partnerships. However, mergers of several industrial companies can also be partnerships. In this case, however, the partnership does not consist of natural, but of legal persons. They then call themselves a consortium, group, interest group or simply a working group. The diversity in appearance corresponds to the multitude of constellations of interests that arise in the individual partnerships.


In the case of corporations, the company itself has its own rights and acts - through its managing directors - independently in legal transactions. The shareholders do not necessarily appear to the outside world. Society itself concludes contracts, owns assets and has to pay taxes. Liability for business debts is limited to the company's assets. Society's creditors cannot satisfy themselves from private assets. Therefore, corporations are subject to greater formal constraints and require a minimum capital to be founded.


Businessman / businessman on request / small business owner


According to Section 1 of the German Commercial Code (HGB), every trader is a businessman, unless the type or scope of the company does not require a commercially set-up business. All corporations are merchants by virtue of their legal form. A distinction must be made between partnerships: The OHG, the KG and the EWIV are commercial companies. The GbR is a small business and cannot be run in a commercial manner. The GbR then becomes an OHG. The following applies to sole proprietorships: If the intention is to do business on a larger scale right from the start that requires commercial operations, then it is a matter of a businessman who must be entered in the commercial register. The HGB applies to merchants.


Those companies (GbR, sole proprietorships) that do not require commercial business operations in terms of type or scope are so-called small businesses that are exclusively subject to the German Civil Code (BGB). Small traders can voluntarily acquire the status of a merchant by entering them in the commercial register.


Taxes


The type and level of taxation of a company and its sponsors largely depend on the chosen legal form. Often a legal form is chosen more from a tax point of view than from a commercial point of view. However, such constructions, chosen solely from a tax point of view, which do not take sufficient account of the actual economic and legal circumstances, can prove to be unsatisfactory.


The brochure "Taxes for Entrepreneurs" from the Association of Hessian Chambers of Industry and Commerce is intended to provide an initial introduction to key tax issues.


Foreign legal forms


It is also possible to set up a corporation in another European country and still carry out the entire business activity in Germany. Before choosing a foreign legal form, you should find out all about the advantages and disadvantages of setting up a business like this. It is important to note that a foreign legal form can only be established abroad.


The choice of the legal form is a decisive basis for the existence of the company. But always keep in mind that a type of company that is currently optimal can develop as a disadvantage due to changes that occur later, such as expansion, higher liability risk, etc. You should therefore check at regular intervals whether the company's legal dress still fits or whether it should not be changed.


More basic legal information.