Legal forms compared: Which one suits your start-up?

Choosing the legal form is one of the first – and economically most long-term significant – decisions when starting a business. It determines your personal liability, the required capital investment, the tax burden, the disclosure requirements and your attractiveness to investors. This article provides a dispassionate comparison of the six legal forms that are practically relevant for new businesses in Germany: sole proprietorship, GbR, OHG, KG, UG (haftungsbeschränkt) and GmbH. At the end, you will find a decision-making aid featuring typical constellations.

sole proprietorship, partnership, limited company

German business law recognises three basic types, which differ significantly in terms of liability, incorporation effort and ongoing obligations.

The sole trader is not a company, but a natural person who operates in the market independently. Formation requires no formal procedure, the structure is lean – and liability is unlimited and personal.

At the Partnerships (GbR, OHG, KG and the special forms PartG and PartG mbB) the person of the partners is in the foreground: they manage the business and are liable – generally personally and without limitation – for the liabilities. An exception is the limited partner in the KG, whose liability is limited to the registered amount of liability (Section 171 of the Commercial Code (HGB)).

At the Limited companies (UG, GmbH, AG), the company acts as an independent legal entity. It is liable with its own assets; once entered in the commercial register, the shareholders themselves are generally not personally liable for the company's liabilities. Anyone who acts on behalf of the company prior to registration, however, may be held personally liable (Section 11 GmbHG). Limited liability companies are subject to stricter incorporation and accounting regulations for this: notarisation of the partnership agreement, entry in the commercial register, capital raising and accounting obligations.

The legal forms in detail

sole trader

Anyone who operates a business alone and independently is a sole trader. Establishment is informal – registration of a business under Section 14 of the German Trade Regulation Act (GewO) is sufficient, or notification to the tax office in the case of liberal professions. One only becomes a merchant in the commercial law sense (Section 1 of the German Commercial Code - HGB) if the nature and scope of the business require a commercially organised business enterprise; smaller businesses remain small-scale operators without any obligation to register in the commercial register. The owner is personally and fully liable for the liabilities with their private assets.

GbR and eGbR

The civil law partnership according to Sections 705 et seq. BGB is formed as soon as two or more persons join together to pursue a common purpose – a written contract is not compulsory, but is strongly recommended. There is no minimum capital requirement. The partners are jointly and severally liable to creditors with their private assets.

Since 1 January 2024, the Partnership Law Modernisation Act (MoPeG) has reorganised the GbR: it has legal capacity, can hold real estate, trademarks and equity investments in its own name, and can voluntarily have itself entered in the newly created partnership register. The registered variant bears the suffix „eGbR“. For certain transactions, registration is effectively a prerequisite – in particular for land register entries (§ 47 para. 2 GBO) and the acquisition of GmbH shares (§ 40 GmbHG). The eGbR is a registered partnership; it is therefore also subject to the obligation to notify beneficial owners to the transparency register (§ 20 GwG).

OHG

The general partnership (sections 105 et seq. of the German Commercial Codeis the commercial partnership: subject to mandatory registration, with no minimum capital, and with unlimited joint and several liability of all partners.

KG and GmbH & Co. KG

The limited partnership (§§ 161 et seq. HGB) has two types of partner: the Complementary, who has unlimited liability and manages the business, and the Limited partners, whose liability is limited to a liability sum entered in the commercial register. If the contribution has been paid in full, direct liability towards creditors ceases to apply (§ 171 HGB).

Of practical significance is the GmbH & Co. KGThe general partner is not a natural person, but rather a GmbH (private limited company). As a result, no natural person has unlimited liability. This structure combines the limited liability of a corporate entity with the structural and tax advantages of a partnership, but requires separate bookkeeping and separate annual financial statements for the KG and the general partner GmbH. Furthermore, if there is no natural person as an unlimitedly liable partner, the disclosure requirements for corporations (§ 264a HGB) apply.

Limited Liability Company (Ltd.)

The entrepreneurial company pursuant to Section 5a of the German Limited Liability Companies Act (GmbHG) is not a separate legal form, but rather a variant of a GmbH with reduced starting capital starting from €1. Because of the lower share capital, special reserve rules apply: a quarter of the annual surplus, reduced by any loss carried forward, must be allocated to a statutory capital reserve. The obligation to form reserves does not end when a specific reserve amount is reached, but only upon the entry of a formal capital increase to at least €25,000 in the commercial register (Section 5a (5) GmbHG). Thereafter, the company may retain the designation „UG (haftungsbeschränkt)“ or change its name to „GmbH“.

Ltd.

The limited liability company is the most commonly chosen form of company. Minimum share capital: €25,000 (Section 5 of the GmbH Act), of which, in the case of a cash formation, at least 25 % per share and a total of at least €12,500 must be paid up prior to registration (Section 7(2) of the GmbHGFollowing entry in the commercial register, the shareholders are generally not personally liable for the company's liabilities. We discuss the procedure, costs and standard protocol in detail in the article Set up a GmbH in Cologne.

AG

The public limited company is the legal form for capital-intensive projects, different classes of shares or access to the capital market. Minimum share capital: €50,000 (§ 7 AktG). The structure has three tiers (management board, supervisory board, general meeting), and the articles of association are heavily predetermined by the legislature (strictness of the articles of association, § 23 para. 5 AktG). For the majority of medium-sized projects, the AG is oversized and is only briefly considered here.

Direct comparison in the table

The following overview summarises the key distinguishing features. It does not replace a case-by-case assessment, but helps to narrow down the direction.

Disclosure notice: The obligation to disclose annual financial statements in the company register pursuant to sections 325 et seq. of the German Commercial Code (HGB) applies to capital companies and commercial partnerships with no unlimitedly liable natural person (section 264a HGB). The scope depends on the size category pursuant to section 267 HGB – small and micro companies enjoy significant simplifications.

Tax treatment at a glance

The tax burden is one of the most important factors in choosing a legal form and one of the most complex. The following overview is limited to the basic structure; the specific calculation must definitely be left to the tax adviser.

Limited companies: Corporation tax and trade tax

UGs, GmbHs and AGs are subject to corporation tax under the Corporation Tax Act (KStG) (currently 15 %), plus a solidarity surcharge of 5.5 % on that amount, as well as trade tax. The legislature has decided to gradually reduce the corporation tax rate: 15 % up to and including the 2027 tax assessment period, after which it will decrease annually to 10 % from 2032 (Section 23 of the Corporation Tax Act, as amended by the Growth Promotion Act).

Trade tax is levied on the establishment rather than the registered office (Section 4 of the Trade Tax Act). For businesses with a permanent establishment in Cologne, the municipal assessment rate – currently 475 % – must be included in the calculation; this is significantly higher than the national average. Where there are several permanent establishments in different local authorities, the trade income is apportioned (Sections 28 et seq. of the Trade Tax Act (GewStG)).

Where profits are distributed to shareholders, a second tier applies: for natural persons, either the flat-rate withholding tax (25 % plus the solidarity surcharge) or – upon application – the partial income scheme under Section 32d(2)(3) of the Income Tax Act (EStG). The right to make such an application requires a shareholding of at least 25 % or – in the case of a shareholding of at least 1 % – the performance of professional duties for the company that confer significant influence over its business operations. The total tax liability depends on the shareholders’ individual tax rates.

Sole proprietorships and partnerships: transparent taxation

Sole proprietorships, partnerships (GbR), general partnerships (OHG) and limited partnerships (KG) are for the earnings taxes Tax-transparent: Profits are allocated pro rata to the owners or shareholders, who are then liable for personal income tax on those amounts (progressive up to 45 %, plus the solidarity surcharge and, where applicable, church tax). For the Corporation tax an important exception applies: in the case of commercial partnerships, the partnership itself is the liable party for trade tax (§ 5 GewStG). It is credited in part against income tax at the level of the partners via § 35 EStG; given the current Cologne assessment rates, this credit frequently falls short of the actual tax burden.

Since 2022, general partnerships (OHG), limited partnerships (KG), registered professional partnerships (PartG) and – following the MoPeG reform – also registered civil law partnerships (eGbR) can opt for corporate taxation pursuant to Section 1a of the Corporate Income Tax Act (KStG). The option changes the tax treatment, not the civil-law legal form. For unincorporated businesses, Section 34a of the Income Tax Act (EStG) additionally offers a retention privilege that partially reduces the tax burden on retained profits.

Which form is more tax-favourable?

There is no general answer. As a guideline: anyone who leaves profits in the company (retains them) is often better off with a limited company; anyone who continually withdraws profits for private use and has a low personal income tax rate may be better off with an unincorporated business. The exact calculation depends on the level of profits, withdrawals, shareholder structure, location of the business establishment and a potential option under Section 1a of the Corporate Income Tax Act (KStG).

Which legal form suits which project?

Typical constellations frequently fall into one of the following groups. The recommendations are guide values; the details of a specific project may point in a different direction.

Sole proprietorship start-up with low initial capital and limited risk

If the activity is manageable and the liability risk is low (such as consulting, IT, trade with low-value goods), sole proprietorships or Limited Liability Company (Ltd.) into consideration. The UG offers limited liability after registration in the commercial register, but in return requires the statutory reserve obligation pursuant to Section 5a(3) of the German Limited Liability Companies Act (GmbHG) and the formal administrative burden of a corporation.

Two to three founders with a shared vision

In the case of several individuals with joint management, investments and mutual trust, there is frequently a LLC with individual articles of association appropriate. The contract should explicitly regulate voting rights, reservation of consent, exit rules and severance formulas in the articles of association – subsequent changes are time-consuming and expensive in the event of a dispute.

Freelance cooperation

For associations of freelance professionals (doctors, lawyers, tax advisors, architects), the partnership or – with limitation of liability for professional negligence – the Partnership with limited professional liability (PartG mbB) common. Both forms do not require a minimum capital and suit professions that do not engage in a commercial activity within the meaning of the German Commercial Code (HGB). The PartG mbB limits liability for professional errors to the partnership's assets, provided the statutory professional indemnity insurance is in place (Section 8(4) of the German Partnership Act (PartGG)); other liabilities – such as rent or wages – remain unlimited.

Family business with succession prospects

Where succession planning is important, the GmbH & Co. KG frequently chosen. It combines the limited liability of a corporate entity with the flexibility of a partnership – at the price of a more complex structure with two companies and separate bookkeeping.

Capital-intensive project, investor rounds planned

For projects with external capital, different share classes or a prospective stock market flotation, the Ltd. common; for very large projects with capital market access the AG. Both forms require structured governance, professional accounting and regular disclosure.

Secondary employment with low turnover

A sole trader or a small business is often sufficient here. Regardless of the legal form, the small business regulation under Section 19 of the German Value Added Tax Act (UStG) may apply: the turnover of a small business is exempt from VAT if the turnover in the previous year did not exceed €25,000 and the anticipated turnover in the current year does not exceed €100,000 (limits applicable since 1 January 2025). The small business regulation is not a legal form, but a VAT status; it is also open to partnerships and corporations.

For international founders

Foreign natural and legal persons can become shareholders of all the aforementioned legal forms in Germany without special approval. Two clarifications are important: The choice of legal form gives rise to in its own right no right of residence in Germany. Anyone who wants to move to Germany themselves as a founder requires a corresponding residence permit – for self-employed activities, this is regularly under Section 21 of the Residence Act (AufenthG) with an individual assessment of economic viability. And: Foreign legal entities as shareholders regularly require a current register extract and proof of authority to represent for the notary, frequently with an apostille or consular legalisation and a certified translation.

Continuing: Residency by founding a business or a company in Germany – Start-up support, including for international clients.

Typical mistakes when choosing a legal form

1. Decide on cost alone

The lower setup costs of a sole proprietorship or a general partnership (GbR) must be weighed against the personal liability risk. The correct point of comparison is the sum of setup expenditure, ongoing costs and liability risk over the planned useful life, not just the initial formation fee.

2. Standard template chosen, even though the situation is individual

The standard protocol pursuant to Section 2(1a) of the German Limited Liability Companies Act (GmbHG) is available for a maximum of three shareholders, one managing director and exclusively cash contributions. Individual provisions are excluded. Anyone who accepts these restrictions in the first step and subsequently wishes to regulate matters differently must have the articles of association amended – the effort regularly exceeds the initial savings.

3. Not putting the GbR agreement in writing

The GbR is formed informally – without a written contract, the default rules of the BGB apply. These rarely match what the partners actually intended. A concise but written partnership agreement reduces subsequent problems of interpretation and proof.

4. eGbR registration overlooked

If the GbR is to hold real estate or acquire shares in a GmbH, the law has required registration as an eGbR since 1 January 2024 (Section 47(2) GBO, Section 40 GmbHG). The traditional, unregistered GbR is effectively incapable of acting in these transactions.

5. Exclude the tax perspective

The civil law legal form determines the framework, but the actual tax burden is also shaped by the amount of profit, withdrawals and the local business tax multiplier of the permanent establishment. A decision on the legal form without a tax adviser risks a structure that is sound under civil law, but disadvantageous from a tax perspective – or vice versa.

Subsequent change of legal form

A subsequent change of legal form is possible, but depends on the previous legal form. The Reorganisation Act provides for four types of reorganisation: merger, demerger, transfer of assets and change of legal form. Not every legal entity can carry out every type of reorganisation – the catalogues in Section 3 of the Reorganisation Act (UmwG) (merger), Section 124 UmwG (demerger) and Section 191 UmwG (change of legal form) are exhaustive.

A sole trader is not a transforming legal entity under the Transformation Act (UmwG). Anyone wishing to convert their sole proprietorship into a GmbH can, as a registered sole trader (eingetragener Einzelkaufmann – e. K.), use the Outsourcing utilising the UmwG; otherwise, a business transfer agreement or a contribution in kind to a newly founded GmbH may be considered. In the case of partnership is exclusively the registered GbR (eGbR) as a transforming legal entity within the meaning of the Transformation Act (UmwG) (§ 191 para. 1, § 152 UmwG); the unregistered GbR must first be registered for this purpose or choose an alternative route.

For tax purposes, the provisions of the Reorganisation Tax Act (Umwandlungssteuergesetz) must be observed, which under certain conditions allows for a tax-neutral reorganisation. The costs and effort involved in changing legal form are not inconsiderable – the choice of the initial form should therefore be made with a view to foreseeable developments in the company.

Frequently asked questions