GmbH
The GmbH (limited liability company) is currently by far the most common legal form among registered companies.
But what is the purpose of a GmbH? What is the difference between the company and its shareholders?
Pooling of Joint Economic Activities
The first and most obvious reason for forming a company is to pool economic interests within a single entity. Pooling the economic interests of several individuals requires not only a platform but also internal rules governing cooperation and the distribution of results (profits and losses).
Limitation of Liability and Protection Against Insolvency
An important reason for using a GmbH is to shield shareholders (or other group companies) from liability for the company’s obligations. The GmbH’s share capital is EUR 25,000.00.
Depending on the type of corporation, shareholders bear varying degrees of liability for the company’s obligations—that is, its debts.
For example, a GmbH shareholder who has contributed their capital contribution and has not received it back is no longer personally liable for the company’s liabilities; the GmbH must settle its debts itself using its corporate assets. Consequently, the term “GmbH” literally stands for “limited liability company”—creditors have access only to the GmbH’s assets as the basis for liability and, as a rule, not to the assets of the shareholder(s). Thus, with a GmbH, no entrepreneur is liable “with his good name and his private assets.”
Taking this logic further, for example, when a single person operates several different businesses or projects simultaneously, the question always arises as to whether each should be operated as a separate company. If, for instance, the entrepreneur must file for insolvency in his A-GmbH, this does not automatically affect his businesses in his B-GmbH and C-GmbH. If the entrepreneur were to manage all businesses under a single legal “umbrella” without legally separating them into individual GmbHs, potential losses in one business division would freely affect the other divisions as well.
Tax Reasons
Last but not least, tax differences between the various forms of business activity may, from the entrepreneur’s perspective, make the choice of a specific corporate form appear attractive for the intended or already operating business. For example, partnerships and commercial partnerships are tax-transparent, whereas corporations, as legal entities, are themselves taxable entities. This can have a significant impact, particularly in terms of profit taxation within a multi-tiered corporate group.
Structure of the GmbH (Governing Bodies)
The GmbH consists of its governing bodies: the shareholders’ meeting and the management board (excluding, for the sake of simplicity, an optional advisory board or supervisory board).
Management
In legal terminology, management refers to the internal management of the company. This means the leadership of the GmbH in its day-to-day operations.
A GmbH has at least one person serving as managing director. This person manages the company.
Management does not necessarily—as is commonly assumed—also entail representing the company in legal transactions. Representation refers to the legally binding implementation of the shareholders’ will on behalf of the company in legal transactions. Strictly speaking, a company (regardless of its legal form) cannot itself enter into a contract or acquire property. To do so, it requires a person to act on its behalf. Acting on behalf of another in legal transactions is referred to in German law as “representation.” This term is also used to describe the representation of companies by the managing partner of a GmbH—the managing director. In this context, one speaks of so-called “natural representatives” or “representatives acting as corporate organs.”
Shareholders’ Meeting
The GmbH is governed by its shareholders. The shareholders may even, by resolution at the shareholders’ meeting, issue specific instructions to the management, which the management is then required to carry out (provided that the instructions themselves are lawful and do not violate the law or public policy).
Individual shareholders cannot directly issue instructions to the management. The management is therefore subject to instructions and may be given very specific directives. The management of a GmbH is thus not as free in its business decisions as, for example, the board of directors of a stock corporation.