Company founders face numerous challenges, especially in the early stages. These include choosing the right legal form and a lack of capital.
Which is the right legal form for your startup?
Choosing the right legal form is crucial for startups. Of course, there's no one-size-fits-all solution. Rather, the legal form must be tailored to the startup's individual needs. The available start-up capital and the desired limitation of liability are particularly important.
In the following, we will show you the advantages and disadvantages of a sole proprietorship or a partnership under civil law (GbR) on the one hand and a limited liability company (GmbH) or an entrepreneurial company UG (limited liability) (UG) on the other.
Sole proprietorship or partnership under civil law (GbR)
The problem with these legal forms is that you are liable for all of the company's liabilities with your business and personal assets without limitation. With this in mind, you should carefully consider how risky your venture is and whether a limitation of liability is appropriate.
In our opinion, this liability disadvantage cannot be offset by the relatively unbureaucratic nature of establishing a sole proprietorship, or a GbR (General Partnership) with more than one founder. A notarized partnership agreement/articles of association, registration in the commercial register, and disclosure of the annual financial statements are not required.
We therefore recommend that you put your project on a solid footing from the outset, especially with regard to your liability. In this context, we consider the GmbH and UG (limited liability company) to be attractive for startups.
GmbH and UG (limited liability)
The GmbH legal form is currently the most common corporate form when considering capital companies. The minimum share capital of a GmbH is €25,000, and this may not be exceeded. In addition to cash contributions, contributions in kind are also possible. However, the €25,000 sum must first be reached. However, this can be difficult and therefore a disadvantage, especially for small startups.
In addition, the establishment of a GmbH is a complex process, requiring a notarized partnership agreement. We advise against a "simplified establishment" with a notarized model protocol if there is more than one shareholder. Due to its very brief content, particularly the lack of any provisions regarding internal relationships, the model protocol is not recommended for the establishment of a multi-member company.
The "simplified formation" of a one-person UG (limited liability company) results in savings of €427.50 compared to a separate partnership agreement. A sample protocol can be used here without adverse side effects, provided you don't intend to add additional partners or hire other managing directors later.
In any case, the GmbH must be registered in the commercial register. The accounting and bookkeeping obligations imposed on the shareholders of the GmbH or UG are also comparatively demanding. Furthermore, any dissolution can be complex and lengthy.
However, there are compelling reasons that speak in favor of a GmbH: The GmbH's liability towards creditors is limited to the company's assets. The shareholders are only liable in absolutely exceptional cases. The GmbH also enjoys a high reputation in legal transactions, whether with investors or business partners. Likewise, a change in the shareholder base is easily regulated.
The UG as the little brother of the GmbH
The UG is, so to speak, the "little brother of the GmbH." The formation, commercial register registration, and liability processes are identical. The minimum capital requirement is just one euro per shareholder. This is a major advantage over a GmbH, as financing issues do not need to be resolved first. However, due to the lower liability capital, the UG is legally required to establish reserves. Once the liability limit of 25,000 euros is reached, it is converted into a GmbH. For this reason, contributions in kind are not permitted with a UG.
In addition, the UG must use the name "Unternehmergesellschaft (haftungsbeschränkt)" or "UG (haftungsbeschränkt)" in its company name. The suffix ("haftungsbeschränkt") may not be abbreviated or even omitted. This explicit reference can undoubtedly lead to a lower reputation in business transactions than that of a GmbH.
What is the right financing strategy for you besides traditional financing through a bank?
Below we present the selected forms of financing: Venture Capital (VC) and Business Angel (BA).
Venture Capital
Venture capital involves equity investments in companies. The duration of the investment depends on the industry and can extend to up to ten years. Investors are typically wealthy private individuals, banks, or insurance companies. They specialize in specific industries. The product or idea should already be in the maturity phase. The additional capital improves the company's overall financial structure.
Access to additional loans and, in particular, public funding (for example, through instruments such as the INVEST grant, the EXIST program, or the High-Tech Gründerfonds) is significantly facilitated. This advantage can certainly offset the opportunity costs that can arise from the lengthy financing rounds.
By contributing capital, VC firms are granted influence over both the strategic and operational aspects of your startup. To minimize risk for the investor, the company is only provided with additional capital once previously agreed (return) targets have been met (stage financing). Exit channels include initial public offerings, buybacks, trade sales, and secondary purchases. VC funds are represented in a wide variety of investment types, both in early-stage and expansion financing.
Business Angel
Business angels are usually very wealthy private individuals who provide the company with additional capital, as well as experience, know-how, and their network. In the past, the business angels have invested at a very early stage. The advantage for the investor is being able to exert influence right from the start-up phase – from the development of the product or idea to its final implementation.
Conclusion: You should not underestimate the importance of choosing the right legal form and financing strategy!
The correct legal form and appropriate financing are crucial for the development of a startup. This provides greater long-term planning security. Added value must also be considered in this context. The appropriate legal form provides a starting point that allows an investor to contribute capital, as well as expertise, experience, and their network.
Therefore, check together with your business partners and consultantswhich concept suits you best.
Guest authors:
Dr. Marcus Zierer (left in the picture), VBW Valuation and Mediation Weihenstephan GmbH, Consultant for company formation and restructuring in the food industry. Contact: info@vbw-weihenstephan.de;
Dr. Jörg-Christof Bauer (right in the picture), Attorney at Law; practicing in the field of commercial and corporate law. Contact: mail@ra-jbauer.de
