Chapter 4

• Legal structure that is customary in the trade

• Liability, risk distribution, creditworthiness

• Capital investment and asset protection

• Management, decision making authority (corporate governance)

• Formation costs and current expenses

• Tax burden

• Legal requirements, trade conditions

• Business volume

Legal relations between economic operators, whether individuals or companies. The basic provisions of civil law can be found in the Civil Code (Bürgerliches Gesetzbuch or BGB). It regulates, for example, the formation and termination of contracts. These general rules apply to all participants in economic life within the scope of the BGB

special rules for the majority of entrepreneurs. These rules are always applied if at least one of the persons involved in the business has the status of a merchant (Kaufmann)This is the central term of the German Commerical Code. Section 1 of the Code states that “A merchant within the meaning of this Code is a person who carries on a commercial business.” People as well as legal entities may carry on commercial businesses. For example, an individual is regarded as a sole proprietor (Einzelkaufmann §§ 1 and 2 HGB), but so are

corporations and limited liability companies according to the German Commercial Code

Einzelunternehmer, if the owner is simultaneously in charge of the company and personally liable with their assets for the company's liabilities

The Code clarifies, in Section 1, the following: “A commercial business is any commercial enterprise unless, by reason of its nature or size, the enterprise does not require a commercially organized business operation.”

small business owners (Kleingewerbetreibender)are easily manageable and that their activities are uncomplicated, such an individual is therefore not considered a merchant under the commercial law Code.

• double-entry bookkeeping

• prepare financial reports in the form of a balance sheet

• take inventory

• make annual accruals

• publish annual accounts

• the nature of the business and its scope

• the number of employees, where more than five employees are usually assumed

• the business assets, this from about 100,000 euros

• the loan amount, from about 50,000 euros

• any existing sites or branches

• the turnover, depending on the type of activity

personal, factual, or fantasy names. They must use the addition registered merchant (eingetragener Kaufmann) or the abbreviation e. K., e. Kfm., or Kffr. In this way, it is clear that an entry has been made in the commercial register.

• exempt from trade tax

• pursue independently exercised scientific, artistic, literary, teaching, or educational activities.

• This typically applies to doctors, architects, engineers, lawyers, artists, and similar professions such as consultants

• status is often combined with an academic degree

• In the case of repetitive activities or standardized products, e.g., of financial or credit consultants, the freelancer status is not applicable

under civil law (Gesellschaft bürgerlichen Rechts, GbR, also called BGBSociety):

• carrie out a commercial activity which stays below the threshold of making it a merchant

• All partners are entitled to its assets, if there are any

  
  

• at least two persons

• All partners have the right to manage the company and must agree to all transactions, but rules can be set

• all partners are liable, without limitation, with all their assets, even if they themselves were not causally involved in a liability case and it was caused by one of the other partners

• A GbR automatically becomes an OHG as soon as the level of its commercial activity crosses the threshold which defines a merchant under the law

  
  

• partners jointly operate a commercial business under a joint company name

• All partners have unlimited personal and direct liability for the acts or omissions of the OHG

• is a form of GbR

• is a form of OHG

• liability is limited to the capital contribution of one (or more) partners with the other partners being limited in their liability

• two types of partners: the personally and unrestricted liable general partners, and the limited partners who are only liable with the capital that they have contributed

• A partnership agreement is required, the general partners and limited partners are named, and the contributions are also stated there.

• to be able to go into business with third parties it requires an entry in the commercial register (Handelsregister)

• several members of the freelancing professions join together to exercise their profession together

• does not exercise a commercial trade

• All of its assets are pooled together.

• written partnership contract for the internal relationship and an entry into the partnership register in the case of an external relationship is necesarry

• all partners are liable without limitation, directly and jointly. However, liability for professional mistakes is limited to the partner who gave rise to the liability claim

• The management of the company is similar to that of the OHG, except that individual partners cannot be excluded from the management of the entire company, but only for individual transactions

• GmbH, public limited company (Aktiengesellschaft or AG), UG, limited liability (Haftungsbeschränkung), Ltd., SE

• independent legal entities with their own legal capacity and fixed nominal capital.

• separate law, the GmbHG.

• can be founded for any legal purpose (GmbHG)

• liability is limited to the company’s assets

• commercial company with its own legal personality according to the German Commercial Code (HGB)

• one or more members

• The GmbH itself is a merchant in the legal sense

• company’s assets belong to the GmbH as legal entity

• consists of the managing director and the general assembly of its members; it may also have a supervisory board

• The general assembly of members exercises ultimate control over the GmbH. The competences of the members are regulated in a separate agreement.

• The managing director(s) are always natural persons who manage the business internally and externally, and they are appointed by the members.

• In addition, a supervisory board can be formed if the company is subject to co-determination and Works Constitution Act

• limited liability company

• does not represent a legal form of its own, but is a variety of the GmbH

• lower capital requirements than GmbH

• low level of liability (thats why haftungsbeschränkt is added to the companies name

• Capital requirements to form this establishment is at least one euro (+registration and notaries fees (+2*150€))

• 25% of the annual net profit must be contributed until at least 25,000 euros are reached (Rücklagenbildung)

• Conversion to GmbH possible after net profit reached 25000€ :

  • auditor must confirm the correctness of the last balance sheets, for which quite considerable costs for audit, notary, etc. are incurred.

• danger with a UG is that it can quickly go into debt due to its low share capital

• commercial company with its own legal personality

• merchant

• share capital amounts to at least 50,000 euros and the shares can be issued as nominal value or nopar value shares (A par value share has a fixed amount, whereas a no-par value share has a share in the share

  capital.)

• partners participate in the share capital of the company with their capital contributions and are not personally liable

• company assets belong exclusively to the corporation.

• management board

  • manages the business

  • consists of one or more persons

• the supervisory board

  • controlling body

  • appoints, monitors, and recalls the management board

    • no members of the management board or senior executives may be elected to the supervisory board

    • reason why the German AG has what is called a “dualistic” model of corporate governance, in contrast to other jurisdictions, such as the one of the United States, where a person may be a member of both boards simultaneously.

• the general meeting

  • annual, composed of the shareholders

  • supervisory board members are elected here, unless they are required to be elected under the Co-Determination Act or the Works Constitution Act

  • As a consequence, German AGs are famously governed only up to 50% by shareholder representatives, with the other half representing the corporation’s employees

    • —>By this German economy does not pursue a model of shareholder value but of stakeholder value

• limited liability on a share basis

• no minimum nominal capital requirement

• founded quickly, with little bureaucracy and expense in England and registered in the English commercial register

• Based on the memorandum of association, the declaration of incorporation, the application for registration, and a declaration by the directors, approval is granted in the form of the “Certificate of Incorporation.” A notarial authentication is not required

• shareholders, board of directors and a company secretary are in the limited company

• company secretary is responsible for making the annual returns and other notifications to the UK Commercial Register

• address of the company is the registered office; the company must be located in England, Wales, or Scotland.

• For a certain time, the Ltd. was fashionable for its simplicity, but became largely obsolete again due to the possibility of the UG in Germany

• EU-wide legal entity which is an alternative to the national company forms

• share capital of 120,000 euros is required to establish an SE, which is then entered in the register of the relevant EU member state

• As with the AG, the SE has a limitation of liability to the capital of the SE

• The management can either be managed by the executive board and the supervisory board (dualistic model as is customary in Germany) or solely by the administrative board (board of directors, monistic model)

• created by forming a KG in which the only (fully liable) general partner consists of a GmbH

• Partnership and corporation are thus mixed here

• A silent partnership is created when one partner participates in a commercial enterprise as a silent partner only through a capital contribution- They participate in the profits but do not appear externally

GmbH, public limited company (Aktiengesellschaft or AG), UG, limited liability (Haftungsbeschränkung), Ltd., SE

GbR, OHG, KG, partnership company

Sole Proprietorship, Partnerships

• law is regulated differently in the individual fifty states. There are model laws, but the laws of the individual states sometimes differ considerably

• a Certificate of Assumed Name (also DBA) is required, unless the company chooses its own name for the business activity. Before starting business, the form must be filled out with the desired business name. After checking that the name does not already exist, the business can then be started

• simplest form of business activity

• does not represent a corporate form

• carried out by a single person as sole proprietor who has complete control over the activity

• personal and unlimited liability

• several people jointly found a company with the aim of making a profit

• A contract (partnership agreement) is required, but it does not have to have a specific form and is also valid and binding in verbal form

• The agreement contains the name, purpose, distribution of profits and losses, name and address of the person authorized to receive services, as well as the rights and obligations of the partners (such as participation in management and the amount and type of their contribu-

  tions)

• The name is freely selectable

• General Partnership (GP)

  • similar to GbR or OHG

  • Several persons run a company together, with all having unlimited personal liability

  • no special requirements for the formation of a company, such as a minimum capital contribution

• limited partnership

  • comparable to KG

  • limited partner is not liable with his personal assets, but only with his shares

  • general partner has unlimited liability with his assets.

  • thats why memorandum of association must be prepared and submitted to the competent state authority

Corporation, Limited Liability Company, Limited Partnership

• founding documents must be submitted to the respective Secretary of State

  • registration confirmed by a certificate of incorporation

  • does not constitute a kind of entry in the commercial register, but only the confirmation of the registration

• The presence of the shareholders or managing directors is not required for registration, but it is advisable to engage a lawyer admitted to practice in the USA for the procedure.

• product liability is not linked to company liability, so a limitation of company liability does not mean a limitation of liability for damages to customers due to product defects or similar

• similar to GmbH or AG, but without their minimum capital contribution

• normally no personal liability on the part of the shareholders

  • can be different if the corporation has no assets of its own or very insufficient capital

• A major disadvantage of the corporation is the double taxation of its profits, as both the legal entity and the owners are taxed

• 3 bodies:

  • the shareholders

  • the board of directors (elected by the shareholders),

  • the executive officers (appointed by the board of directors)

• special feature of Corporation, which eliminates double taxation

• Only the shareholders are taxed, but not the legal entity.

• Restrictions:

  • balance sheet year must be the calendar year

  • number of shareholders is limited

  • only natural persons with American citizenship or permanent residence permits can be shareholders

• similar to GmbH

• it combines corporation and partnership

  • Partners are free from personal liability

  • company is managed by the shareholders or by an external manager.

• option to tax the LLC either as a corporation or as a partnership

• In most US states, one-person LLCs can also be formed.

• For LLCs, articles of organization and an operating agreement must be drawn up

  • articles of organization must contain: name, the corporate purpose, the registered agent, and the registered office

• similar to the German partnership company

• In American law or tax consulting firms, architectural firms, etc., the partners are personally liable, even if they are limited partners. However, if an LLP exists, each

  partner is only liable for their own activities

In Germany, founders can choose the legal form of a sole proprietorship, partnership, or corporation.

One person carrying out commercial activity is called Einzelgewerbetreibender. If several persons join together, they constitute a partnership. GbR, OHG, and KG are possible variants. If a corporation is founded, then GmbH, AG, UG (haftungsbeschränkt), Ltd., and SE are typical. The GmbH & Co KG represents a hybrid form.

In the USA, similar legal forms exist in the form of sole proprietorship, partnership, corporation, and limited liability, although the minimum capital requirement customary in Germany does not exist there.