24	1  Introduction

1.3  The Legal Framework for Business Organizations in Germany

1.3.1  Case Study

Case Study

Having read C’s memorandum, B is now convinced that it is worthwhile to pursue his plans. He gives C another call and schedules an appointment with him to discuss in more detail the options available to A for doing business in Germany.

B wants to know which forms of business organization are available and asks C to prepare a comparative analysis highlighting the advantages and disadvantages of each type of business.

1.3.2  Options for Conducting Business in Germany

A foreign investor or enterprise considering options for conducting business in Germany will typically choose between establishing a branch office (i.e. a dependent business unit) of the corporation in her/his own jurisdiction, or establishing a subsidiary of her/his home corporation in Germany (by establishing or acquiring a German company). In contrast to a subsidiary, a branch office is not a separate legal entity (but is considered a permanent establishment for taxation purposes). On the other hand, when considering using a subsidiary as a separate legal entity for doing business in Germany, an investor will have the choice between various unincorporated or incorporated business organizations. Thus, after looking at the requirements for establishing a branch office in Germany, we will briefly outline different German business forms available. In the following chapters we will then look at the legal framework governing the limited liability company (GmbH) and the stock corporation (AG) in more detail.

1.3.2.1  Establishing a Branch Office

A branch or branch office (Zweigniederlassung) is defined as a dependent operational unit of a foreign enterprise. A branch office has no separate legal personality distinct from its head office and is thus subject to the law governing the head office. Nevertheless, the branch has to be entered in the Commercial Register (Handelsregister) of the local District Court and the statutory requirements of Secs. 13 et seq. HGB therefore have to be met. Although setting up a branch might sometimes be preferable for tax purposes, and has been quite popular in Germany in the case of limited liability companies formed in accordance with the laws of England and Wales, it is quite a complicated and time-consuming procedure, since many documents must be filed with the competent German Commercial Register.

The registration must be filed by the directors authorized to represent the company. It has to be filed in German (Sec. 184 GVG) with the court in the district where the branch operates (Sec. 13d HGB).

1.3  The Legal Framework for Business Organizations in Germany	25

The following check list for information and documents required for the registration of a branch of an private company limited by shares formed in accordance with the Companies Act of England and Wales (Ltd.) will introduce you to this procedure:

Check List for the Registration of a Branch

[Example: UK private company limited by shares (Ltd.)]

Information and documents necessary to register a branch of a Limited in Germany (see Secs. 13d, 13g HGB) 

1.Information concerning the company and its foreign head office

–Name, registered office and object of the company

–Commercial Register with which the company is registered and subsequent registration number

–Date of formation and data on the duration of the company

–Amendments to theArticles ofAssociation and date thereof

–Amount of issued share capital

–Number of shares and par value per share

–Details of any contributions in kind

–Name, address and date of birth of each shareholder

–Name, address and date of birth of each managing director, including power of representation

–Company’s legal form

–Publication requirements for official notices by the company

2.Information concerning the branch

–Name of the branch (admissible under German law)

–Location of branch

–Address and object of the branch

–Name (address and date of birth not compulsory) of the persons who are authorized to represent the company with respect to the business of the branch as permanent representatives in and outside of court

–Names (address and date of birth are not compulsory) of persons who are granted ‘Prokura’ (holder of an unlimited power of attorney) and their power of representation

3.Documents which need to be attached to the application form

–Certificate concerning the adequate formation of the company, (as a general rule) Certificate of Incorporation with copies of the Articles of Association and the Memorandum ofAssociation

–List of shareholders

–Certificate concerning the appointment of the managing directors and their powers of representation (issued by the company secretary)

–Signature sheet containing the signatures of the managing directors

–Signature sheet containing the signatures of the permanent representatives and the ‘Prokurist’of the branch, if applicable

–Licenses with respect to the object of the company (where required)

Given the complicated procedure of establishing a branch as outlined above, many investors prefer instead to establish a new German company as a subsidiary. The

26	1  Introduction

following section gives an overview of different possible forms of business organizations.

1.3.2.2  Overview of Various Forms of Business Organizations

German business law provides for various types of business organization such as corporations, partnerships and associations. The most important types of corporations are the GmbH and the AG.30 There are three types of partnership, the BGBGesellschaft (civil law partnership), the oHG (general commercial partnership) and the KG (limited commercial partnership). Although corporations, and in particular the GmbH, are quite popular, there may also be reasons to choose a partnership as the legal vehicle for conducting business, e.g. partners have a greater flexibility in management issues and in regards to the dissolution of the partnership. Moreover, in a partnership there are fewer publication requirements and a higher level of confidentiality. For these reasons partnerships are often selected as the business vehicle for small entities or family-owned enterprises.

Sole Proprietorship (einzelkaufmännisches Unternehmen)

This business form is typically used by small enterprises. Since it is the easiest way to start and run a business, it is one of the most prevalent forms of small business organizations for entrepreneurs in Germany. A sole proprietorship is an unincorporated business, owned by a single person and operated in her/his name or under a trade name. The sole proprietorship is not a legal entity. Thus, it cannot have any rights and obligations of its own, nor can it sue or be sued in court. Instead, it is the owner (Einzelkaufmann) who holds all the rights and who is fully liable for all business debts and obligations. Depending on its size and range of activities, the sole proprietorship has to be registered with the Commercial Register. If the sole proprietor is not legally obliged to register, she/he may still choose to do so voluntarily. However, in both cases (mandatory and voluntary registration), the sole proprietor—being a ‘merchant’ according to the definition of German commercial law—has to comply with many of the HGB’s regulations.

Civil Law Partnership (GbR)

In contrast to the AG and GmbH, the civil law partnership (Gesellschaft bürgerlichen Rechts, GbR or BGB-Gesellschaft) is an association of two or more persons without corporate organization. The GbR does not have the status of a corporation as a separate legal entity. The GbR is established by setting up a partnership agreement between at least two partners wishing to pursue any legal purpose. However, if the partners intend to pursue a commercial business, this partnership will be treated as a general commercial partnership (oHG) or as a limited commercial partnership (KG).

30  Both the AG and the GmbH will be explained in detail infra in Sects. 2 and 3 respectively; the SE will be introduced in Sect. 5.2. The following presentation therefore is limited to a brief overview of the most important non-corporate and hybrid forms of business organizations available under German law.

1.3  The Legal Framework for Business Organizations in Germany	27

The GbR is managed and represented jointly by all partners, unless the partnership agreement provides otherwise. The assets of the partnership belong to its partners jointly. All partners are jointly and severally liable for the firm’s debts and obligations. Such liability may be limited to the partnership assets only by agreement with the third party creditor or by restrictions set out in the partnership agreement and made known to the third party creditor. Because of its flexibility, the GbR is used for a great variety of business purposes.

Beginning in 2001, the Bundesgerichtshof fundamentally changed the traditional statutory regime for the GbR in several landmark decisions by treating this company form in a way similar to that of a general commercial partnership.

•In its decision of 29 January 2001,31 the BGH acknowledged the capacity of a GbR to sue and be sued in private proceedings. Furthermore, the court applied the liability rules for partners of German commercial partnerships (oHG, KG) to partners of a private law partnership. The extension of these liability rules means that, for claims against that partnership, creditors may hold partners of a private law partnership personally liable.

•With its decision of 24 February 2002,32 the BGH further extended the liability of the civil law partnership by ruling that damages caused by the managing directors have to be compensated by the civil law partnership. The court emphasized that partners of a private law partnership are personally and jointly liable for the liabilities of that partnership.

•In another landmark decision of 7April 2003,33 the BGH held that a new partner of a private law partnership may be held liable for obligations that arose even before she/he joined the private law partnership. With this decision, the Court thus further expanded the personal liability of partners of a private law partnership by analogizing them to partners of a commercial law partnership.

In essence, the Bundesgerichtshof has treated the private law partnership as a legal entity quite similar to the general commercial partnership (described below) and, in effect, thus transformed the GbR into a legal entity that now largely approximates the general commercial partnership.

General Commercial Partnership (oHG)

The general commercial partnership (offene Handelsgesellschaft, oHG) is a partnership established by two or more persons for the purpose of operating a commercial business within the meaning of the Commercial Code (vollkaufmännisches Handelsgewerbe) under a company name, provided that all partners are fully liable for the partnership’s debts and obligations. It is formed by agreement between the partners, which may be concluded even by conduct. After that, the oHG must be registered in the Commercial Register.

In contrast to the GbR, the oHG has a company name under which it may acquire rights of its own, incur obligations and sue or be sued in court (see Sec. 124 HGB).

31  See BGHZ 146, 341, 29 January 2001, II ZR 331/00. 32  See BGHZ 154, 88, 24 February 2003, II ZR 385/99. 33  See BGHZ 154, 370, 7April 2003, II ZR 56/02.

28	1  Introduction

Although the oHG has a status similar to that of a corporation regarding its dealings with third parties, significant differences to corporations do remain. For instance, the assets of the oHG belong to all partners jointly and the partners are jointly and severally liable for the oHG’s debts and obligations. Each partner is individually entitled to manage and represent the partnership, unless the partnership agreement provides otherwise by consent of all partners.

The oHG is a business form typically used by a small number of partners who personally rely on each other and wish to commit all their assets to a joint undertaking. However, the overall importance of the oHG has significantly decreased and other company forms (not demanding the personal liability of its members) have become more popular. As of 1 January 2010 in Germany 27,422 oHGs were registered.34

Limited Commercial Partnership (KG)

The limited commercial partnership (Kommanditgesellschaft, KG) is a general partnership similar to the oHG, in that it is also a partnership established for the purpose of operating a commercial business. In contrast to the oHG, however, the KG has two kinds of partners. There are one or more general partners (persönlich haftende Gesellschafter or Komplementäre) with unlimited personal liability (identical to a partner in an oHG). These partners with personal liability manage and represent the limited commercial partnership. On the other hand, there are one or more ‘limited partners’ (Kommanditisten) whose personal liability is limited to the amount of a fixed capital contribution to be paid to the partnership. The amount of this capital contribution is registered in the Commercial Register (Handelsregister) and, to the extent it has been paid into the limited commercial partnership and has not been repaid, the limited partner is discharged from personal liability.The limited partners are excluded from the management and representation of the partnership, unless the partnership agreement provides otherwise.

The KG is frequently used for family-owned enterprises. Quite often it has also been used to bring together capital from investors for particular ventures. The KG is particularly popular in a form in which the sole general partner is a corporation, typically, a GmbH. As of 1 January 2010 there were 236,554 limited commercial partnerships registered in Germany.35

Hybrid Commercial Limited Partnership (GmbH & Co. KG)

A frequently used combination of the limited commercial partnership and the corporation is that of a KG, in which the only general partner is a GmbH (so-called

GmbH & Co. KG, Fig. 1.6).

By allowing the KG to have corporations such as the GmbH as a partner with full personal liability (so-called Komplementär), personal liability can be avoided in a legally permissible way since, in principle, only the GmbH (and not its shareholders) will be liable vis-à-vis the creditors of the KG.

34  See Kornblum 2010, p. 740. 35  See Kornblum 2010, p. 740.

1.3  The Legal Framework for Business Organizations in Germany	29

German Forms of Business Organizations

	Partnerships	Hybrid Forms	Corporations
	General	Hybrid commercial	Limited liability
	partnership (GbR)	partnership (GmbH	company (GmbH)
	General	& Co. KG)	Stock corporation
	commercial	Partnership limited	(AG)
	partnership (oHG)
		by shares (KGaA)	European company
	Limited
			(SE)
	commercial
	partnership (KG)
	Silent partnership
	(Stille
	Gesellschaft)

Fig. 1.6 Forms of business organizations in Germany

The attractiveness of the GmbH & Co. KG results from the fact that it combines the advantages of a partnership (tax benefits) with those of a corporation (limitation of liability), which may outweigh the disadvantages resulting from a somewhat complex corporate structure.

Partnership Limited by Shares (KGaA)

The partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA) is another hybrid business form combining elements of a limited commercial partnership with those of a stock corporation. Partnership law is applicable for those partners with personal liability whereas the KGaA and the partners with limited liability (Kommanditaktionäre) are subject to the German Stock Corporation Act (Sec. 278 paras. 2 and 3 AktG). Due to its relative complexity the KGaA is not common in German legal practice: As of 1 June 2010 only 225 partnerships limited by shares were in existence.36

36  See Bayer and Hoffmann 2010, p. R286.