Founding an eG: member promotion, statutes, shares and liability

Five winegrowers want a shared press, a bottling line costing 180,000 € and joint sales, without any one of them owning the others. A GmbH would weight them by capital, an association could hardly trade. The registered cooperative fits this case: it works for its members rather than its shareholders, and each member in principle has one vote.

Promoting, not earning: what an eG is

§ 1(1) GenG describes the cooperative by its purpose. It covers societies with an open number of members that aim to promote the income or business of their members, or their social or cultural interests, through a jointly run business. A society that meets these conditions and is registered acquires the rights of a registered cooperative.

Two features carry this definition. First, the open membership: new members can join and old ones can leave without any change to the statutes. Second, the promotion purpose: the business is not an end in itself but a tool that lets the members buy more cheaply, sell better, find housing, obtain energy or use services.

Profit is not forbidden. An eG may earn surpluses, build reserves and distribute profits. But profit is the means, not the goal. How seriously the Act takes this shows in the mandatory audit: under § 58 the audit report must state expressly whether the cooperative has pursued a permissible promotion purpose.

Holdings in other companies, including public-law bodies, are permitted by § 1(2). They must either serve the promotion of the members or, without forming the main purpose, serve charitable aims of the cooperative. An eG that mainly manages holdings and loses sight of its members misses the point of its legal form.

In law the registered cooperative is a legal person. Under § 17 it holds its own rights and obligations, can acquire land, sue and be sued. At the same time it counts as a merchant under the Commercial Code, by virtue of its legal form, whatever the nature and size of its business.

Under § 2, only the cooperative's assets are liable to creditors for its debts. This is the sentence that makes the eG attractive to founders. How this principle fits with a possible duty to make additional contributions is explained in the section on liability below.

Under § 3 the trading name must contain the words eingetragene Genossenschaft or the abbreviation eG, even when an existing name is continued. Using only a brand name in business dealings hides the legal form. The mandatory details on business letters are covered by a separate course on mandatory disclosures.

Three founders and a set of statutes

The bar on numbers is low. § 4 GenG requires at least three members, not only at formation but permanently. Members may be natural persons, legal persons or partnerships; the boards, however, are subject to a restriction dealt with in the second module.

The Act sets no minimum capital. Unlike a GmbH, no amount has to be paid in before registration. The statutes may, however, set a minimum capital under § 8a, which must not be undercut by payouts to departing members. The comparison with the GmbH and the UG is drawn in the course on that choice.

The statutes are the constitution of the eG. § 18 makes clear that the relationship between the cooperative and its members is governed first by them, but that they may depart from the Act only where it expressly allows. Many rules of the GenG are therefore mandatory; others are only defaults.

§ 6 lists what every set of statutes must contain at a minimum. The list is short, but each item has consequences, and a gap in one of them is among the few grounds on which the register court may refuse registration.

• the trading name and registered seat of the cooperative
• the object of the business
• whether members make additional contributions in insolvency without limit, limited to a liability sum, or not at all
• the form of convening the general meeting, of recording its resolutions and of chairing it; notice only in the Federal Gazette is not enough
• the form of announcements and the public journals designated for them, which may include electronic information media

§ 7 adds two more mandatory items. The statutes must state the amount of the business share and the payments every member owes on it. At least one tenth of the share must be fixed by amount and date. They must also provide for a statutory reserve to cover balance sheet losses, with the allocation rate and a minimum amount.

Other rules apply only if the statutes spell them out. § 8 names, for example, a limited duration of the cooperative, a financial year that differs from the calendar year, larger majorities for certain resolutions and business with non-members. Anyone who wants turnover with outsiders therefore has to write it into the statutes.

A special opening is the investing member under § 8(2): a person who does not use the cooperative's services but only provides capital. The statutes must ensure that such members never outvote the user members and cannot block resolutions requiring a three-quarter majority. They may hold at most a quarter of the supervisory board seats.

From the auditing association to the register

Formation follows an order that surprises many. Before the court does anything at all, the future eG must find an auditing association willing to admit it. § 54 makes membership of such an association a permanent duty, and its certificate must already be attached to the application for registration.

First, the founding meeting adopts the statutes and elects the first boards. Under § 15(1), founding members may acquire membership simply by signing the statutes instead of making a separate declaration of accession. The appointment of the management and supervisory boards is recorded in documents, copies of which later go to the court.

Under § 11 the management board applies for registration at the court of the seat. The application encloses the statutes, signed by at least three members, and the documents appointing the boards. Instead of signatures, an assurance by the management board together with statements in text form from at least three founders is also sufficient.

The third document comes from the auditing association. It certifies that the cooperative has been admitted as a member and gives an expert opinion: in view of the personal or economic circumstances, in particular the financial position, is there a risk to members or creditors? This formation audit takes the place of capital-raising rules the eG does not have.

Under § 11a the court checks whether the eG has been properly set up and registered. It refuses if a risk is obvious or follows from the opinion, and also if the association considers contributions in kind overvalued. Defects in the statutes count only where they concern mandatory content, creditor protection or the nullity of the statutes.

Under § 10, the statutes and the members of the management board are entered in the cooperative register at the court of the seat. Only the entry creates the eG: under § 13 the society before it lacks the rights of a registered cooperative. Anyone signing contracts in the meantime should check their personal liability.

Tax life begins in parallel. After formation the cooperative must report to its tax office through an electronic questionnaire; a separate course walks through that step and treats cooperatives expressly.

Business share, payment, credit balance

Three terms are constantly confused in practice. Under § 7 no. 1, the business share is the amount up to which a member can contribute: a ceiling per share fixed in the statutes. It is not an asset the member owns but a unit of account.

The payment is what the member actually has to pay on that share, and the statutes set its amount and due date. The credit balance, finally, is the account recording payments, credited profits and debited losses. Only this balance is repaid when a member leaves.

Under § 7a(1) the statutes may allow a member to hold several business shares and set a maximum. Under subsection 2 they may even impose a compulsory holding, linked for example to use of the facilities. Contributions in kind are possible under subsection 3 if the statutes allow them.

Under § 15b(2) the cooperative may admit a further share only once all of the member's existing shares are fully paid, except the one taken up most recently. A compulsory holding is exempt from this bar. The holding thus grows step by step rather than through empty promises.

§ 22 protects the capital raised strictly. As long as a member has not left, the credit balance may be neither paid out nor pledged, and a payment owed may not be waived. The cooperative may not lend a member money to make the payment, and the member may not set off claims against it.

§ 19 governs how profits and losses are shared. In the first financial year the ratio of payments counts, afterwards the ratio of credit balances. Profits are credited to the balance until the business share is reached. The statutes may choose another key or, under § 20, exclude distribution altogether.

§ 20 also lets the statutes empower the management board to transfer part of the annual surplus to revenue reserves on its own. The ceiling is half of the surplus. The rest is decided by the general meeting, which adopts the annual accounts.

Who is liable, and up to what

Under § 2 only the eG's assets are liable to creditors. Members cannot be sued directly. Their first risk is their payment: it absorbs losses, the reserves are used up and the credit balance is written down.

Beyond this the Act knows an indirect liability, the duty to make additional contributions. Under § 105, members must pay contributions into the insolvency estate to the extent the claims are not covered by the cooperative's assets. They pay the insolvency administrator, not individual creditors, and in principle per head.

This duty is the statutory default, not a requirement. § 6 no. 3 obliges the statutes to choose: unlimited contributions, contributions up to a liability sum, or none. Exclusion has a practical side effect: only a micro cooperative without such a duty can benefit from the simplified audit of § 53a, explained in the second module.

If the statutes choose a liability sum, § 119 forbids setting it below the business share. Where a member holds several shares, § 121 raises the liability sum to their total amount if it is lower. The statutes may exclude this increase or set an even higher amount.

Two rules sharpen the picture. Under § 23(2) whoever joins is also liable for debts incurred before joining, and agreements to the contrary are void. If individual members cannot pay their contribution, § 105(3) spreads the shortfall over the others.

Introducing or extending the duty later requires, under § 16(2), a majority of three quarters of the votes cast. Under § 22a it does not bind members who had already left. If instead the duty is limited or removed, the creditor protection rules of § 22 apply accordingly.

Joining, giving notice, transferring

Anyone joining after formation needs, under § 15, an unconditional declaration of accession in text form and admission by the cooperative. Beforehand the statutes must be made available; access online with a printout on offer is enough. The new member is entered in the list of members without delay and informed.

Under § 15a the declaration must contain an express commitment to make the payments and, where the statutes provide for additional contributions, to make those too. Further payment duties or a notice period of more than one year must be expressly acknowledged by the member.

Every member may leave by giving notice. § 65 allows it only at the end of a financial year and at least three months beforehand, in text form. The statutes may extend the period to at most five years, and for a cooperative whose members are more than three quarters entrepreneurs, to finance fixed assets, even up to ten years.

After leaving comes the settlement under § 73. The credit balance must be paid out within six months unless the statutes or a minimum capital provide otherwise. The member generally has no claim to reserves or other assets. If the assets are insufficient, the member must pay a share of the deficit up to the level of the contribution duty.

§ 76 offers a faster route. A member may at any time transfer all or part of the credit balance in text form to someone who is or becomes a member. Membership then ends without a settlement. The statutes may exclude such transfers, except where they also impose very long notice periods or a payout freeze.

For tax purposes a cooperative share is no special case: selling it can fall under the rules for substantial holdings. The details are in the course on selling shares in corporations.