Who prepares annual accounts, and in which size class

An advertising agency GmbH in Leipzig closes 2025, just as it closed the previous year, with a balance sheet total of 380,000 €, revenue of 1,140,000 € and an average of twelve employees. The managing director looks only at the first figure, takes the company for a micro corporation and has nothing but the balance sheet deposited. Yet two of the three criteria sit above the limits, and the whole shape of the disclosure is wrong as a result.

Merchant, balance sheet and profit and loss account

The starting point is § 238(1) HGB, the German Commercial Code: every merchant, or Kaufmann, must keep books and make his commercial transactions and the state of his assets visible in them according to the principles of proper accounting. The books are the tool; the annual accounts are what they deliver once a year.

§ 242 HGB describes that output in three steps. When the business starts, the merchant draws up an opening balance sheet, and at the close of each financial year a balance sheet. For each financial year he adds a comparison of expenses and income, the profit and loss account.

Subsection 3 brings the two together: the balance sheet and the profit and loss account form the annual accounts, the Jahresabschluss. The balance sheet shows assets and debts on a reporting date; the profit and loss account explains how the result arose over twelve months. One is a photograph, the other a film.

For companies there is no need to search long for merchant status. § 13(3) GmbHG declares the GmbH a commercial company, and § 6(1) HGB extends the rules on merchants to commercial companies. Every GmbH and every Unternehmergesellschaft, or UG, is therefore bound to prepare annual accounts from its very first day.

How quickly a sole merchant must prepare his accounts is stated only in general terms by § 243(3) HGB: within the time that corresponds to an orderly course of business. The statute sets fixed deadlines in months only for corporations. They are the subject of the second module.

Who is exempt and who is not

Not every merchant draws up a balance sheet. § 241a HGB relieves small sole merchants below two revenue and profit limits of the bookkeeping duty, and § 242(4) HGB disapplies subsections 1 to 3 for them. The course on the bookkeeping obligation covers the limits themselves and how they relate to § 141 AO.

For this module the direction of the exemption is enough. It lifts the commercial-law duty to prepare annual accounts, not the tax duty to keep books. Whether the tax office nevertheless requires a balance sheet is decided by tax law alone, and tax law applies its own yardsticks.

The exemption is tied to the person of the sole merchant. A GmbH, a UG or a limited partnership cannot rely on it, however small they are. For them the question is never whether annual accounts must be prepared, only how extensive they have to be.

§ 264a HGB builds a bridge between the two worlds. A general or limited partnership in which no natural person bears unlimited liability is treated like a corporation. The typical case is the GmbH & Co. KG, whose only general partner is a GmbH.

Everything this module and the two that follow say about corporations therefore applies to the GmbH & Co. KG as well: notes, size classes, deadlines, audit and disclosure. Anyone who chooses this legal form for its limited liability also takes on the publicity obligations of a GmbH.

What a corporation owes in addition

§ 264(1), first sentence, HGB requires two further things of the legal representatives of a corporation. They extend the annual accounts by notes, which form a single unit with the balance sheet and the profit and loss account, and they prepare a management report, the Lagebericht.

The notes explain the figures: accounting and valuation methods, breakdowns, contingent liabilities. The management report looks beyond the reporting date and describes the course of business, the company's position, opportunities and risks. Under the fourth sentence small corporations need not prepare a management report; they still owe the notes.

Subsection 1a sets out the header details. The annual accounts state the company name, the registered office, the registry court and the commercial register number, and for a company in liquidation that fact as well. It sounds like a formality, but it makes the accounts unambiguous once they sit in the register.

Subsection 2 sets the standard for the content: in compliance with the principles of proper accounting, the annual accounts must give a true and fair view of the company's assets, financial position and results. If special circumstances prevent that, additional information must be given in the notes.

Three criteria, two must fit

How much a corporation owes in detail depends on its size class. The statute knows four: micro, small, medium-sized and large. Three criteria decide, built the same way at every level: the balance sheet total, revenue in the twelve months before the reporting date and the average number of employees.

What matters is the two-out-of-three rule. Under § 267(1) HGB a company is small if it does not exceed at least two of the three criteria. A single outlier therefore changes nothing. A company that is above the limit only on revenue, but below it on the balance sheet total and staff, remains small.

Under subsection 2 a company is medium-sized if it exceeds at least two of the three criteria for small companies while not exceeding at least two of the three higher criteria. Under subsection 3 a company is large if it exceeds at least two of the three criteria for medium-sized companies.

Subsection 3, second sentence, contains one exception. A capital-market-oriented corporation within the meaning of § 264d HGB is always deemed large, whatever its figures. For the businesses this course addresses it hardly matters, but it explains a number of special rules in the provisions that follow.

How the three criteria are measured

The balance sheet total is not simply the last line of the assets side. § 267(4a) HGB builds it from items A to E of the assets side under § 266(2) HGB. A deficit not covered by equity, shown on the assets side, is expressly left out.

Revenue is taken for the twelve months before the reporting date. In a short financial year, for instance the year of formation, that is not necessarily the revenue of a full financial year. What counts is the profit and loss item, which under § 277(1) HGB is stated after deducting sales deductions and VAT.

For employees, subsection 5 prescribes a fixed method. Staff are counted on four dates, 31 March, 30 June, 30 September and 31 December; the four figures are added up and a quarter of the sum is taken. Staff working abroad are included, trainees are not.

Two reporting dates in a row

A single strong year does not turn a small company into a medium-sized one. § 267(4), first sentence, HGB lets the legal consequences of the criteria take effect only if they are exceeded or undershot on the reporting dates of two consecutive financial years. The rule works in both directions.

Upwards it protects against chance fluctuations: a large order that pushes revenue over the limit once triggers neither an audit nor a management report. Downwards it demands patience: a company that was once medium-sized becomes small again only after staying below the limits for two years in succession.

Formation and conversion are different. Under the second sentence the consequences then apply as soon as the conditions are met on the first reporting date afterwards. A newly formed GmbH is therefore classified immediately after its first accounts, without waiting for a second year.

The third sentence excludes a change of legal form from this if the entity changing its form was already a corporation or a partnership within the meaning of § 264a HGB. When a GmbH & Co. KG converts into a GmbH, the two-year view simply carries on without a break.

The micro corporation

Below the small company there has been a separate level for some years. § 267a(1) HGB defines micro corporations as small corporations that do not exceed at least two of three much lower criteria. Subsections 4 to 6 of § 267 apply accordingly, including the two-reporting-dates rule.

Under subsection 2, micro companies enjoy all the reliefs granted to small companies unless otherwise provided. They also have reliefs of their own. The most important within the accounts themselves: under § 264(1), fifth sentence, HGB the notes may be dropped entirely if certain information is given below the balance sheet instead.

Below the balance sheet then go the contingent liabilities under § 268(7) HGB and the advances, loans and guarantees in favour of board members under § 285 no. 9(c) HGB. Under § 264(2) HGB, accounts prepared with these reliefs are presumed still to give the required true and fair view.

Subsection 3 excludes three groups even where their figures would fit: investment companies, venture capital companies and pure holding companies that only acquire, manage and realise shareholdings without intervening in the management of those holdings. An entrepreneur's small holding GmbH is therefore often not a micro company.

Which thresholds apply in 2026

The figures given here have been in the statute since 17 April 2024. Under Article 93(1) EGHGB, the introductory act to the Commercial Code, they apply for the first time to financial years beginning after 31 December 2023. For accounts closing on 31 December 2026 they are therefore plainly the relevant ones.

Subsection 2 allowed voluntary application as early as financial years beginning after 31 December 2022, but only as a whole. A company that brought the new figures forward had to use them for all criteria and all size classes at once and could not pick the more favourable limit in each case.

What Article 93 EGHGB leaves open is which figures a reporting date from before the switch carries into the two-reporting-dates rule. A company sitting close to a limit should therefore not settle that question alone, but agree it with its tax adviser or auditor.

The table shows why classification comes first. The deadline for preparation, the management report, the statutory audit, the scope of disclosure and even the amount of a reduced administrative fine all depend on it. The next two modules take these consequences in turn.