Limited liability, share capital and incorporation

A founder in Dortmund has 6,000 € available and wants a company with limited liability. The GmbH Act requires share capital of at least 25,000 €, and she reads that as barring her way. It does not — but the way that is open has a name, a compulsory addition to the company name, and a reserve that takes a quarter of the profit away from her year after year.

What limited liability really means

The notion of limited liability is usually explained the wrong way round. What is limited is not the shareholder's liability but the pool of assets liable: there is one estate creditors may reach, and outside it nothing.

§ 13 (1) GmbHG sets the frame: the company as such holds its rights and duties independently, may acquire ownership and other rights in rem over land, and may sue and be sued. It is a bearer of rights, not a shell.

Subsection 2 draws the consequence in a single sentence: for the liabilities of the company, only the company's assets are liable to its creditors. The shareholder's private wealth does not appear in that sentence, and that is the whole point.

Subsection 3 adds that the company counts as a commercial company within the meaning of the Commercial Code. The commercial duties of bookkeeping and annual accounts therefore apply regardless of what the company earns its money from.

From these three subsections a working rule for incorporation follows: everything that protects the company rests on keeping company assets and private assets apart. A mixed cash box is not a formal slip but the point of attack on that separation itself.

Every founder who takes out a loan knows the practical flip side: banks regularly demand a personal guarantee. The statutory limitation of liability is thereby broken through by contract — not by the statute, but by the signature.

A second breach lies in tax law and hits the managing director. For taxes and contributions they culpably fail to remit, they are personally liable; the limitation in § 13 (2) GmbHG protects the company, not its officer.

The sentence in subsection 2 is therefore to be read exactly as it stands: it allocates the pool of assets for the liabilities OF THE COMPANY. It says nothing about a managing director's own breaches of duty or a shareholder's own contracts.

The independence in subsection 1 has a pleasant side too. Contracts, accounts, licences and employment relationships belong to the company and not to its shareholders. A change of shareholder therefore leaves them untouched — unlike a sole trader.

The minimum share capital of the GmbH

§ 5 (1) GmbHG is short and unambiguous: the share capital of the company must amount to at least twenty-five thousand euros. That is a floor for subscribed capital, not for the bank balance on the day of incorporation.

Subsection 2 expressly allows a shareholder to take several business shares on formation. That is no formality: anyone wanting to sell or pledge shares later has an easier time with several smaller ones than with a single large one.

Subsection 3 also permits nominal amounts of differing size. Participation quotas therefore need not be represented through equally sized shares, as long as the sum is right. The final arithmetic is the only hard condition.

The whole-euro requirement of subsection 2 looks incidental but is not. It prevents nominal amounts carrying cents, and with them rounding differences that would propagate across share transfers and capital increases.

In practice a denomination anticipating later movements is therefore advisable: several shares in round amounts rather than a single large one. Conversely, a share may be divided only on the conditions set by the statute and the articles.

The figure 25,000 has a function reaching beyond incorporation. It is the reference point of several other provisions: the payment threshold of § 7, the demarcation from the UG in § 5a, and the crisis rule of § 49 (3), which turns on half of it.

A common misconception concerns where that money ends up. Share capital is not a blocked account and not a reserve that must stay untouched. It is a figure on the liabilities side; the funds paid in may be used for the business from day one.

What is protected is not the money but the figure. The capital maintenance rules forbid payments to shareholders that encroach on the assets required to preserve the share capital — a restriction on distribution, not on liquidity.

The level of share capital is therefore also a signalling decision. A high subscribed capital raises the threshold above which distributions are permitted, and reads differently to banks and suppliers than the statutory minimum.

What must be paid in before registration

Here lies the most misunderstood point in the whole law of incorporation. § 7 (2) GmbHG lays down not one condition but two, and both must be met before the application to the commercial register may be made.

The first condition is share-related: on each business share, in so far as no contribution in kind is agreed, a quarter of the nominal amount must be paid in. It is therefore tested for each individual share, not for the capital as a whole.

The second is company-related: in total, enough must be paid in on the share capital that the cash contributions plus the aggregate nominal amount of the shares carrying contributions in kind reach half the minimum share capital under § 5 (1).

The reference point of the second threshold is noteworthy. It turns on half the MINIMUM share capital, a fixed quantity, and not on half the capital actually subscribed. With a higher share capital it therefore does not grow.

A figure makes that vivid. Whoever subscribes share capital of 100,000 euros must pay a quarter on every share before registration — 25,000 euros in total — and that sum comfortably clears the second threshold.

Conversely, the second threshold can overtake the first. With share capital of exactly 25,000 euros, a quarter on each share comes to 6,250 euros together; the aggregate threshold, however, demands 12,500 euros, and it is then the binding one.

Which of the two conditions binds therefore depends on the level of subscribed capital. Both are always to be tested, and the order of testing does not matter — what matters is grasping that neither replaces the other.

The notary will hold the application back until both proofs are in. That is not over-zeal: on the wording, the application MAY be made only once the conditions are met, and a false assurance about them carries criminal sanction.

A stricter rule applies to contributions in kind. Under § 7 (3) GmbHG they are to be provided to the company before registration in such a way that they stand finally at the free disposal of the managing directors. Part performance does not suffice here.

The difference has a systematic basis. A cash contribution can be called at any time and its value is fixed; a contribution in kind must be valued, and its value can change. The statute therefore requires it to be provided in full in advance.

What was not paid in is moreover not forgiven. The outstanding contribution remains a debt of the shareholder to the company and is regularly called in a crisis — that is, when it suits least.

Anyone starting with the statutory minimum payment has therefore not founded a cheaper company but agreed a later obligation to pay. The difference between subscribed and paid-in capital is a debt with an indeterminate due date.

In practice that means keeping and knowing both figures separately: the subscribed share capital, which stands in the articles and the commercial register, and the paid-in part, which the accounts show. Only the first is public.

The UG as an incorporation below the minimum capital

§ 5a GmbHG opens the way the founder from the opening is looking for. A company formed with share capital falling below the minimum under § 5 (1) is possible — subject to four departures.

The first concerns the name. Departing from § 4, the company name must carry the designation "Unternehmergesellschaft (haftungsbeschränkt)" or "UG (haftungsbeschränkt)". The addition is compulsory and cannot be shortened to a bare "UG".

That compulsory designation is not a label but a warning to those dealing with the company. Anyone contracting with a UG should be able to tell from the name that very little capital may stand behind the limitation of liability.

The second departure concerns payment. Departing from § 7 (2), the application may be made only once the share capital has been paid in full. The quarter rule of the GmbH precisely does not apply here.

The third stands in the same sentence: contributions in kind are excluded. A UG can raise its capital only in cash, and in full. That removes every valuation question, which would weigh especially heavily on a capital of a few thousand euros.

Taken together the two departures show a symmetry that guides the legislator: whoever subscribes less capital must raise it wholly and in cash. Low capital is matched not by a lighter discipline of raising it but by a stricter one.

The fourth departure concerns the crisis and the statutory reserve. The second module takes both, for they are what decides the lifespan of the legal form — and not the question of what amount one starts with.

It is worth recording what § 5a does NOT change. The UG is not a legal form of its own but a GmbH with special rules: everything said above about § 13 applies to it unchanged, as do the commercial duties of bookkeeping and accounts.

The tax treatment is the same as well. A UG is a capital company within the meaning of § 1 (1) no. 1 KStG and therefore subject to unlimited corporation tax liability; a low share capital changes nothing about the kind of tax.

The choice between the two routes is therefore not a choice between two legal forms but between two points in time. Either one raises 25,000 euros at the outset, or one earns it through the reserve — with all the constraints that brings.

• Name: the addition "Unternehmergesellschaft (haftungsbeschränkt)" or "UG (haftungsbeschränkt)" (§ 5a (1))
• Payment: share capital in full before registration (§ 5a (2) sentence 1)
• Contributions in kind: excluded (§ 5a (2) sentence 2)
• Reserve: a quarter of the reduced annual surplus (§ 5a (3))
• Crisis: meeting to be called already on imminent illiquidity (§ 5a (4))