Business structures in Germany: your guide to making the right choice

Choosing the right business structure is a milestone for any company. It determines your liability, flexibility, and how your business is perceived externally. To help you get started with confidence, here’s an overview of all the main business structures in Germany – clear, practical, and straight to the point.

Summary

1. What is a company’s legal form?
2. The main business structures at a glance
3. Legal forms for establishing a sole proprietorship
4. Legal forms for establishing a partnership
5. Legal forms for establishing a capital company
6. Pros and cons of the main legal forms for companies
7. FAQ – Your key questions about legal forms

What is a company’s legal form?

The legal form establishes the legal foundation for your business. It determines how many people are involved, how you are liable, the amount of starting capital required, and the taxes you need to pay. This makes it one of the most important decisions when setting up a company.

In everyday language, the terms “legal form” (Rechtsform) and “type of company” or ”business form” (Unternehmensform) are often used interchangeably. Both refer to the legal structure of your business. Sometimes the term “corporate form” is also used, especially for businesses with multiple partners or joint ventures. What matters is that all these terms relate to the fundamental legal framework under which your business operates.

The main business structures at a glance

In Germany, there are three main types:

• Sole proprietorships: for solo founders, easy and fast to establish.
• Partnerships: for teams, e.g. GbR, OHG, KG – ideal if you want to share responsibility.
• Corporations: for bigger plans, with limited liability, e.g. GmbH, UG, AG, SE.

You’ll also find hybrid models like the GmbH & Co. KG and special company forms, for example the KGaA or SE.

* Income tax is paid by individuals, such as sole proprietors and partners in partnerships. The tax rate increases progressively with income and can reach up to around 45%.

Corporation tax is paid by legal entities like capital companies (e.g., GmbH or AG). It is a flat rate of 15% on profits, plus a solidarity surcharge, resulting in a total of approximately 15.8%. This tax is levied at the company level. Distributions to shareholders may be subject to additional taxation.

* Commercial businesses are those engaged in activities like trade, manufacturing, or services. They must register their trade at the trade office and are subject to trade tax. They often face stricter bookkeeping and tax obligations.

Freelance professions require personal expertise and special qualifications, such as doctors, lawyers, artists, or tax consultants. Freelancers only need to register with the tax office and are exempt from trade tax. Their tax and regulatory requirements are usually simpler than those for commercial businesses.

Legal forms for establishing a sole proprietorship

A sole proprietorship is a business structure where a single natural person is the sole owner and decision-maker. The focus here is on maximum personal control and flexibility, with no formal establishment hurdles or required starting capital. All rights, obligations, and risks lie with this one individual.

The owner’s liability is unlimited, meaning they are personally responsible for the business debts, including with their private assets. This form suits founders who want to work independently and take full responsibility, without partners or complex corporate structures, such as freelancers, small traders, or solo entrepreneurs.

Typical sole proprietorship types:

• Sole proprietorship (Einzelunternehmen)
• Registered merchant (eingetragener Kaufmann, e.K.)

The sole proprietorship is the simplest and fastest form of setting up a business, with no minimum capital requirements. The owner has unlimited personal liability for all business and private assets. Advantages include low startup costs and simplified accounting (cash basis). Disadvantages are full personal liability and limited options for raising capital.

The registered merchant (e.K.) is a sole proprietorship recorded in the commercial register, subject to commercial law obligations, but with the same unlimited liability. Holding the title “merchant” increases transparency and credibility but also means additional formal requirements.

Alternative legal forms to sole proprietorship

If starting a sole proprietorship, the personal liability is important to consider. In the classic sole proprietorship, the founder is fully liable with private assets for all debts and obligations of the business. This unlimited liability can be problematic especially in higher risk situations.

To reduce liability risk, alternatives exist in the form of capital companies, which can be founded by a single person:

• One-person UG (limited liability): A simplified version of the GmbH, which can be founded with just 1 euro of starting capital. It offers limited liability protection as the company is a separate legal entity protecting personal assets.
• One-person GmbH: Similar to the UG but with a higher minimum capital requirement of 25,000 euros. It combines the benefits of a sole proprietorship with limited liability.
• One-person company: Requires a minimum capital of 50,000 euros and entails more complex founding and administration obligations, which come with higher costs.

These options are particularly relevant for solo founders who want to reduce personal risk and are prepared to manage the administrative challenges of a capital company.

Legal forms for establishing a partnership

A partnership is a type of business where at least two people join forces to pursue an economic or other objective together. In partnerships, it is not the capital but personal cooperation, trust, and shared responsibility among the partners that matter most. In partnerships, the partners have unlimited personal liability, meaning they are also liable with their private assets. The founding process is fairly straightforward and informal; often, a simple agreement between partners suffices.

This legal form suits founder teams or partners who want to actively collaborate and are willing to share the business risk. Usually, no capital contribution is required, allowing flexible arrangements.

Typical partnerships include:

• Civil law partnership (GbR)
• General partnership (OHG)
• Limited partnership (KG)
• Partnership company (PartG)

The civil law partnership (GbR) is suitable for a simple and quick start for two or more persons with a common purpose. All partners have unlimited personal liability. The GbR is transparent for tax purposes and has low formal requirements.

The general partnership (OHG) is similar but is specifically used for commercial businesses with at least two personally liable partners. It requires registration in the commercial register and double-entry bookkeeping.

The limited partnership (KG) distinguishes partners into general partners (full liability) and limited partners (liable only up to their contribution). This form is useful for structuring businesses with investors who do not take active management roles.

The GmbH & Co. KG is a special type of KG where the personally liable partner is a GmbH. This means liability is limited to the assets of the GmbH, thus protecting the private assets of the individual partners. Limited partners are liable only up to their investment. This setup combines the limited liability of the GmbH with the flexible capital and partnership structure of the KG. It is popular among family businesses and larger companies due to its combination of security and flexibility.

The partnership company (PartG) is designed especially for freelancers and allows joint professional practice with personal, joint liability often supplemented by professional indemnity insurance.

Legal forms for establishing a capital company

Capital companies are legal entities where the focus is on contributed capital and liability limitation. Shareholders generally only risk their capital contribution. Important factors when choosing this legal form include minimum capital requirements, opportunities for raising capital, market presence, and the increased formalities in founding and administration. These forms are particularly suitable for founders who value liability protection, professional structure, and capital acquisition, such as larger companies or those involving investors.

The main capital companies:

• Stock corporation (AG)
• Limited liability company (GmbH)
• Entrepreneurial company (UG – haftungsbeschränkt)
• Limited partnership on shares (KGaA)

The stock corporation (AG) is geared towards larger companies, requiring a minimum share capital of €50,000. The capital is divided into shares that can be freely transferred. The company is governed by three key bodies: the management board responsible for day-to-day operations, the supervisory board overseeing the management, and the shareholders’ meeting where key decisions are made. These bodies ensure transparent control and effective management. Personal liability is excluded.

The limited liability company (GmbH) is one of the most popular capital companies in Germany, requiring a minimum share capital of €25,000. It offers limited liability with a comparatively simple structure and flexibility, making it especially popular among small and medium-sized enterprises.

The entrepreneurial company (UG – haftungsbeschränkt) is a mini-GmbH that can be formed with share capital starting at €1. It is suitable for founders with limited capital. Profits generally need to be partially retained until the share capital equivalent to that of a GmbH is reached.

Limited partnership on shares (KGaA) combines attributes of the KG with those of the AG. It allows a separation between management (general partner with unlimited liability) and capital providers (limited shareholders with limited liability). It is particularly suited for family enterprises with investor structures.

Pros and cons of the main legal forms for companies

Sole proprietorship

Advantages:

• Very simple and quick to establish without minimum capital
• Full control and decision-making authority held by the owner
• Low administrative effort and simple accounting possible
• No profit sharing; all profits belong to the owner
• Tax benefits such as the basic allowance and exemption from trade tax for small businesses

Disadvantages:

• Unlimited personal liability including private assets
• Limited financing opportunities due to difficulty raising capital
• Business image often less professional than capital companies
• Growth potential may be limited by financial and personnel resources

Partnership

Advantages:

• Shared use of resources and know-how of multiple partners
• Flexible and straightforward founding, mostly with no capital requirement
• Tax transparency: profits are directly allocated to partners
• Joint responsibility and decision-making that creates synergies
• Suitable for close collaboration in teams and partnerships

Disadvantages:

• Personal, unlimited, and joint liability of all partners
• Potential conflicts in case of disagreements or partner withdrawal
• More limited capital raising options compared to capital companies
• Higher administrative effort than sole proprietorships, especially for larger partnerships

Capital company

Advantages:

• Liability limited to the company assets, protecting private wealth
• Increased trust from banks, investors, and business partners due to capital base
• Easier capital raising through issuing shares or stocks
• Clear corporate structure with established management and supervisory bodies
• Ability to involve further investors without changing management

Disadvantages:

• Higher formation and administrative costs, including notary and registration fees
• Strict legal requirements like double-entry bookkeeping and disclosure obligations
• Minimum capital requirements (e.g., €25,000 for GmbH, €50,000 for AG)
• Greater bureaucratic burden during decision-making and shareholders’ meetings