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July 1, 2023
Financial management: When planning their own business, founders have to make many decisions. Choosing the right business structure is one of them. There are many options available.
When it comes to choosing the right legal structure for your business and the associated requirements, things can get quite confusing. There's no single perfect option for craft businesses . Especially at the beginning, the following questions arise: Should liability be limited to protect personal assets? Will you be the managing director yourself, or will someone else be? How will the company be financed? Of course, aspects like administrative costs , craft-related requirements, and tax regulations also play a role . But one thing at a time.
Options include sole proprietorships, partnerships such as civil law partnerships (GbR) and general partnerships (OHG), limited partnerships (KGs), or corporations such as GmbHs, GmbH & Co. KGs, entrepreneurial companies (limited liability companies), UGs (limited liability companies), or stock corporations (AGs). What distinguishes these forms from one another, and what are the advantages and disadvantages for a craft business?
The sole proprietorship is the most frequently chosen legal form. After registering the business and being entered in the trade register, operations can essentially begin. Sole proprietors make decisions alone – and are fully liable for them: No minimum capital is required to start the business , but they are personally liable for any debts of the business with their entire business and private assets.
When a company consists of more than one person, it is a partnership. The differences lie in whether the partners act as equals or whether there is a more differentiated distribution of roles.
Operations management
The Chambers of Skilled Crafts in Germany - HWK of Saarland
Operations management
The GbR (general partnership) is the simplest form. For registration in the trade register, founders need a written GbR agreement that regulates their internal relationships as partners. They are equally liable with their personal assets . The GbR automatically becomes an OHG (commercial partnership) if the business is managed commercially – or if the annual turnover exceeds €250.000. In this case, registration in the commercial register is also required , and stricter accounting requirements apply, among other things.
If the goal is to involve individuals in the business who contribute capital but are not intended to make operational decisions, founders can also consider a limited partnership (KG) . It is essentially the same as a general partnership (OHG), but distinguishes between fully liable general partners and limited partners with limited liability. The former retain control of the business with full liability. Limited partners, as additional investors, increase the equity capital but have little say in the business and are only liable up to the amount of their investment.
The basic idea is to equip the company with capital in the form of shares or equity for all its activities. The public limited company (AG) is the most well-known form, but it plays hardly any role for craft businesses. The same applies to the limited partnership (GmbH & Co. KG).
A popular option, especially among medium-sized businesses, is the GmbH (limited liability company). The GmbH is a separate legal entity. In other words, the shareholders are not personally liable with their private assets; instead, the company is liable with its capital. To establish a GmbH, shareholders must contribute a minimum share capital of €25.000 , which can also be in the form of assets such as machinery.
A limited liability company (GmbH) is entered in the commercial register. This requires a notarized articles of association . Founders of a GmbH are generally required to keep double-entry bookkeeping.
Another variant is the UG (limited liability), also known as a mini-GmbH. The business can be started with as little as one euro of capital. However, a reserve must be set aside annually from the profits until the required capital contribution for a GmbH has been reached.
The information contained herein is for general information purposes only and does not relate to the specific situation of any individual or legal entity. It does not constitute business, legal, or tax advice. In specific cases, this content cannot replace individual advice from a qualified professional.
Sole proprietorship Pro: no minimum capital, quick decisions possible, low bureaucratic requirements
cons: Shareholders are liable with private assets, higher risk for investors
Partnership (GbR, OHG, KG) Pro: few formal requirements, legal form adaptable to role distribution, flexibility in equity
Partnership (GbR, OHG, KG)
cons: Shareholders are liable with private assets, higher risk for investors
Corporation (GmbH, UG) Pro: Equity helps with investments and loans; private assets remain untouched
cons: Share capital contribution required, obligation to maintain double-entry bookkeeping and financial statements
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