As a lawyer, I repeatedly encounter cases in which startups unexpectedly stumble due to legal pitfalls. One such stumbling block that deserves special attention is “hidden non-cash incorporation.” This problem arises particularly in the start-up phase, when the entrepreneurial focus is primarily on product development and market entry.
What is a hidden non-cash foundation?
Hidden non-cash formation occurs when assets such as software or goods are brought into a GmbH disguised as cash contributions. From a legal point of view, these are contributions in kind, but they are not declared accordingly. A common case is that founders who previously worked together in a GbR, without a strong sense of guilt, sell assets to the newly formed GmbH. However, this action, often committed out of ignorance or underestimation of the legal implications, can have far-reaching consequences. This is because the legal framework conditions that distinguish a GmbH from a GbR are not merely formal in nature. They also imply stricter capital raising and maintenance. In this context, hidden non-cash contributions may lead to liability of the shareholders, especially if the assets contributed do not have the declared value. It is therefore of the utmost importance that founders are aware of the importance of correctly declaring contributions in kind and respect the legal intricacies of company formation.
Why is this problematic for startups?
For start-ups that begin as a GbR and later become a GmbH, a concealed non-cash formation harbors considerable legal risks. A discrepancy arises between what legally appears to be a cash contribution and what is economically to be regarded as a contribution in kind. The qualification of these transactions as a hidden contribution in kind leads to the fact that, pursuant to Sec. 19 (4) Sentence 1 GmbHG, the cash contribution obligation is deemed not to have been fulfilled and can be claimed again by the GmbH. However, under certain conditions, the value of the asset can be offset against the GmbH’s contribution claim, which excludes double utilization of the cash contribution obligation1. Under insolvency law, a hidden non-cash formation may lead to over-indebtedness, which may not be recognized or declared in a timely manner, which may result in liability of the managing directors (§ 15a InsO). Under criminal law, the concealed formation in kind can result in personal civil liability of the managing director towards the GmbH pursuant to Section 9a GmbHG and criminal liability of the managing director pursuant to Section 82 (1) no. 1 GmbHG, with the penalty ranging from a fine to a prison sentence of up to three years.
Legal consequences and § 19 IV GmbHG
The legal consequences of a concealed non-cash foundation can be serious. According to § 19 IV GmbHG, the obligation to make a contribution remains in money. Agreements on the hidden contribution in kind and the corresponding legal acts are not invalid. The value of the assets is credited against the shareholder’s monetary contribution obligation, but only after the company has been registered in the Commercial Register. It should be noted, however, that contracts governing any subsequent transfer are not trivial. While the GmbH and the shareholders may have problems later, the GbR could have tax problems if these tangible assets are sold too favorably to the GmbH. Such transactions must be carefully examined to ensure that they comply with tax law requirements and that no unexpected tax burdens arise.
Prevention and recommendations for action
Knowledge of the hidden formation in kind and the correct application of § 19 IV GmbHG are essential in order to avoid legal pitfalls. Expert legal advice is recommended to identify and minimize risks. All asset transfers should be transparent and legally compliant, especially when registering in the commercial register.
Conclusion
Founding and developing a startup not only presents opportunities but also legal challenges. Legal prudence and diligence are just as important as an innovative business idea. Only with a solid legal foundation can unexpected challenges be avoided and long-term success ensured.
