The share capital of a GmbH: myths and facts

When advising founders, I often come across a widespread misunderstanding: many believe that when a GmbH is founded, EUR 25,000 (or at least EUR 12,500) must be paid in and then “parked”, so to speak. It is often unclear whether and how this capital can be used. This misinterpretation can lead to considerable restrictions in entrepreneurial freedom and even deter potential founders from choosing the legal form of a GmbH. It is essential to understand the actual legal situation in order to be able to make informed decisions. The reality is much more flexible than many people assume. In order to dispel this myth and create clarity, it is necessary to take a closer look at the legal principles and practical options for dealing with the share capital of a GmbH. Only in this way can founders and managing directors fully exploit the options available to them and at the same time act within the framework of the legal requirements.

The truth about share capital

First of all, it is true that a minimum share capital of EUR 25,000 must be set for the formation of a GmbH. However, this does not mean that this amount must remain untouchable in an account. In fact, the share capital can be used for various purposes in the course of business operations. This flexibility is a key advantage of the GmbH as a legal form and enables companies to use their capital efficiently. It is important to understand that the share capital is not intended as a kind of security reserve that must remain untouched. Rather, it serves as start-up capital that the company can and should use for its business activities. The statutory regulations stipulate that the share capital is fully available to the company. This means that it can be used for all types of business activities as long as they are in line with the company’s purpose and do not violate the capital maintenance regulations. Founders should therefore move away from the idea that share capital is some kind of “sacred cow” that must not be touched. Instead, they should see it for what it is: a financial instrument to promote the success of the company.

Possible uses of the share capital

The share capital is freely available to the GmbH and can be used for the following purposes:

1. Working capital: The GmbH can use the capital to make necessary purchases. This includes the purchase of office equipment as well as production machinery or vehicles. Investing in working capital is often an essential step in starting or expanding business activities.
2. Settlement of invoices: Outstanding payments to suppliers can be settled with the share capital. This is particularly important in the initial phase of the company when sufficient revenue is not yet being generated. Paying invoices on time helps to maintain good business relationships.
3. Personnel costs: Capital can be used to pay employees. This includes salaries as well as social security contributions and other personnel-related costs. Investing in qualified personnel is often decisive for the success of a company.
4. Investments: Investments in goods, office space or marketing are also possible. This can include renting business premises, setting up a warehouse or running advertising campaigns. Such investments are often necessary to establish and expand the business.
5. Formation costs: Part of the share capital may even be used for the costs of the company’s own formation. These include, for example, notary fees, fees for entry in the commercial register or costs for drawing up the articles of association. The option of paying these costs from the share capital makes the formation process considerably easier.

Observe the capital maintenance obligation

Despite this flexibility, it is important to observe the capital maintenance obligation. This states that the assets required to maintain the share capital may not be paid out to the shareholders. The aim is therefore to preserve the substance of the company and not to leave the money unused. The capital maintenance obligation is a fundamental principle of GmbH law and serves to protect creditors. It is intended to ensure that the company has sufficient funds to meet its obligations. It should be noted that not only direct payments to shareholders can be problematic, but also hidden profit distributions. Managing directors must therefore always carefully check whether planned transactions with shareholders could lead to an impermissible erosion of the company’s assets. However, the capital maintenance obligation does not mean that the share capital may not be used for business purposes. Rather, it is about finding an appropriate balance between entrepreneurial freedom and creditor protection. Managing directors should therefore weigh up all financial decisions carefully and seek legal advice if in doubt.

Caution when using

Although the share capital can generally be used, caution is required. As soon as the company’s assets no longer cover its liabilities, the managing director is obliged to file for insolvency. It is therefore advisable not to use up the share capital lightly. Managing directors bear a special responsibility for the financial stability of the company and must always keep an eye on the economic situation. This requires a regular and careful review of the finances, especially if major expenditure or investments are planned. It is advisable to keep a certain financial reserve in order to be able to cushion unforeseen expenses or drops in turnover. However, it should be noted that excessive restraint in the use of share capital can also be counterproductive if it prevents important investments in the company’s future. It is therefore important to find a balance between prudent management and necessary investments for the company’s growth. In this context, it can be useful to draw up a detailed financial plan that takes into account both the short-term and long-term financial needs of the company.

Examples of breaches of the capital maintenance obligation

To illustrate the practical significance of the capital maintenance obligation, here are five examples of potential breaches:

1. Excessive salaries for shareholder managing directors: If a shareholder managing director receives a salary that is significantly higher than the standard market level, this can be considered a hidden profit distribution. This would be a breach of the capital maintenance obligation, as it leads to an impermissible reduction in the company’s assets.
2. Loans to shareholders without adequate collateral: If the GmbH grants a loan to a shareholder without the shareholder providing sufficient collateral or paying a market interest rate, this may also violate the capital maintenance obligation. Such transactions must always take into account the arm’s length principle.
3. Sale of company assets below value: If the GmbH sells assets to a shareholder at a price below the market value, this can be considered an impermissible transfer of assets. Such a transaction would reduce the company’s assets in an impermissible manner.
4. Payment of a shareholder’s private expenses: If the GmbH pays a shareholder’s private expenses, such as vacation trips or private purchases, this violates the obligation to maintain capital. Such payments constitute an impermissible withdrawal from the company’s assets.
5. Rent-free transfer of company property: If the GmbH transfers assets, such as real estate or a vehicle, to a shareholder for use without appropriate consideration, this may also constitute a breach of the capital maintenance obligation. The arm’s length principle must also be observed here.

Conclusion

The share capital of a GmbH is not “dead capital” that has to sit unused in an account. It can and should be used for business operations. However, it is essential that it is used responsibly. Founders should be aware that although the share capital can be used, it also serves as security for creditors. The capital maintenance obligation is an important legal framework that must be observed. It serves to protect creditors and maintain the financial stability of the company. Managing directors must therefore always carefully consider how they use the share capital without breaching this obligation. This requires a good understanding of the legal basis and forward-looking financial planning. It is advisable to seek legal advice for complex financial decisions or transactions with shareholders in order to avoid potential breaches of the capital maintenance obligation. This is the only way to ensure that the company is on a sound footing, both legally and economically, and it is essential for successful company management to be aware of the legal framework and to seek professional advice in case of doubt. This applies in particular to the handling of share capital and compliance with the capital maintenance obligation. A sound knowledge of these aspects enables founders and managing directors to exploit the full potential of the GmbH as a legal form without taking legal risks. It is important to understand that the use of share capital is not a taboo, but on the contrary can often be necessary for business success. At the same time, however, a balance must always be maintained between entrepreneurial freedom and legal obligations. Through responsible and informed handling of the share capital, the GmbH can be used as a flexible and effective form of company that takes into account both the interests of the shareholders and the protection of creditors.