Introduction

Corporations are one of the most common legal forms for businesses. They are particularly suitable for larger business ventures where limited liability and the ability to raise capital are key considerations. In this article we will look in detail at the concept of a corporation, examine the different types of corporations and explain the legal framework.

Definition and characteristics

A corporation is a company in which the liability capital is divided into shares or business shares. The liability of the partners is limited to the company’s assets, and the partners are not liable with their personal assets. The main characteristics of corporations include:

• Legal personality: Corporations are legal entities and have a legal personality independent of the shareholders.
• Limitation of liability: The liability of the shareholders is limited to their contributions.
• Capital division: The capital is divided into shares or business shares.
• Raising capital: Corporations have the option of raising capital by issuing shares or taking out loans.

Types of corporations

In Germany, the most common types of corporations are the stock corporation (AG) and the limited liability company (GmbH). There are also other forms such as the Unternehmergesellschaft (haftungsbeschränkt) (UG) and the Kommanditgesellschaft auf Aktien (KGaA).

Stock corporation (AG)

The AG is a corporation whose share capital is divided into shares. It is suitable for large companies that want to raise capital from the public. The AG is subject to strict statutory regulations, in particular the German Stock Corporation Act (AktG).

Limited liability company (GmbH)

The GmbH is the most widespread form of corporation in Germany. It is suitable for medium and larger companies. The liability of the shareholders is limited to their shares in the company. The GmbH is subject to the GmbH Act (GmbHG).

Entrepreneurial company (limited liability) (UG)

The UG is a special form of the GmbH with lower minimum capital. It is often referred to as a “mini-GmbH” and is suitable for founders with limited start-up capital.

Partnership limited by shares (KGaA)

The KGaA is a hybrid of an AG and a limited partnership (KG). It combines elements of the partnership with those of the corporation.

Foundation and capital requirements

As a rule, the formation of a corporation requires the preparation of a partnership agreement (articles of association), the payment of the required share capital or capital stock, and registration in the commercial register. Capital requirements vary depending on the type of corporation. For example, the minimum share capital for a GmbH is 25,000 euros, while a minimum share capital of 50,000 euros is required for an AG.

Rights and duties of the shareholders

The shareholders of a corporation have certain rights and obligations. These include the right to participate in profits, the right to information and inspection of business documents, the right to vote at the general meeting or shareholders’ meeting, and the obligation to pay in the agreed capital contribution.

Management and representation

The management of a corporation is usually entrusted to one or more managing directors or to a management board. The managing directors or board members represent the company in and out of court and are responsible for the day-to-day management of the company.

Accounting and auditing

Corporations are subject to strict accounting rules. They have to prepare annual financial statements, which usually have to be audited by a certified public accountant. The annual financial statements are to be published in the Federal Gazette.

Liability and insolvency

One of the main characteristics of corporations is the limited liability of the shareholders. In the event of insolvency, the shareholders are generally liable only up to the amount of their capital contribution. However, the managing directors or members of the Board of Management may be personally liable under certain circumstances, in particular in the event of breaches of duty.

Termination and liquidation

The termination of a corporation may be effected by a resolution of the shareholders, by the opening of insolvency proceedings or by a court decision. Termination is usually followed by liquidation proceedings, in which the company’s assets are realized and its liabilities are settled.

Conclusion

Corporations offer a number of advantages, particularly in terms of limited liability and capital raising. However, they are also associated with increased regulatory requirements and complexity. Choosing the appropriate legal form requires careful consideration of the company’s specific needs and objectives.

Please note that this article contains general information and does not constitute legal advice. It is recommended to seek professional assistance for legal issues.