German Limited Liability Companies Act (GmbHG)

Historical development and significance

The Limited Liability Companies Act was passed on April 20, 1892 and came into force on May 10, 1892. The last significant reform came in 2008 with the Act on the Modernization of Limited Liability Company Law (MoMiG), which for the first time worldwide created a legal form that enabled capital accumulation and limited liability for smaller companies. The regulations have proven to be extremely successful, with over one million GmbHs in Germany. The law has been continuously adapted to modern business needs. Today, the GmbH is the dominant legal form in the German SME sector. The combination of flexibility and limited liability makes this legal form particularly attractive. The provisions of the GmbHG are a model for many foreign legal systems. The modernization through the MoMiG has strengthened international competitiveness. The introduction of the UG (haftungsbeschränkt) has also opened up the legal form to start-ups. The digitalization of start-up processes has been continuously driven forward.

Basic structure and systematics

The GmbHG regulates the essential aspects of the company form in six sections. The establishment of the company is regulated in detail in §§ 1-12. The legal relationships of the company and the shareholders can be found in §§ 13-34. Representation and management are standardized in §§ 35-52. Amendments to the articles of association are regulated in §§ 53-59. The dissolution and nullity of the company are dealt with in §§ 60-77, while the provisions on regulations, penalties and fines can be found in §§ 78-85. The systematic structure allows for clear orientation. The individual regulatory areas are coordinated with each other. The regulations form a closed system. Case law has continuously developed the regulations. Practicality is at the forefront of the system.

Foundation and raising capital

The GmbHG requires a minimum share capital of EUR 25,000 for the formation of a GmbH. The company only comes into existence when it is entered in the commercial register. The articles of association must be notarized and contain minimum information. Contributions can be made in cash or in kind. If the company is founded in cash, at least a quarter of each capital contribution must be paid in. Contributions in kind must be made and valued in full. The managing directors must ensure that the capital has been properly raised. The formation audit is carried out by the registry court. The list of shareholders must be submitted upon formation. The business address must be in Germany. The formation costs must be presented transparently.

Executive bodies and management

The GmbH has two mandatory bodies: the management and the shareholders’ meeting. The managing directors represent the company in and out of court. They must exercise the diligence of a prudent businessman. The shareholders’ meeting is the supreme decision-making body. A supervisory board is generally optional, except in the case of co-determined GmbHs. The managing directors are subject to comprehensive fiduciary duties. The shareholders can issue instructions to the management. The liability of managing directors is strictly regulated. Appointment and dismissal is by shareholder resolution. The power of representation can be limited. The management authority can be regulated internally.

Shareholder rights and obligations

The shareholders have extensive information and control rights. Profits are distributed according to the shares held. Shareholder resolutions require a simple majority. Amendments to the articles of association require a three-quarters majority. The shareholders are obliged to pay the capital contribution they have made. Obligations to make additional contributions must be regulated in the articles of association. The duty of loyalty binds the shareholders to each other. The shares are generally freely transferable. Transfer restrictions can be contractually agreed. The list of shareholders has a constitutive effect. Minority rights are protected by law.

Capital preservation and creditor protection

The GmbHG contains strict regulations on capital maintenance. Payments to shareholders may not affect the share capital. The managing directors are personally liable for prohibited payments. The company may not acquire its own shares. Equity-replacing shareholder loans are subordinated. The obligation to file for insolvency protects creditors. Liability through recourse is possible in exceptional cases. The raising of capital is strictly controlled. The repayment of prohibited payments can be demanded. Accounting is subject to strict regulations. The position of creditors is comprehensively protected.

Current developments and outlook

The digitalization of GmbH formation is being driven forward. Online incorporation is to be made possible throughout Europe. Harmonization with EU law will be continued. Making the raising of capital more flexible is being discussed. The focus is on modernizing shareholder rights. International competitiveness remains central. The fight against abuse will be intensified. Case law continues to develop the law dynamically. Practicality is continuously improved. The GmbH remains the most important legal form. The reform of partnership law is influencing developments. The digital transformation is shaping the future.