Termin buchen

Choosing a Legal Form: Which One Fits Your Business?

At the start of a business, much is still open: the first customers, the financing, sometimes even the exact path. That makes one decision all the more important, because it provides certainty from the outset: the right legal form. It determines how large your personal risk is, how professional your company appears externally and how much effort awaits you later.
Book a formation consultation

Table of contents

At a glance

The legal form is one of the first major decisions of your formation. It influences liability, tax, financing and the later administrative burden, among other things. Which legal form makes sense depends on your goals, your capital and the planned business.

The key differences at a glance:

  • Sole proprietorships are often suitable for a simple start with little administrative effort.
  • The GbR is a common legal form for several founders who want to start together.
  • UG and GmbH limit personal liability but differ mainly in the share capital required.
  • Each legal form entails different tax and organisational obligations.
  • Early advice helps to avoid later changes and unnecessary effort.

Why the legal form decides more than just the name

At the beginning, one question above all circles in the minds of many founders: what actually happens if something goes wrong? This is exactly where the significance of the legal form lies. It decides whether, in the event of a dispute or insolvency, only the company is liable or also your private account and your savings. It also determines how much tax you pay, how demanding your bookkeeping becomes and how seriously banks, investors and business partners take you.

That is exactly why it is worth not making this decision on the side. Those who choose the form that matches their own risk and plans from the outset build on a stable foundation. With a UG or GmbH, the path leads via the notary anyway. The notary notarises the articles of association, explains the legal structuring options and ensures a legally sound filing with the commercial register.

The most important legal forms at a glance

Not every legal form suits every project. These forms are the ones most frequently encountered in practice.

Sole proprietorship

Those who start alone often choose the sole proprietorship. It is the simplest form of all: no minimum capital, hardly any formalities, and you pay tax on the profit via income tax.
A common misunderstanding first: “freelancer” (Freiberufler) is not a legal form of its own but a tax classification. Those who work alone as freelancers, for example in medical, legal advisory, creative or consulting professions, legally often operate as sole proprietors, generally do not have to register a trade and pay no trade tax on the freelance activity. In case of doubt, the classification should be checked from a tax perspective.
The price of this simplicity is liability. You are liable with all your private assets for all business obligations.

Who is it suitable for? For advisory and service activities and small projects without high economic risk.

GbR

The civil-law partnership (GbR) comes into existence as soon as two or more people join together and start working. It is uncomplicated and ideal for small teams that want to start quickly.
Important to know: all partners are personally and jointly and severally liable. This means that, in case of doubt, a creditor can pursue each individual, regardless of who made the mistake.

Practical tip: A written partnership agreement clarifies shareholdings, responsibilities and exit from the outset and prevents later conflicts.

UG (haftungsbeschränkt)

The UG is the low-cost entry into the world of corporations. You can form it from as little as one euro, although in practice a somewhat higher contribution makes sense in order to remain able to act. As with the GmbH, your liability is limited to the company’s assets.
A special feature is the statutory reserve: each year the UG must set aside a quarter of its annual net profit, reduced by any loss carried forward. This reserve can later be used to increase the share capital to at least EUR 25,000. Only then can the UG operate as a GmbH. There is no obligation to do so, however.

GmbH

The GmbH is by far the best-known corporation and, for many, the gold standard. It offers a clear limitation of liability and high standing in business dealings. The minimum share capital is EUR 25,000, of which at least EUR 12,500 must be paid in at formation.

A GmbH only comes into existence with the notarisation of the articles of association and registration in the commercial register. After that, you keep commercial accounts and prepare annual financial statements every year.

Practical tip: Banks and investors often prefer the GmbH because they know and can assess its clear liability and structural requirements.

OHG and KG

These commercial partnerships are intended for commercial businesses. In an OHG, all partners are personally liable without limit. The KG distributes liability: the general partner is fully liable, the limited partner only up to the amount of their contribution.
The legal basis can be found in the German Commercial Code (HGB).

GmbH & Co. KG

A hybrid form popular in practice is the GmbH & Co. KG. Here a GmbH takes on the role of the fully liable general partner. The result: you combine the tax flexibility of a partnership with the limited liability of the GmbH, because in the end no natural person is liable without limit. The structure is somewhat more complex and is worthwhile above all for larger or family-run companies.

Liability: who bears which risk?

Hardly any topic concerns founders as much as the question of personal liability, and the concern is justified. This is where the legal forms differ most clearly. As a sole proprietor or partner in a GbR, you are liable with everything you own, in the worst case including your private assets.
With a UG or GmbH, liability is in principle limited to the company’s assets. This limitation is not a complete shield, however. It only applies from registration in the commercial register; before that, those acting are personally liable. And it does not apply if managing directors breach their duties, for example by failing to pay taxes or social security contributions or by filing for insolvency too late. In practice, banks also frequently demand personal guarantees for loans. You are then additionally liable privately for that debt.

Practical tip: You should consciously ask yourself what happens in the worst case before formation, not only when things get tight. Assess the financial and contractual risk of your business model honestly. The greater it is, the more it speaks for a corporation. It does not replace careful entrepreneurial conduct, however.

Geometric shapes made of clear glass in different forms, symbolising the choice of legal form

Tax and bookkeeping: what to expect

There are bigger differences in bookkeeping than many initially think. What matters is not only whether you run a partnership or a corporation, but for partnerships also whether you count as a merchant.

Sole proprietorship, GbR and freelancers

Here the profit is attributed directly to those involved and taxed via income tax. As long as certain turnover and profit thresholds are not exceeded, a simple income-surplus statement suffices, which keeps the effort manageable. Freelancers may generally use it regardless of the level of their income and pay no trade tax on freelance income.

OHG and KG

OHG and KG are also treated transparently for tax purposes, so the profit ends up with the partners. Unlike sole proprietorships and the GbR, however, they count as merchants registered in the commercial register and are therefore generally obliged to keep double-entry accounts and prepare a balance sheet. Trade tax is also payable on the commercial profit.

Corporations (UG and GmbH)

UG and GmbH pay corporation tax and trade tax. If you distribute profits to yourself, capital gains tax is added. Balance sheet accounting and annual financial statements are always mandatory here, which is why a tax adviser is almost always on board.

Costs and formation effort

Formation costs vary widely. Sole proprietorships and the GbR start simply and cheaply. With a UG or GmbH, notary fees, the commercial register entry and the share capital are added.

The official start-up portal of the Federal Ministry for Economic Affairs (Existenzgründungsportal, in German) also offers a neutral overview of the individual legal forms.

Note: Think not only about the formation but also about the running costs such as tax advice and annual financial statements. They arise year after year.

Young man at a laptop researching legal forms

Which legal form suits which project?

Freelance activities and small consultancies often benefit from the simplicity of a sole proprietorship or a GbR. As soon as growth, capital requirements or a higher liability risk come into play, a UG or GmbH is usually the better choice. Three questions help you with the classification:

Guiding questions:

  1. How high is the business risk in my model?
  2. Do I need capital or do I want to approach investors?
  3. How important is the external image of the legal form to me?

Common mistakes when choosing a legal form

Many wrong decisions arise not from carelessness but from time pressure. You finally want to get going, secure the name, get the notary appointment done and take on the first orders. That is exactly when the legal form is often ticked off too quickly.
The liability risk is often underestimated, an overly complex structure chosen or the articles of association seen as a mere formality. Yet it is precisely this framework that later determines how well conflicts, growth or an exit are regulated.

Tip: A brief legal and tax assessment before formation costs little and saves you costly restructuring or disputes afterwards.

Back to the Founders Plus overview

More from the series: preparing for formation

Two people planning the structure of a company in a modern office with large digital screens
Structure of a company: incorporate securely and start with a clear structure
Two people in a futuristic corridor developing a business idea
Developing a business idea and preparing to incorporate
Person at a desk choosing a company name
How to choose a legally sound company name
Glowing light bulb icon symbolising the company purpose
Defining the company purpose: clear, precise and legally sound
Man working on a laptop at a kitchen table, starting a business from home
Starting a business from home: requirements, legal forms and practical steps
Group of people working on articles of association in front of a large screen
Drafting your own articles or using ChatGPT templates
Small mailbox symbolising a virtual business address
Incorporating with a virtual office and business address
Man at a desk researching the costs of forming a company
What company formation costs: fees, capital requirements and additional costs

Clarify the next step of your company formation with legal certainty

Book an appointment and discuss your questions directly with the notary, often within a few working days.
Book an online appointment now

Frequently asked questions about choosing a legal form

Whenever you need a clear limitation of liability and a professional external image towards banks, partners and customers matters.

Yes. A change of legal form is possible, for example from a UG to a GmbH or from a sole proprietorship to a corporation. However, it involves effort and costs, which is why a good choice from the outset pays off.

Corporations such as the UG and GmbH limit liability in principle to the company’s assets. This protection is not complete, however: before registration in the commercial register, in the event of breaches of duty by the management and with personal guarantees for loans, you can still become personally liable.

Not for the choice itself. But as soon as you form a UG or GmbH, notarisation of the articles of association is required by law.

Mert ★ ★ ★ ★ ★

“Very friendly notary and a super friendly team. Everything went super fast and smoothly.”

Notarial support in choosing a legal form

For many legal forms, going to the notary is mandatory. Anyone forming a GmbH or UG needs notarisation of the articles of association and the filing with the commercial register.
Notary Franke accompanies you neutrally and independently: from the legal classification of the structuring options to the review and notarisation of the agreement and proper registration. The aim is a legal form that suits your project and gives you a legally sound basis for your ongoing business operations.
Signature of Notary Franke