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Germanies Common Corporates: GmbH and AG

German company law provides for two different types of corporate entities, the limited liability company (GmbH) and the stock corporation (AG). As legal entities, the liability of the GmbH and the AG are limited to their paid share capital.

Both of these business forms have legal capacity, that is, they can act, purchase and hold property, sue and be sued in their own name.

The GmbH is typically suited for a limited number of shareholders/owners, whereas the AG is usually a public corporation with many shareholders. The GmbH structure allows its shareholders a direct influence on the business of the company, so that the shareholders/owners often also serve as managing directors (Geschäftsführer) of the GmbH. The GmbH shareholders´ meeting controls the managing directors and is empowered to appoint or dismiss them at any time. In contrast, the structure of an AG is different, and many AG shareholders are only interested in their capital investment.

The minimum stated capital stock for a GmbH is € 25,000 and the minimum stock capitalization for an AG must be € 50,000. The shares of an AG can be traded on a stock exchange, whereas GmbH "shares", which are legally referred to not as stock (Aktien) but as "business interests"(Geschäftsanteile), cannot be so traded.

GmbH business interests, which cannot be evidenced by any share document, can only be transferred by means of a formal notarial contract recorded by a German notary (Notar). On the other hand, the transfer of AG shares, which are always represented by stock certificates, does not require formalization by a notary. The articles of a GmbH frequently stipulate that transfer of business interests requires the consent of the company or of the other shareholders.

These basic differences between the organizational structure of a GmbH and an AG can be explained by the fact that the legal form of the AG is intended more for the protection of a larger number of shareholders, whereas the GmbH is structured for medium-sized and smaller enterprises with only a few shareholders/owners who can exert their influence through the shareholder meeting.

Thus, the Stock Corporation Law requires that an AG have two boards: a Supervisory Board (Aufsichtsrat) and an Excecutive (or Management) Board (Vorstand). The GmbH is not required to have a Supervisory Board unless the company has more than 500 employees. However the GmbH shareholders are free to provide for such a board in the articles of association. In the event the GmbH has a Supervisory Board, part of the duties otherwise performed by the shareholders' meeting are transferred to the Board. As indicated above, if the GmbH employs more than 500 persons, a Supervisory Board is mandatory.

If the GmbH does not employ more than 500 persons, the voluntary Supervisory Board is elected solemnly by the shareholders; but if the GmbH has more than 500 employees, a third of the Supervisory Board members are elected by the employees. With a few exceptions, a certain number of AG Supervisory Board members also serve as employee representatives.

The operations of a GmbH are run by one or more Managing Directors (Geschäftsführer) elected by the shareholder/owners. An AG is managed by the members of the Management Board (Vorstand) appointed by the Supervisory Board.

When making the decision whether to commence business in Germany through a branch or through a subsidiary, the investor should remember that the formation of a branch will generally require a greater expenditure of both time and money than the establishment of a GmbH. Unless the GmbH has unusually complex provision in the articles of association it should be possible to form and register the GmbH in the Commercial Register, which act brings the GmbH into existence, within a few weeks.

However, the procedure for formation and registration of a branch normally requires several months. Furthermore, the legal requirements for operating a branch office can be much more cumbersome than is the case with a subsidiary.

The fact that that initial losses in the operation of a branch of a foreign corporation are deductible is critical to the choice between doing business in the form of a GmbH or a branch. Although, pursuant to German tax law and tax treaties, the branch is deemed to be a permanent establishment, with income attributable to the branch subject to German taxation, the losses of the branch can be deducted from the income of its main office.

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