Corporations: features, types and differences explained simply

What is a corporation?

Corporation is not a single legal form but an umbrella term for companies that act as a legal entity in their own right and are built on a fixed capital. Anyone who takes part contributes money or assets and receives shares in return: shares in a GmbH (Geschäftsanteile), shares in an AG (Aktien). Three ideas shape them:

• Capital instead of person: What matters is how much someone has contributed, not who they are. Shareholders can change, and the company continues to exist. GmbH shares can be sold and inherited (Sec. 15 (1) GmbHG).
• Own legal personality: The contracting party is the company, and the business assets belong to it.
• Separation of ownership and management: The managing directors of a GmbH can be shareholders or other persons (Sec. 6 (3) GmbHG), see External managing director.

There is no single statutory definition. The Corporation Tax Act (KStG) lists the most important forms (Sec. 1 (1) no. 1 KStG). The short version can be found in the glossary under Corporation.

Features of a corporation

Feature	What it means	Legal basis
Legal entity	The company itself has rights and obligations, can acquire land, sue and be sued	Sec. 13 (1) GmbHG, Sec. 1 (1) AktG
Liability	only the company's assets are liable to creditors	Sec. 13 (2) GmbHG, Sec. 1 (1) sentence 2 AktG
Minimum capital	share capital (Stammkapital or Grundkapital) fixed by law	Sec. 5 (1) GmbHG, Sec. 7 AktG
Notarial formation	the articles of association (Gesellschaftsvertrag or Satzung) must be notarised	Sec. 2 (1) GmbHG, Sec. 23 (1) AktG
Coming into being on registration	before entry in the commercial register, the company does not exist "as such"	Sec. 11 (1) GmbHG, Sec. 41 (1) AktG
Merchant by legal form	always deemed a commercial company, whatever its business	Sec. 13 (3) GmbHG, Sec. 3 (1) AktG
Management by non-members (Fremdorganschaft)	can also be managed by persons who are not shareholders	Sec. 6 (3) GmbHG
Accounting	annual financial statements with notes, audit and disclosure depending on size	Sec. 264, 267, 316, 325 HGB

What types of corporation are there?

The AG and the KGaA play a role above all in larger projects and with investors.

Feature	GmbH	UG (haftungsbeschränkt)	AG	KGaA
Minimum capital	€25,000 (Sec. 5 (1) GmbHG)	under €25,000, each share at least €1 (Sec. 5 (2), Sec. 5a (1) GmbHG)	€50,000 (Sec. 7 AktG)	€50,000 (Sec. 278 (3), Sec. 7 AktG)
Payment before the application for registration	a quarter of each share, at least €12,500 in total (Sec. 7 (2) GmbHG)	in full (Sec. 5a (2) GmbHG)	cash contribution of at least a quarter of the lowest issue price (Sec. 36a (1) AktG)	as for the AG (Sec. 278 (3), Sec. 36a AktG)
Contributions in kind	permitted (Sec. 5 (4) GmbHG)	excluded (Sec. 5a (2) GmbHG)	permitted, to be made in full (Sec. 36a (2) AktG)	as for the AG
Founders	from 1 person (Sec. 1 GmbHG)	from 1 person	from 1 person (Sec. 2 AktG)	at least one personally liable partner and limited shareholders (Kommanditaktionäre) (Sec. 278 (1), Sec. 280 (2) AktG)
Management	managing director (Sec. 6 GmbHG)	managing director	management board (Vorstand) (Sec. 76 AktG)	personally liable partners (Sec. 278 (2) AktG)
Supervision	shareholders' meeting; supervisory board only under the articles of association or co-determination law (Sec. 52 GmbHG)	as for the GmbH	supervisory board with at least three members (Sec. 95 AktG), general meeting (Sec. 118 AktG)	supervisory board and general meeting (Sec. 285, 287 AktG)
Personal liability	no (Sec. 13 (2) GmbHG)	no	no (Sec. 1 (1) AktG)	yes, for the personally liable partners
Special feature	transfer of shares only by notarial deed (Sec. 15 (3) GmbHG)	mandatory reserve: a quarter of the annual net profit (Sec. 5a (3) GmbHG)	share capital divided into shares (Sec. 1 (2) AktG)	hybrid of KG and AG
Formation with Recht 24/7	€319 fixed price, net plus VAT, notary fees, court fees, IHK and trade registration costs	€259 fixed price, net plus VAT, notary fees, court fees, IHK and trade registration costs	no fixed-price service	no fixed-price service

GmbH

The limited liability company (Gesellschaft mit beschränkter Haftung) is the standard form for small and medium-sized businesses (Mittelstand). One or more persons form it for any lawful purpose (Sec. 1 GmbHG). The guide What is a GmbH? explains its structure, bodies and costs.

UG (haftungsbeschränkt)

The Unternehmergesellschaft (entrepreneurial company) is not a separate legal form but a GmbH with less than €25,000 in share capital. It must use the suffix "UG (haftungsbeschränkt)" (Sec. 5a (1) GmbHG) and put a quarter of its annual net profit, reduced by any loss carried forward, into a reserve until the share capital has been increased to at least €25,000 (Sec. 5a (3), (5) GmbHG). There is no automatic conversion into a GmbH: after the capital increase, the company may even keep the name "UG (haftungsbeschränkt)" (Sec. 5a (5) GmbHG). Details in the guide What is a UG?, and the choice between the two forms under UG or GmbH.

Stock corporation (AG)

The AG has share capital (Grundkapital) of at least €50,000 divided into shares (Sec. 1 (2), Sec. 7 AktG). The management board runs it, and the supervisory board monitors it. An AG does not have to be on the stock exchange: it is only listed if its shares are admitted to a regulated market (Sec. 3 (2) AktG). More in the glossary under Stock corporation.

Partnership limited by shares (KGaA)

The KGaA has its own legal personality, but at least one partner is liable without limit; the others hold shares in the share capital and are not personally liable (Sec. 278 (1) AktG). The law of the KG applies to the personally liable partners (Sec. 278 (2) AktG). The role corresponds to that of the general partner in a KG.

European Company (SE)

The SE (Societas Europaea) is a stock corporation under European law and is expressly named in Sec. 1 (1) no. 1 KStG. For founders of small businesses, it plays practically no role: it is not formed by private individuals, only by existing companies or other legal entities with a connection to at least two EU member states, and the subscribed capital must be at least €120,000 (Art. 2, Art. 4 (2) SE-VO).

Special forms: gGmbH, gUG and holding company

If a GmbH pursues exclusively and directly tax-privileged purposes, it may use the name "gGmbH" (Sec. 4 sentence 2 GmbHG). It remains a GmbH and therefore a corporation, see gGmbH and gUG. A holding company is not a separate legal form but a company that holds interests in other companies; it is usually a GmbH or UG, see What is a holding company?.

Is a GmbH a corporation? How the legal forms are classified

Yes, every GmbH is a corporation. Hybrid forms are trickier:

Legal form	Corporation?	Why
GmbH	yes	legal entity with share capital (Sec. 13 GmbHG), named in Sec. 1 (1) no. 1 KStG
UG (haftungsbeschränkt)	yes	GmbH with lower share capital (Sec. 5a GmbHG)
gGmbH, gUG	yes	GmbH or UG with tax-privileged purposes
AG, KGaA, SE	yes	named in Sec. 1 (1) no. 1 KStG
GmbH & Co. KG	no	a KG, i.e. a partnership; however, rules like those for corporations apply to the annual financial statements and the insolvency filing (Sec. 264a HGB, Sec. 15a (1) sentence 3 InsO)
KG, OHG	no	partnerships with at least one personally liable partner (Sec. 105, 161 HGB)
GbR, eGbR	no	partnership, the partners are personally liable (Sec. 721 BGB)
Cooperative (Genossenschaft)	no	legal entity (Sec. 17 GenG), but a separate group alongside corporations in the KStG and the UmwG (Sec. 1 (1) no. 2 KStG, Sec. 3 (1) no. 3 UmwG)
Association, foundation	no	legal entities without shareholders holding capital shares; the foundation has no members (Sec. 21, Sec. 80 (1) BGB)
Sole proprietorship	no	not a company, the owner is personally liable

The GmbH & Co. KG is often mistaken for a corporation because a GmbH takes on liability as the general partner. Legally, it remains a limited partnership.

Difference between a corporation and a partnership

Since the MoPeG, the GbR, where it participates in legal transactions in accordance with the will of the partners, as well as the OHG and KG expressly have legal capacity: they can acquire rights and incur obligations themselves (Sec. 705 (2) BGB, Sec. 105 (2) HGB). The statement "Only a corporation can conclude contracts" is therefore no longer correct. Today, the differences lie above all in liability, capital, management and taxes. What the reform has changed is covered in the guide MoPeG.

Feature	Corporation	Partnership (GbR, OHG, KG)
Legal nature	legal entity	partnership with legal capacity, not a legal entity
Liability	only the company's assets	partners personally as joint and several debtors (Sec. 721 BGB, Sec. 126 HGB); limited partners up to the liability amount (Sec. 171, 172, 176 HGB)
Minimum capital	prescribed by law	none
Formation	notarised agreement, comes into being only on registration	partnership agreement, possible without a register for the GbR (Sec. 707 (1) BGB); the OHG and KG must be registered with the commercial register (Sec. 106 (1), Sec. 161 (2) HGB)
Management	managing directors or management board, outsiders possible too	in principle the partners themselves (Sec. 715 (1) BGB, Sec. 116 (1) HGB)
Change of shareholders	shares transferable, GmbH shares by notarial deed (Sec. 15 GmbHG)	as a rule only with the consent of the other partners (Sec. 711 (1) BGB, for the OHG and KG via Sec. 105 (3) HGB)
Taxes	corporation tax and trade tax at company level	profit is allocated to the partners; option to be taxed under corporation tax possible (Sec. 1a KStG)

You can find an overview of all partnerships, with its own comparison table, in the guide Partnerships, and details under GbR, OHG and KG.

Liability: when are shareholders personally liable after all?

The principle is clear: only the company's assets are liable to creditors for the GmbH's obligations (Sec. 13 (2) GmbHG), and the same applies to the AG (Sec. 1 (1) sentence 2 AktG). And with all of the company's assets, not just up to the amount of the share capital. It becomes personal in these cases:

• Before registration: Until it is entered in the commercial register, the GmbH does not exist as such. Anyone who acts in its name is personally and jointly and severally liable (Sec. 11 GmbHG); the same applies to the AG (Sec. 41 (1) AktG).
• Outstanding contribution: Limited liability does not release you from paying the contribution you have undertaken in full (Sec. 14, Sec. 19 (2) GmbHG).
• Payments to shareholders: Assets required to maintain the share capital may not be paid out to the shareholders (Sec. 30 (1) GmbHG). Prohibited payments must be repaid (Sec. 31 (1) GmbHG).
• Crisis: If the company becomes illiquid or over-indebted, the management must file for insolvency without culpable delay, at the latest three weeks after illiquidity occurs and six weeks after over-indebtedness occurs (Sec. 15a (1) InsO). Anyone who fails to do so commits a criminal offence (Sec. 15a (4) InsO). More in the guide Delayed insolvency filing.
• Your own commitments: If you sign a personal guarantee for a loan to the company, you are liable under it with your private assets.
• Abuse: Only in exceptional cases do the courts reach through to the shareholders' private assets. See the glossary under Piercing the corporate veil.

Forming a corporation: the process in 5 steps

The process is essentially the same for the GmbH, UG and AG. Using the GmbH as an example:

1. Notarise the articles of association: The articles must be notarised (Sec. 2 (1) GmbHG); notarisation is also possible by video communication (Sec. 2 (3) GmbHG). With no more than three shareholders and one managing director, the simplified procedure with the model protocol is sufficient (Sec. 2 (1a) GmbHG). For an AG, the articles (Satzung) must likewise be notarised (Sec. 23 (1) AktG).
2. Appoint the managing director: in the articles of association or by resolution of the shareholders (Sec. 6 (3) GmbHG). Only a natural person with full capacity to contract can be a managing director (Sec. 6 (2) GmbHG).
3. Pay in the capital: for the GmbH, at least a quarter of each share and €12,500 in total (Sec. 7 (2) GmbHG); for the UG, the full share capital (Sec. 5a (2) GmbHG).
4. Apply for registration in the commercial register: at the register court where the company has its registered office (Sec. 7 (1) GmbHG).
5. Wait for registration: Only on registration does the GmbH come into being and limited liability apply (Sec. 11 (1) GmbHG). Trade registration and tax registration with the tax office follow.

At Recht 24/7, all formation documents for a GmbH or UG are ready within 24 hours. According to the service description, registration usually takes 5 to 16 days for a GmbH and 5 to 14 days for a UG. A step-by-step guide for the UG can be found in the guide Forming a UG.

Bookkeeping, annual financial statements and disclosure

Because the GmbH, UG and AG are deemed commercial companies (Sec. 13 (3) GmbHG, Sec. 3 (1) AktG), they are merchants (Sec. 6 (1) HGB). They must therefore keep books (Sec. 238 HGB) and prepare a balance sheet and a profit and loss account (Sec. 242 HGB). This also applies to an engineering or consulting GmbH. In addition, notes and a management report are required, to be prepared within the first three months of the new financial year (Sec. 264 (1) HGB). How much of this is needed depends on the size class.

Size classes under Sec. 267 HGB

A company falls into a size class if it does not exceed at least two of the three thresholds. The legal consequences only apply if this is the case on two consecutive balance sheet dates; for a newly formed company, the first balance sheet date already counts (Sec. 267 (4) HGB).

Size class	Balance sheet total	Revenue (12 months)	Average number of employees over the year	Main consequences
Micro (Sec. 267a HGB)	up to €450,000	up to €900,000	up to 10	no notes under certain conditions, only the balance sheet is disclosed, deposit possible
Small (Sec. 267 (1) HGB)	up to €7,500,000	up to €15,000,000	up to 50	no management report, preparation within six months, no audit requirement, balance sheet and notes are disclosed
Medium-sized (Sec. 267 (2) HGB)	up to €25,000,000	up to €50,000,000	up to 250	management report, audit by a statutory auditor
Large (Sec. 267 (3) HGB)	above	above	over 250	all obligations; capital market-oriented companies are always deemed large

These thresholds apply to financial years beginning after 31 December 2023, and voluntarily to financial years that began in 2023 (Art. 93 EGHGB). Older overviews still give considerably lower values.

Audit requirement and disclosure

• Audit: The annual financial statements and management report of medium-sized and large corporations must be audited by a statutory auditor. Without an audit, the annual financial statements cannot be adopted (Sec. 316 (1) HGB). Small companies are exempt.
• Disclosure: The management must submit the documents electronically to the company register (Unternehmensregister) no later than one year after the balance sheet date (Sec. 325 (1), (1a) HGB). Small companies only disclose the balance sheet and notes; micro companies only the balance sheet, and they can deposit it instead of publishing it (Sec. 326 HGB). Breaches can result in administrative fines (Ordnungsgelder) (Sec. 335 (1) HGB). See also the glossary under Disclosure obligation.

How is a corporation taxed?

Taxation distinguishes between the company and its shareholders. This is only an overview; the details are a matter for your tax adviser:

• Corporation tax: The company itself is subject to unlimited corporation tax liability (Sec. 1 (1) no. 1 KStG). The rate is 15% up to the 2027 assessment period and then falls gradually to 10% from 2032 (Sec. 23 (1) KStG). The solidarity surcharge is added on top. More in the glossary under Corporation tax.
• Trade tax: The activity of a corporation is always and in full deemed a commercial business (Sec. 2 (2) GewStG). This is why a GmbH in which freelance professionals work also pays trade tax.
• Distributions: If the company distributes profit, the shareholder pays tax on it again personally. The salary of the shareholder-managing director and distributions must be kept separate for tax purposes, see the glossary under Hidden profit distribution.
• Option for partnerships: The OHG, KG, partnership company (Partnerschaftsgesellschaft) and eGbR can apply irrevocably to be taxed like a corporation (Sec. 1a KStG). Under company law, they remain partnerships.

Advantages and disadvantages of a corporation

Advantages	Disadvantages
shareholders' private assets protected in principle	minimum capital, €25,000 for a GmbH
shares transferable and inheritable, investors can come in	notarial formation and registration with notary and court fees
the company continues when shareholders change	bookkeeping, annual financial statements and disclosure in every case
management by external managing directors possible	transfer of GmbH shares only by notarial deed
profits can remain in the company and are taxed there with corporation tax and trade tax	trade tax even for freelance activities
clear organisation through bodies governed by law	strict duties for managing directors, for example the duty to file for insolvency

Which corporation suits you?

As a rough guide based on capital and plans:

• Little start-up capital: UG (haftungsbeschränkt), with the obligation to build a reserve. Form a UG.
• €25,000 share capital available: GmbH. Form a GmbH.
• Pooling shareholdings: holding company, usually as a GmbH. Form a holding company.
• Limiting liability, but as a partnership: Form a GmbH & Co. KG, which is then not a corporation.
• Non-profit purpose: gGmbH or gUG.
• Many investors, stock exchange as the goal: AG. Recht 24/7 does not offer a fixed-price formation for this, but does offer legal advice on choosing the legal form.