What is a GmbH? Meaning and key features explained simply

GmbH: meaning of the abbreviation

GmbH stands for Gesellschaft mit beschränkter Haftung, a company with limited liability. It is a legal form of German company law governed by the "Act on Limited Liability Companies" (GmbHG). The name describes the core: it is not the shareholders who are liable for the company's debts, but the company itself with its assets.

Three terms come up again and again:

• Corporation (Kapitalgesellschaft): The focus is on the capital contributed, not on the individual person. Shareholders can change; the GmbH continues to exist.
• Legal entity: The GmbH has its own rights and obligations. It concludes contracts, buys property, sues and is sued (Sec. 13 (1) GmbHG).
• Merchant by legal form (Formkaufmann): The GmbH is always deemed a commercial company (Sec. 13 (3) GmbHG), whether it runs a café, an agency or a software firm. The German Commercial Code (HGB) and the duty to prepare a balance sheet therefore apply to it.

A GmbH can be formed for any lawful purpose, alone or with others (Sec. 1 GmbHG). Shareholders can be natural persons, but also other companies, associations or foundations.

How to write it: The company name must contain the words "Gesellschaft mit beschränkter Haftung" or a generally understandable abbreviation (Sec. 4 GmbHG). In practice this is almost always "GmbH", for example "Nordlicht Design GmbH". The abbreviation "gGmbH" is only permitted for tax-privileged companies; more in our guide on the gGmbH.

Key features at a glance

Feature	GmbH
Legal basis	GmbHG, supplemented by the HGB
Legal nature	corporation, legal entity, merchant by legal form
Founders	from 1 person, natural persons or legal entities
Minimum share capital	€25,000 (Sec. 5 (1) GmbHG)
Payment on formation	at least a quarter per share, in total at least €12,500 (Sec. 7 (2) GmbHG)
Contributions in kind	allowed, with a report on the formation by contribution in kind (Sec. 5 (4) GmbHG)
Articles of association	notarised, also possible by video (Sec. 2 GmbHG)
Register	entry in the commercial register is mandatory; the GmbH only comes into existence with it (Sec. 11 (1) GmbHG)
Liability	after registration only the company's assets (Sec. 13 (2) GmbHG)
Management	one or more managing directors, shareholders or outsiders (Sec. 6 GmbHG)
Taxes	corporate income tax, solidarity surcharge, trade tax, VAT
Accounting	double-entry bookkeeping, annual financial statements, disclosure
Legal form suffix	"Gesellschaft mit beschränkter Haftung" or "GmbH" (Sec. 4 GmbHG)
Time to registration	usually 5 to 16 days after notarisation
Cost with Recht 24/7	€319 net fixed price plus VAT and third-party costs

How is a GmbH structured?

A GmbH acts through its corporate bodies. Two are mandatory; one is usually voluntary.

Body	Who	Tasks	Mandatory?
Shareholders' meeting	all shareholders	adopt the annual financial statements, decide on profits, appoint and dismiss managing directors, call in contributions, appoint authorised signatories (Sec. 46 GmbHG)	yes
Managing director	one or more natural persons with unlimited legal capacity	run day-to-day business, represent the GmbH in and out of court (Sec. 35 GmbHG), bookkeeping, filings with the commercial register	yes (Sec. 6 (1) GmbHG)
Supervisory board	elected members, with co-determination also employee representatives	supervise management	only voluntarily (Sec. 52 GmbHG) or with, as a rule, more than 500 employees (Sec. 1 (1) no. 3 DrittelbG)

Shareholders and the shareholders' meeting

Shareholders are the owners of the GmbH. Who owns which share is recorded in the list of shareholders at the commercial register. The shareholders decide by resolution in the shareholders' meeting. Shares can be sold and inherited, but a transfer requires a notarised contract (Sec. 15 GmbHG).

Managing director

The managing director runs the GmbH day to day. This can be a shareholder or an external managing director (Sec. 6 (3) GmbHG). Anyone sentenced to at least one year's imprisonment, for example for intentional delay in filing for insolvency or for fraud, is excluded for five years from the judgment becoming final; anyone subject to a relevant professional ban is excluded for its duration (Sec. 6 (2) GmbHG).

Who has more say: shareholders or managing director?

Internally, the shareholders have the final word. They can give the managing director instructions, and the managing director must observe the restrictions in the articles of association and shareholder resolutions (Sec. 37 (1) GmbHG). The shareholders can also dismiss the managing director at any time, unless the articles of association limit this to good cause (Sec. 38 GmbHG).

Externally, it is the other way round: the managing director represents the GmbH, and internal restrictions do not apply to third parties (Sec. 37 (2) GmbHG). If the managing director signs a contract against the shareholders' will, the GmbH is still bound, but the managing director is liable to it for the damage.

Share capital: what happens to the €25,000?

Share capital is the capital that the shareholders commit to the GmbH on formation. It amounts to at least €25,000 (Sec. 5 (1) GmbHG) and is divided into shares with nominal amounts in whole euros.

Not a deposit: The money paid in is not held in a blocked account. It belongs to the GmbH and must be at the free disposal of the managing directors at the time of registration (Sec. 7 (3) and Sec. 8 (2) GmbHG). After that, the GmbH may spend it on its business, for example on rent, goods or salaries.

Two limits apply:

• Capital maintenance: Assets required to maintain the share capital must not be paid out to the shareholders (Sec. 30 (1) GmbHG). Spending on the business, yes; paying back to you, no.
• No release: Shareholders cannot be released from the obligation to make their contribution (Sec. 19 (2) GmbHG). The part not yet paid in remains a claim of the GmbH. The shareholders' meeting can call it in at any time (Sec. 46 no. 2 GmbHG); in an insolvency, the insolvency administrator does so.

Example 1: cash formation by two founders

Anna and Ben form a GmbH with €25,000 share capital. Anna takes a share of €15,000, Ben one of €10,000.

Rule (Sec. 7 (2) GmbHG)	Anna	Ben	Total
at least a quarter per share	€3,750	€2,500	€6,250
in total at least €12,500			€6,250 still missing
possible split	€10,000	€2,500	€12,500

Both rules must be met at the same time. The quarter rule alone only gives €6,250, so more must be paid in. Without a different arrangement, payments must be made in proportion to the cash contributions (Sec. 19 (1) GmbHG), so for €12,500 Anna pays €7,500 and Ben €5,000. The two set out a different split, as above, in the articles of association. The outstanding €12,500 remain claims of the GmbH against Anna (€5,000) and Ben (€7,500).

Example 2: cash and contribution in kind combined

This time Anna contributes machines worth €15,000 for her €15,000 share, and Ben pays his €10,000 share in cash.

• For the half rule, cash contributions paid in count plus the nominal amount of shares paid by contribution in kind: the €15,000 contribution in kind is already enough for the €12,500.
• Ben must still pay in at least a quarter of his cash share, i.e. €2,500.
• The machines must be fully transferred to the GmbH before registration (Sec. 7 (3) GmbHG), and the articles of association must specify the item and the nominal amount. A report on the formation by contribution in kind is also required (Sec. 5 (4) GmbHG).

A formation with contributions in kind usually takes several weeks because valuation and documents are more complex. Recht 24/7 offers it for a surcharge.

Single-member GmbH: If you form the company alone, the same rules apply. Additional security for the unpaid part, as was previously required for single-member GmbHs, has no longer been required since the MoMiG reform of 2008: the current Sec. 7 (2) GmbHG no longer contains this obligation.

Who is liable in a GmbH?

After registration, only the company's assets are liable to creditors (Sec. 13 (2) GmbHG). That means all of the GmbH's assets, not just the share capital. Your private assets are protected in principle. As a shareholder, you primarily risk your contribution, as long as it is still outstanding.

Before registration, the GmbH as such does not yet exist (Sec. 11 (1) GmbHG). From the notary appointment, it exists as a "GmbH in formation" (often "GmbH i. G.") and can already act. However, anyone acting on behalf of the company during this phase is personally and jointly liable (Sec. 11 (2) GmbHG). It is therefore better to conclude larger contracts only after registration. Before the notary appointment, there is only a pre-formation company whose contracts and accounts do not automatically pass to the GmbH.

Exceptions where it becomes personal:

• Managing director liability: If the managing director breaches their duties, they are liable to the GmbH for the damage (Sec. 43 GmbHG).
• Insolvency filing: In the event of illiquidity, the managing director must file for insolvency within three weeks at the latest, in the event of over-indebtedness within six weeks (Sec. 15a (1) InsO). Failing to do so is a criminal offence (Sec. 15a (4) InsO). Payments made after illiquidity or over-indebtedness has occurred must in principle be reimbursed to the GmbH personally (Sec. 15b (1) and (4) InsO). More in our guide on delayed insolvency filing.
• Taxes and social security contributions: The managing director is liable for unpaid taxes under Sec. 69 AO if they have breached their duties intentionally or through gross negligence; withholding employees' social security contributions can be a criminal offence under Sec. 266a StGB.
• Own commitments: Guarantees, assumptions of debt or private security for loans to the GmbH override the limitation of liability, because you are then liable under your own contract.
• Piercing the corporate veil: Only in exceptional cases are shareholders directly liable, for example when private and company assets are mixed or in case of an intervention that destroys the company's existence.

Who is a GmbH suitable for?

The GmbH fits if a business involves real liability risks and you can pay in at least €12,500. Typical cases:

• Founders with liability risks: for example trade, construction, manufacturing or IT projects with warranty obligations.
• Teams: Shares, voting rights, exit and succession can be regulated in the articles of association.
• Growth and investors: Shares are transferable; new shareholders join via a capital increase.
• Switching from a sole proprietorship: For this there is our service convert a sole proprietorship into a GmbH for €1,069 net plus VAT, notary and court fees and the cost of re-registering the trade.

If you start alone with low risk and hardly want to keep any profit in the company, the balance sheet, formalities and costs often outweigh the benefits. Anyone who wants limited liability but cannot pay in €12,500 should look at the UG (haftungsbeschränkt).

Advantages and disadvantages of the GmbH

Advantages	Disadvantages
liability limited to the company's assets after registration	€12,500 must be paid in before registration
formation alone or with any number of shareholders	notary for formation, sale of shares and amendments to the articles
shares transferable and inheritable	double-entry bookkeeping, annual financial statements and disclosure
external managing director possible, salary as a business expense	the GmbH's money is not private money; withdrawals only via salary or distribution
retained profits only charged with corporate income tax and trade tax	on distribution, additional flat-rate withholding tax for the shareholder
established as the standard with banks, customers and partners	personal liability remains for guarantees and breaches of duty by the managing director

Whether the advantages outweigh the disadvantages depends mainly on risk, capital and how much profit is to remain in the company. A direct comparison with its smaller sibling can be found in our guide UG or GmbH.

Taxes and accounting of the GmbH

The GmbH is itself liable to tax. Its profits are subject to:

• Corporate income tax: 15% for assessment periods up to 2027. After that, the rate falls step by step: 14% for 2028, 13% for 2029, 12% for 2030, 11% for 2031 and 10% from 2032 (Sec. 23 (1) KStG).
• Solidarity surcharge: 5.5% on corporate income tax (Sec. 4 SolZG).
• Trade tax: trade income times a base rate of 3.5% (Sec. 11 (2) GewStG) times the municipal multiplier. With a multiplier of 400%, this is 14% of trade income. Unlike sole proprietors, the GmbH has no tax-free allowance.
• VAT: as for any business, unless an exemption applies.

With 15% corporate income tax, the solidarity surcharge and a multiplier of 400%, this amounts to just under 30% on profits (15.825% plus 14%). The multiplier differs from municipality to municipality.

Distributions to you: If the GmbH distributes profits to the shareholders, you pay 25% flat-rate withholding tax on them privately (Sec. 32d (1) EStG) plus the solidarity surcharge and church tax if applicable. A managing director's salary, by contrast, is a business expense for the GmbH and wage income for you. It must be appropriate; otherwise the tax office treats the excessive part as a hidden profit distribution (Sec. 8 (3) sentence 2 KStG).

Accounting: As a merchant by legal form, the GmbH keeps accounts under the HGB and prepares annual financial statements every year. The managing directors must submit them electronically to the company register at the latest one year after the balance sheet date (Sec. 325 (1) and (1a) HGB). Small GmbHs only disclose the balance sheet and notes; micro-entities only the balance sheet (Sec. 326 HGB). Failure to disclose can lead to administrative fine proceedings (Sec. 335 HGB).

Business letters: All business letters and order forms must state the legal form, registered office, register court, register number and all managing directors with their surname and at least one first name written out in full (Sec. 35a GmbHG).

Whether a salary or a distribution is more favourable should be clarified with your tax adviser.

What does a GmbH cost?

Formation:

Item	Amount	Note
Recht 24/7 fee (form a GmbH)	€319 net	fixed price, articles of association, list of shareholders, application to the commercial register, managing director's service agreement, name check
Notary	approx. €350 to €750 incl. expenses and VAT	with individual articles of association; somewhat cheaper with the model protocol (approx. €280 for one, approx. €420 for two to three shareholders) because the minimum business value of €30,000 does not apply (Sec. 105 (6), Sec. 107 (1) GNotKG)
Online notarisation	€25 flat-rate expenses	only for notarisation by video, in addition to the notary fees
Register court	approx. €300	entry and document retrieval; the entry fee alone is €225 (no. 2100 GV HRegGebV)
Trade registration	depends on the municipality
Chamber of commerce (IHK) fee	depends on the chamber	membership arises automatically
Transparency register	€129 net	optional, notification by Recht 24/7, fixed price per company
Share capital	€25,000, of which €12,500 immediately	no fee, remains the GmbH's assets

For the notary and the register court, you therefore end up with around €580 to €720 with the model protocol and around €650 to €1,050 with individual articles of association, each including expenses and VAT; on top come the fee of €319 net plus VAT and the trade registration. The notary invoices the new company after notarisation, the register court about 10 days later.

Ongoing per year: bookkeeping, annual financial statements and tax returns (usually via a tax adviser), chamber of commerce fee, account management and disclosure. The amounts depend on turnover, number of receipts and chamber; a quote from your tax adviser before formation provides clarity.

The GmbH compared with the UG, GbR and sole proprietorship

Feature	GmbH	UG (haftungsbeschränkt)	GbR	Sole proprietorship
Capital	€25,000, €12,500 immediately	under €25,000, fully in cash	none	none
Liability	company assets	company assets	partners personally and without limit (Sec. 721 BGB)	owner personally and without limit
Notary	yes	yes	no; for the eGbR for the registration	no
Register	commercial register mandatory	commercial register mandatory	partnership register optional (eGbR)	commercial register only as a merchant
Accounting	balance sheet	balance sheet	usually cash-basis accounting; for a commercial GbR, bookkeeping obligation above €800,000 turnover or €80,000 profit (Sec. 141 AO)	cash-basis accounting up to €800,000 turnover and €80,000 profit
Profit reserve under the GmbHG	none	a quarter of the annual net profit	none	none
Price with Recht 24/7	€319	€259	from €259	€259

All prices net plus VAT and third-party costs. More comparisons: UG or GmbH and UG vs. sole proprietorship.

Special forms of the GmbH

• UG (haftungsbeschränkt): a GmbH with less than €25,000 share capital and a reserve requirement (Sec. 5a GmbHG), see What is a UG?.
• gGmbH: a GmbH with exclusively tax-privileged purposes and no profit distribution, see gGmbH.
• GmbH & Co. KG: a limited partnership with a GmbH as the general partner, see GmbH & Co. KG.
• Holding GmbH: a GmbH that holds shares in other companies, see What is a holding company? and form a holding company.
• Asset management GmbH and real estate GmbH: manage their own assets such as securities or property. Whether this pays off should be clarified with a tax adviser.

How a GmbH is wound up is explained in our guide on GmbH liquidation.

Forming a GmbH in 5 steps

1. Prepare the articles of association: determine the company name, registered office, corporate purpose, share capital, shares and managing directors, plus the list of shareholders and the application to the commercial register.
2. Notary appointment: The notary notarises the articles of association, in person or by video (Sec. 2 (3) GmbHG). From now on, the GmbH in formation exists.
3. Account and payment: Open a business account in the name of the GmbH in formation and pay in at least €12,500. The managing director confirms the payment to the register court (Sec. 8 (2) GmbHG).
4. Commercial register: The notary files the application. The GmbH comes into existence with the entry, usually 5 to 16 days after notarisation.
5. Trade office, tax office, register: Register the trade, complete the tax registration questionnaire and report the beneficial owners to the transparency register.

Recht 24/7 handles the entire process with all documents on the page form a GmbH.