Are there specific legal requirements or preferences regarding the choice of entity and/or equity structure for early-stage businesses that are seeking venture capital funding in the jurisdiction?
When starting any early-stage business, the business form not only creates the legal framework for subsequent entrepreneurial activity, but also influences, among others, tax and accounting obligations, the founding formalities and the way investors or banks assess the company. A basic distinction is made between partnerships and corporations. Partnerships are characterized by the fact that they can be set up easily and with little bureaucratic and financial effort. Since a partnership is an association of individuals, the founding members are, however, basically liable with their private assets which is one of the reasons that partnerships are the exception within the German venture capital environment. Another reason is that the participation of an investor, which itself is structured as a tax transparent investment fund, in a partnership might also negatively impact the tax status of such investor. In contrast, a limited corporation is only liable with its assets.
The German limited liability company (Gesellschaft mit beschränkter Haftung) with a required share capital of at least EUR 25,000.00 is the most frequently chosen corporation form in Germany. The main advantage is the limited liability of the individual shareholders. The founders (and shareholders) are therefore not liable with their private assets if the company suffers difficulties, but only in the amount of the capital contribution or the amount of the company’s assets. In addition, such legal form simplifies the collaboration with external investors as the share capital is split in transferable shares with a nominal value of EUR 1.00 each.
The entrepreneurial company (Unternehmergesellschaft (haftungsbeschränkt)) is not a separate legal form, but a special form of the Germany limited liability company. The advantage compared to a classic Germany limited liability company is that the required share capital amounts to EUR 1.00 only. Founders knowing from the start that they will raise large amounts of funding in the future or pursue an initial public offering may consider to set up their company as a German stock corporation (Aktiengesellschaft). However, in Germany a stock cooperation involves from scratch increased organizational and legal efforts for the founding team. In addition, the share capital of a German stock cooperation is at least EUR 50,000.00.
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The Legal 500 Country Comparative Guides 2024_ Venture Capital_Chapter Germany
This article was first published in: The Legal 500 Country Comparative Guide Venture Capital (last updated: March 2024)
