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What you need to know about the reform bill

Introduction
In Germany, foreign shareholders find various forms of legal entities available to launch their businesses. Fast to establish and easy to manage, the GmbH (Gesellschaft mit beschränkter Haftung - Company with limited liability) has been the all time favourite legal entity of national and international players.

However, the formalities of the incorporation of a GmbH are much stricter than in other European legal systems, in particular regarding the minimum registered share capital and the business seat. Therefore, in recent years many German businesses have selected other European countries to set up their businesses, specifically the UK and the Ltd.

Now, the German legislator plans to implement a major reform of the GmbH including the provisions on the incorporation of a GmbH. The legislator's objective is clearly to facilitate the process of incorporating a GmbH compared to the past and make the German GmbH more competitive.

What are the changes? What are the options? We briefly introduce you to the main innovations of the process of setting up a GmbH.

Reduction of minimum registered share capital
A significant change will be the reduction of the minimum registered share capital. Currently, a GmbH requires a minimum registered share capital of EUR 25,000.00, a rather high amount compared to international standards.

Although the legislator does not abandon this requirement totally, the minimum registered share capital will be reduced to an amount of EUR 10,000.00. This obviously aims to make the German GmbH more attractive for small enterprises, in particular start-up businesses, in comparison to competing legal forms in other European legal systems.

Simplification of registration
Also, the registration process is expected to be simplified. In some German cities and regions the process of the registration of a GmbH may take up to 6 weeks and longer.

To serve the needs for a fast and flexible incorporation of a GmbH the reform bill provides for an alternative way of establishment: If there are no more than three founding shareholders of the GmbH and if the registered share capital is paid in cash these founders are allowed to make use of a legal template of the Articles of Association of their GmbH provided for by the legislator. This practice will make cost and time consuming notarization of the Articles dispensable.

Furthermore, the obtaining of public administrative licences, if any, will not be a requirement for the registration of a GmbH any more. Any such licences, e. g. required by construction companies and restaurants, may be submitted in due time after the registration of the GmbH.

Free choice of the administrative seat
Another key modification will address the free choice of the administrative seat of the GmbH.

It is mandatory for a GmbH to have its registered business seat within Germany. This will not change. However, under the new law, the administrative seat may be transferred outside of Germany. Currently, any such transfer would result in the dissolution of the GmbH with the risk of triggering severe tax consequences.

The reform bill gives way to a free choice of the administrative seat, either in Germany or abroad, when incorporating the GmbH. This will increase the mobility of the GmbH and should create a highly appreciated flexibility.

"Entrepreneur Company (limited liability)" - the new "little sibling" of the GmbH
The GmbH will get a little sibling. This sibling will be called "Unternehmergesellschaft (haftungsbeschränkt)" / "Entrepreneur Company (limited liability)" and creates another option of a flexible incorporation process for the shareholders.

The "Entrepreneur Company (limited liability)" will not be required to have a minimum registered share capital of EUR 10,000.00. Any registered share capital above EUR 1.00 will suffice. However, 25% of the revenues per year must be entered into a legally restricted reserve. As soon as the legally restricted reserve amounts to EUR 10,000.00 the "Entrepreneur Company (limited liability)" may be registered as a GmbH.

The "Entrepreneur Company (limited liability)" is likely to avoid liquidity strains and should be attractive to businesses, which in general do not require the financing of major assets, e. g. service companies.

Conclusion
The reform bill takes into consideration many practical needs to simplify the incorporation process of a GmbH and intends to create a level playing field for the GmbH in its competition to comparable forms of limited liability companies in other European legal environments.

The reform bill is expected to be implemented in October 2008. However, until then the bill in its current form might be changed. Furthermore, once the reform is passed legal uncertainties may have to be addressed when applying the new law.

We will closely follow the developments and work out the best options for your current business and future enterprises.

Christian Andrelang

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