Advantages and disadvantages of GmbH (limited liability company).

Advantages of a GmbH

Compared to a partnership, a GmbH offers the following advantages:

• Limited liability to the company’s assets. Shareholders are not personally liable.

• Separate legal personality: the GmbH can transact in its own name and hold shares in other companies.

• Taxation: partners in a partnership are taxed progressively on their profit shares, whereas corporate income tax is typically lower in aggregate.

• Ability to build hidden reserves by retaining profits.

• Shareholder changes are generally unproblematic under the GmbH Act; restrictions may be set in the articles.

• Flexible articles (statutes), e.g. supervisory/advisory board, agreed additional contributions.

• On a business sale, it is sufficient to transfer the shareholders’ interests to the buyer.

• An external managing director can be appointed, which can ease succession.

Disadvantages of a GmbH

Alongside the advantages there are disadvantages and risks to be aware of:

• Formation and organisational acts (e.g. amending the articles) require notarisation and registration in the commercial register.

• Transfers of shares must be notarised (for partnerships, written form can suffice).

• Full application of the German Commercial Code (HGB): bookkeeping, financial statements, commercial duties such as defect notification, etc.