When setting up a business in Germany, there are various ways of limiting liability and ensuring that shareholders’ personal assets remain protected.
For further information on business formation and limiting liability, call our expert team of German lawyers on +49 (0) 221 / 951 563 0 or use our contact form.
Generally, the promoters of a business are fully and personally liable for any transactions entered into before the business has been registered.
The owners of business partnerships are also generally jointly and severally liable for the obligations of the partnership. However, there are certain partnership models which allow the option to limit liability.
A limited partnership (Kommanditgesellschaft, KG) has a ‘general partner’ and a ‘limited partner’.
The general partner is personally liable for all the debts and obligations of the firm. The limited partner, however, is only liable up to the amount contributed in share capital to the partnership, as stated in the commercial register. Both partners can be either a natural person or a legal person.
Under a professional partnership (Partnerschaftsgesellschaft, PartG) which can be formed by natural persons who are members of a freelance or independent profession (the so-called freie Berufe), if only one partner conducts a business transaction, the liability for fault is limited to that partner.
Partners to a PartG have a further option of limiting their liability in the partnership agreement. The so-called ‘PartG mbB’ is open to lawyers, patent lawyers, accountants and tax advisors. In this case, liability is limited to the partnership’s assets. Partners wishing to take advantage of this benefit must purchase professional indemnity insurance.
Shareholders can limit their liability through the choice of business form. The liability for a limited company (Gesellschaft mit beschränkter Haftung, GmbH), for example, is limited to the assets of the company and the amount invested by the shareholders. This means that the shareholders’ personal assets are protected.
There are situations in which the separation between the company and its shareholders becomes diluted or in which it is disregarded entirely.
For instance, shareholders may be required by the company’s lender to provide personal guarantees. Here, shareholders could limit their liability or at least ensure it is apportioned between the shareholders as a whole by entering into a shareholders’ agreement.
In rare and exceptional circumstances, the courts may disregard the separation between the company (as a separate legal entity) and its shareholders in order to hold the shareholders personally jointly and severable liable. It is generally accepted that there are three situations in which this may occur: 1) commingling of assets or disregard for corporate formalities; 2) intentionally prejudicing creditors through undercapitalisation and; 3) domination and interventions endangering a business’ existence.
Taking limited companies as a further example, directors have a statutory duty of care towards the company they run. They are generally liable to the company only. This means that, in the broadest sense, they too are protected from creditors. Exceptions to this rule include some tax, social security and criminal matters. Also, where directors neglect to apply for the company’s insolvency, they may become personally liable.
For further information on starting a business in Germany and limiting liability, call our expert team on +49 (0) 221 / 951 563 0 or use our contact form.