Meaning of Company Forms

The term corporate form describes the legal form under which a company is founded or managed by one, two or more people.
Choosing the type of company is one of the most important decisions when starting a business. Because the corporate form not only defines the rights and obligations towards customers, suppliers and the state, but can also have a direct influence on the reputation and the serious impression of the company.

The importance of the corporate form

If a company is founded, the founder (s) must decide on a type of company. The reason for the importance of the corporate form is based on the different scope of liability.

An overview of the individual corporate forms

  • Sole proprietorship – sole trader, freelancer
  • Partnership – GbR, OHG, KG, GmbH & Co. KG, GmbH & Co
  • OHG, Silent Society, PartG
  • Corporation – AG, GmbH, UG, KGaA
  • Other: Foundation, cooperative, VVaG

Strictly speaking, only partnerships, corporations and some other forms of business such as the cooperative count as corporate forms.

The sole proprietorship as a form of company

The simplest of all corporate forms is the sole proprietorship . Anyone who takes up an entrepreneurial activity, i.e. a business activity, is automatically a sole trader. No minimum capital is required and no notarial entry or certification is required. This makes it easy and uncomplicated to set up a company. The point of criticism that is cited here is that the entrepreneur in this form of company is fully and personally liable with his private assets and in addition there is a low credit base.

Partnership vs. corporation

When it comes to corporate forms, a distinction is made between partnership and corporation. Both types of company are founded by several people with the purpose of a common corporate goal.
A partnership, however, does not form a separate legal person and here the individual shareholders remain for the most part the bearers of rights and obligations. This means that they, like the sole proprietorship, are liable with their private assets.
It is different with a corporation, because it is considered a separate legal entity. The focus here is not on the shareholders, but on the capital. Basically, the shareholders are limited in liability to the company’s assets.

The main differences between partnerships and corporations

Set up a sole proprietorship or focus on several founders?

The establishment of a sole proprietorship as well as the establishment of a company with several shareholders has its advantages and disadvantages.
For the individual founder, the following advantages can be cited, for example:

  • A great freedom of choice
  • High flexibility
  • A full claim to profit

But establishing a team also has its advantages:

  • A broader financial base
  • Higher manpower / capacity
  • A reduced risk

If the company is spread over several shoulders when it is founded, there are three options to choose from when it comes to partnerships:

  • OHG / open trading company
  • KG / corporation
  • GbR / company under civil law

However, if the company is to show a form of company in which liability does not extend to private assets, the following options are possible, for example:

  • GmbH / limited liability company
  • UG / entrepreneurial company

Choosing the type of company: Nine helpful criteria

There are clear favorites when it comes to the choice of corporate forms, but the decision as to which legal form to choose should be made by every founder based on various factors.

  • The number of founders: self-founders or in a team?
  • The limitation of liability: corporate or private assets?
  • The start-up capital: minimum capital yes or no?
  • The company name: What should the company be called?
  • Formation costs and duration.
  • Bookkeeping and taxes for the company form
  • Disclosure regulations after the establishment
  • Search for investors and participation
  • Social Entrepeneurship or Non-Profit?

Registration of the corporate form

When it comes to registering a company, i.e. founding a company, the list of offices and authorities with which contact must be made is long: trade office, tax office, commercial register, chamber of registry, Federal Employment Agency, professional association … There are also differences between the various types of company; you should inquire about this in detail to avoid making mistakes.

Company Forms