Setting Up a GmbH: How Far Does the Limitation of Liability Go?

“I want to set up a GmbH so that I am no longer personally liable.” That is roughly what many entrepreneurs have in mind when planning to incorporate a corporation. The conditions for, and scope of, the limitation of liability are often not understood in detail. Particularly complex duties apply to the managing directors of a GmbH. Every managing director should therefore familiarise themselves with the various requirements in order to avoid serious negligence.

This article provides an overall view of the key pitfalls for shareholders and managing directors.

In Brief

• The GmbH itself is not liable only up to its share capital; it is liable without limit with all of its corporate assets.
• What is limited in principle is recourse against the shareholders. Exceptions arise mainly around contributions, capital maintenance, commingling of assets, personal obligations and economic re-formation.
• Managing directors face a much broader liability profile in practice, especially around insolvency maturity, prohibited payments, taxes, social security contributions, accounting and the transparency register.
• Anyone acquiring GmbH shares should review, from a liability perspective, in particular outstanding contributions, capital maintenance, hidden distributions, commingling of assets, economic re-formation and personal guarantees or security provided by shareholders.

General rule: shifting liability to the corporation

From an entrepreneur’s perspective, the principle of the legal person is almost ingenious: the legal system allows the creation of a fictional person which, although controlled by the equity holders, is the owner of the business and alone responsible for its liabilities. If the business is going well, the equity holders can distribute the profits. If the business fails economically, in the worst case the company enters insolvency, the insolvency administrator deals with the creditors, and the shareholders’ other assets remain untouched. That, at least, is the general rule.

That this cannot apply without exception is obvious. Scholars and legislators have long tried to define the line between legitimate risk reduction that encourages economic activity and the abuse of limited-liability structures. Over the decades, that measuring line has been moved back and forth more than once.

Before looking at the individual liability risks under current law, one widespread misunderstanding should be cleared up – one that can even be heard from some lawyers. Contrary to what the name of the legal form (Gesellschaft mit beschränkter Haftung – company with limited liability) may suggest, the GmbH itself is not limited in its liability. Statements such as “The GmbH is liable only up to its share capital” are therefore wrong. The GmbH is always liable without limit with all of its corporate assets, which in a running business will regularly be far higher than the share capital. It is only recourse against the shareholders that is, in principle, excluded.

For the liabilities of the company, only the company’s assets shall be liable to its creditors.

Liability of shareholders

First, some good news: compared with the liability of managing directors, the cases in which a GmbH shareholder may incur personal liability are relatively clearly defined. As a starting point, it is useful to distinguish between external liability and internal liability. External liability means that a person dealing with the GmbH as a third party has a direct claim against the persons “behind” the GmbH (managing directors, shareholders). An outside creditor could therefore approach a shareholder directly and demand payment. Internal liability means that liability exists only vis-à-vis the company. Internal liability may appear less risky, because those claims first have to be asserted by management against the shareholder. However, internal liability claims can also be attached by the company’s creditors, so their enforcement is no longer in management’s hands. In any event, those claims will be pursued by the insolvency administrator at the latest.

These are the most important categories of external and internal liability of GmbH shareholders:

1) Assuming a personal obligation

A shareholder incurs direct external liability whenever they themselves assume an independent obligation. A practically important example is providing a guarantee for the company. These cases should not, however, be regarded as exceptions to the limitation-of-liability rule in § 13 para. 2 GmbHG. Formally speaking, the shareholder is not standing in for liabilities of the company, but for their own obligations, which were assumed separately.

2) Liability during the formation phase (Vor-GmbH)

Anyone who has ever incorporated a corporation may remember the notary’s warning to wait for registration of the company in the commercial register before commencing business. The reason is that no fewer than three liability regimes apply during the phase between notarial formation and registration (the so-called Vor-GmbH, the company in formation) and can continue to have effect afterwards. In practice they are frequently conflated, but they should be kept clearly apart.

Loss-compensation liability (Verlustdeckungshaftung). If registration fails, or if the company in formation incurs losses until then, the founders are liable to ensure that the capital raised is not consumed by the premature business activity (in any event, this applies to those shareholders who consented to the premature commencement of business). According to the case law of the German Federal Court of Justice, this is in principle an internal liability towards the company; external liability of the shareholders arises only exceptionally, in particular in the one-person company in formation, where there is no internal relationship.

Under-balance / pre-burden liability (Unterbilanz- bzw. Vorbelastungshaftung). If the company’s net assets (assets less liabilities) at the time of registration are not sufficient to cover the share capital figure entered in the commercial register, the shareholders must make up the difference. This liability is always an internal liability, but unlimited in amount: since the net assets may also be negative, the obligation to make up the shortfall may significantly exceed the share capital figure. Later profits or other inflows of funds do not eliminate this liability, even if corresponding equity is accumulated in the meantime. What is required is the (possibly renewed) contribution of capital.

Liability of the person acting (Handelndenhaftung). Anyone who concludes transactions in the company’s name before registration (usually the managing director) is personally and without limitation liable to the contracting party for them (§ 11 para. 2 GmbHG). This liability of the person acting is the real lever behind the notary’s warning – it does, however, lapse upon registration of the company.

Hidden trap: The under-balance liability can also arise again in an already existing GmbH if, after the business has been abandoned, the company is reactivated (so-called economic re-establishment).

3) Commingling of assets or spheres

Commingling of assets or spheres is another important category of external liability for GmbH shareholders. Commingling of assets exists where the company’s assets cannot be traced separately from the shareholders’ assets. So if the insolvency administrator finds not proper accounts but only a laundry basket (literal or figurative) full of unsorted receipts that cannot be allocated to one legal entity or the other, the shareholders must stand in personally for the company’s liabilities. The same applies where shareholders regularly “help themselves from the till” without proper accounting records. Commingling of spheres exists where, in dealings with third parties, the shareholders do not sufficiently distinguish between themselves and the company (this is therefore a case of liability based on appearance). In all of these cases, external liability of the shareholders may arise. In particular, the sole shareholder-managing director should take great care to keep the affairs of the company separate from their own other matters. Two provisions deserve attention: § 48 para. 3 GmbHG, under which the sole shareholder must always record shareholder resolutions promptly in writing, and § 35 para. 3 sentence 2 GmbHG, under which every transaction between the company and the sole shareholder must likewise be documented in writing without delay.

4) Capital contribution

The share capital stated in the articles and recorded in the commercial register must be contributed to the company by the shareholders. Accordingly, there is internal liability for contributions that have not been made in full. This covers not only the obvious cases of cash contributions that, on incorporation, are permissibly paid only in part (minimum contribution: EUR 12,500 where the registered share capital is EUR 25,000). Undervalued contributions in kind also trigger liability for the difference. Important: liability for the contribution is not borne only by the shareholder who failed to make the contribution attributable to their shares. If enforcement against the primarily obliged shareholder is insufficient, the other shareholders may be secondarily liable in proportion to their shareholdings (§ 24 GmbHG). Anyone acquiring shares should therefore insist on warranties regarding the payment of all contributions.

5) Capital maintenance

The rule in § 30 GmbHG requiring maintenance of the share capital is often described as the core of GmbH law. The share capital is the capital stock of the company protected in the interests of creditors. While that capital may be consumed through operating expenditure, payment out to the shareholders is not permitted. The idea is that this capital must at least once have been available to the company for the purposes of the business.

The assets of the company required to maintain the share capital may not be paid out to the shareholders.

But when does a withdrawal of assets violate the capital maintenance rule?

Whenever the payment causes or deepens an underbalance sheet. An underbalance sheet exists where the assets required to cover the share capital amount stated in the commercial register are no longer present in the company. As a rule, this must be determined in accordance with the accounting rules of the German Commercial Code. In doubtful cases, it is therefore advisable to document the company’s accounting position at the time of payment by rolling forward the last annual balance sheet to the date of payment, using book values. Caution: liability is not capped at the amount of the share capital. If, for example, the company is already over-indebted (meaning the assets have been entirely consumed by liabilities) and a prohibited payment deepens that over-indebtedness, the shareholders are also liable to repay that amount.

It should also be noted that the capital maintenance rule does not cover only open distributions. Hidden payments can also violate the rule, in particular payment of non-arm’s-length remuneration or other consideration in related-party transactions between the shareholders and the GmbH (for example, consultancy agreements, sale agreements or lease agreements). The legal consequence is always internal liability under § 31 para. 1 GmbHG.

As with capital contribution, the other shareholders are also subject to secondary default liability for reimbursement of the impermissible payment (§ 31 para. 3 GmbHG).

6) Removal of assets essential to the company’s existence

Case law refers here to interference destructive of the company’s existence (existenzvernichtender Eingriff). Liability may arise where one or more shareholders intentionally withdraw assets for purposes unrelated to the business that are necessary to satisfy the company’s creditors, thereby causing or deepening the company’s insolvency. The issue here is not bad entrepreneurial decisions, but rather shareholder self-dealing in which the destruction of the GmbH’s existence is accepted. The concept covers not only capital withdrawals, but also indirect harm to assets such as the diversion of business opportunities and external resources away from the GmbH. This liability for destruction of the company’s existence supplements the capital maintenance rules and opens the door to broader liability in cases of particularly serious abusive conduct. In the case law to date, this category has been especially relevant in group situations. The legal consequence is internal liability of the shareholders.

7) Appointment of an unsuitable managing director

§ 6 para. 5 GmbHG imposes internal liability on shareholders who intentionally or with gross negligence entrust management to a person who is not permitted to hold that office. The grounds of disqualification are set out in § 6 para. 2 sentence 2 GmbHG and essentially concern prior convictions in the field of business crime. The consequence is liability in damages for all harm caused by the disqualified managing director through breaches of managing directors’ duties.

8) Breach of a non-compete obligation

Any shareholder who, by virtue of their position in the company, can exercise decisive influence over management (in particular, a majority shareholder) is subject to a non-compete obligation within the scope of the company’s corporate purpose. This applies even where the articles contain no non-compete provision. If the shareholder breaches that non-compete obligation, they are liable in damages to the company. In serious cases, such a breach may also amount to grounds for exclusion of the shareholder. If this non-compete obligation does not reflect the shareholders’ wishes, an appropriate exemption should be provided for in the articles of association (important: a later exemption from a non-compete obligation may have adverse tax consequences, which is why the issue should ideally be addressed already in the original articles).

9) Shareholder loans in insolvency

The disadvantaged treatment of shareholders’ loan repayment claims in the company’s insolvency is not usually described as an exception to the general rule of limited liability. Because of its major practical significance and comparable economic effect, however, this category should still be mentioned here.

In insolvency, shareholder loans are generally subordinated, meaning that they are paid only after all company creditors have been satisfied (§ 39 para. 1 no. 5 InsO). An important exception applies to a non-managing shareholder who holds 10% or less of the liable capital (§ 39 para. 5 InsO); there is also a restructuring privilege (§ 39 para. 4 sentence 2 InsO). In practice, the shareholder will therefore usually suffer a total loss on the loan. Any repayments made within the year before the insolvency filing may be challenged and clawed back by the insolvency administrator.

This can lead to unpleasant surprises in particular when a company is sold and, in that context, the seller has outstanding shareholder loans repaid. If the company later enters insolvency under the new owner within the one-year period, the seller may still be required to repay the amount (so an alternative structure should be considered).

10) Liability as a de facto managing director

This provides a useful bridge to the next section: the concept of the de facto managing director. This is a person (usually a shareholder) who has not been formally appointed as a managing director, but influences or assumes management measures to such an extent that the actual managing directors are displaced in their corporate office. According to the German Federal Court of Justice (in a view that remains controversial), a de facto managing director must also appear outwardly as a managing director. Mere shareholder instructions controlling management – even very closely – do not in themselves make the shareholders de facto managing directors. A de facto managing director is liable on the same principles as a “real” managing director.

Liability of managing directors

While the loss of the shareholders’ liability shield is limited to relatively clear categories, managing directors often operate in liability grey zones because of the dense network of duties of care and conduct imposed on them. Their duties are laid down in detail by statute, because managing directors dispose, as fiduciaries, over interests in assets that are not their own – those of the company and, indirectly, of the shareholders. There is also concern that power over a pool of assets with “limited liability” may encourage abuse or carelessness in dealings with third parties. The most important liability categories are outlined below.

1) Duty of proper and diligent management

The duty of proper and diligent management may be described as the duty of the managing director to promote the company within the framework of the law, the articles of association (corporate purpose), the binding resolutions of other company bodies (usually the shareholders’ meeting or advisory board), and with due regard to public interests; that is, to safeguard the company’s advantages and avert harm from it.

In other words, the general management duty may be broken down into a duty of careful business leadership, a duty to ensure lawful conduct by the company (principle of legality), and a duty to implement the shareholders’ decisions. Managing directors who breach their obligations are jointly and severally liable to the company for the resulting damage. There is no breach of duty if, in making a business decision, the managing director could reasonably assume, on the basis of appropriate information, that they were acting in the best interests of the company.

Of these duties, the least tangible is often the requirement of careful business leadership. It can be made more concrete as follows.

Careful business leadership requires management to take the necessary entrepreneurial decisions itself, without exceeding – or permanently falling short of – the corporate purpose stated in the articles. For subordinate employees, management must set appropriate guidelines for achieving the company’s objectives. Where external circumstances change, management must respond and define suitable adjustments to the corporate objectives, submitting them to the shareholders for decision where appropriate. Management must develop organisational structures in order to supervise the company and its employees properly. It is also under a duty to prepare a plan: at least once a year, a budget must be drawn up, typically comprising revenue and earnings planning, financing, liquidity and investment planning, as well as production and cost planning. This forms part of the general duty to secure the company’s financing and to manage risks.

The general management duty may be further specified and supplemented by the managing director’s service agreement.

To illustrate, here are some examples of breaches of the general management duty:

• entering into a transaction at prices that do not cover costs
• waiving a claim that could be realised
• allowing claims to become time-barred
• paying a claim that is not yet due despite tight liquidity
• paying excessive remuneration
• taking on loans that exceed the company’s capacity or can be repaid only if business develops optimally
• failing to implement suitable controlling systems in order to react to liquidity bottlenecks in time
• passively tolerating withdrawals by shareholders without a legitimising shareholders’ resolution

If a management measure is based on an instruction from the shareholders’ meeting, the managing directors are generally released from liability. They must, however, provide the shareholders’ meeting with all information relevant to the decision and point out any concerns. Important: instructions must be based on properly adopted resolutions of the shareholders’ meeting. Direct instructions from the majority shareholder are ineffective. Important no. 2: the exculpatory effect of instructions applies to general management measures, but not to those areas of responsibility that cannot be taken away from management (capital maintenance, proper bookkeeping, preparation of annual financial statements, filing for insolvency, compliance with the law, etc. – see further below).

As further inspiration for proper corporate governance, reference may be made to the German Corporate Governance Code, which is aimed primarily at listed stock corporations but also contains useful guidance for other companies.

Business Judgment Rule – hindsight is always 20/20:

The § 93 AktG provision quoted at the outset contains an important limitation of liability for business decisions taken by directors. Although the wording of that provision applies to management board members of stock corporations, it is applied by analogy to GmbH managing directors. Under this rule, managing directors have the possibility of an exculpatory defence if a business decision later turns out to have been wrong and causes damage to the company.

To succeed, management must be able to demonstrate and prove that it prepared and made the decision through appropriate gathering of information, in good faith and free of conflicts of interest. That includes identifying and weighing alternative courses of action. Managing directors are also obliged to obtain suitable expert advice (yes, for example from a lawyer). If management can make that showing, the alleged breach of duty is rebutted. The Business Judgment Rule therefore grants a “right to make an error of judgment” – a court is not supposed, with hindsight, to decide whether the outcome of an entrepreneurial weighing of risk was right or wrong.

Where decisions involve material risk, management should always ensure that the decision-making process is thoroughly documented and that this documentation is retained until the limitation periods have expired (usually five years).

2) Capital contribution and capital maintenance

As already explained above in relation to shareholder liability, the share capital stated in the articles must be paid into the company and may not thereafter be distributed to the shareholders. Management bears an independent responsibility for compliance with the capital contribution and capital maintenance rules. During incorporation, managing directors must give the commercial register a criminally sanctioned statement that the contributions have been paid up and are freely available to management. The same obligation applies in the event of a capital increase.

To the extent shareholder contributions have not yet been made in full, management must call those contributions from the shareholders before the claims become time-barred. If outstanding contributions can no longer be obtained because the contribution claim has become time-barred (as a rule after ten years), the managing directors are personally liable. A managing director who makes or tolerates impermissible payments to shareholders – namely payments that cause or deepen an underbalance sheet (net assets minus liabilities lower than subscribed capital) – owes reimbursement of those payments to the company. Important: corresponding instructions of the shareholders’ meeting must be refused by a managing director. If it is doubtful whether a payment would breach the capital maintenance rules, management is obliged to prepare an interim balance sheet (not least in its own interest, because otherwise it will hardly be able to prove that the payment was lawful).

Granting a loan out of the assets required to maintain the company’s share capital to managing directors, other statutory representatives, holders of procuration or general commercial representatives authorised for the whole business is not permitted, even if the loan is on market terms and adequately secured (§ 43a GmbHG). The company’s acquisition of its own shares without meeting the requirements of § 33 GmbHG (put briefly: the company may acquire its own shares only where the contributions on those shares have been made in full and the consideration can be paid out of the company’s free assets) likewise constitutes a breach of the capital maintenance duty and gives rise to a compensation claim against the managing directors. Acquisitions of own shares should therefore, as a rule, be accompanied by the preparation of up-to-date financial statements.

3) Supervisory duties in a multi-member management board

Where there are several managing directors, management is in principle incumbent on all of them jointly. All managing directors are therefore equally responsible for the welfare of the company. However, a properly established allocation of responsibilities (typically by adopting written rules of procedure) can distribute responsibility among the members of management to a certain extent. Such an allocation reduces the management duty in areas assigned to others to a supervisory duty. So even outside their own area, every managing director has a duty of ongoing supervision over the departments of their co-managing directors. Breach of this supervisory duty triggers joint liability. The members of a multi-member management body are, moreover, obliged to cooperate with one another.

4) Liability in a corporate crisis and insolvency

Once a financial crisis of the company begins to emerge, the duty programme for managing directors becomes materially stricter in several respects. First, any departmental allocation regarding financial matters is suspended, so that not only the commercial managing director (CFO) is responsible for closely monitoring the financial position. Managing directors must continually determine the company’s liquidity position, asset position and going-concern prognosis in order to establish whether the company is insolvent and therefore obliged to file for the opening of insolvency proceedings.

In dealings with business partners, managing directors must point out the crisis situation if performance of the relevant contract appears doubtful because of the crisis. If the company is already insolvent, performance will in most cases have to be regarded as doubtful (and pretending solvency may also amount to fraud). If the assets have been reduced to the point where half of the company’s share capital has been lost, the management must without undue delay convene a shareholders’ meeting and notify the shareholders of that loss (§ 49 para. 3 GmbHG), so that appropriate measures can be decided upon. This loss notification is subject to criminal sanction: a managing director who fails to make it faces up to three years’ imprisonment or a fine (§ 84 GmbHG). Managing directors should therefore prepare a restructuring plan at an early stage, which can then be decided upon, at the latest, in that shareholders’ meeting.

Managing directors are liable for payments to shareholders that cause the company’s illiquidity. Caution: this may include payments made well before the crisis actually materialises. The rule covers all payments that, in the ordinary course of events and absent unforeseeable intervening circumstances, will lead to illiquidity. Before making a payment, a solvency forecast should therefore generally be prepared covering the current and the following financial year.

Managing directors are also liable for any payments (including to non-shareholders) made after the company has become insolvency-mature. Exceptions to the prohibition on payments exist only in a very narrow range for payments that are indispensable to a specific restructuring plan (possibly rent, electricity, etc.) or that are permitted because of a conflict of public-law duties (in particular remittance of wage tax, VAT and social security contributions).

After the company has become illiquid or over-indebted, managing directors may in principle no longer make payments on behalf of the company (§ 15b InsO). The only exception is for payments consistent with the care of a proper and diligent business leader; in the ordinary course of business, this includes in particular payments serving to maintain business operations. A corresponding liability for reimbursement also exists for payments to shareholders where those payments had to lead to the company’s illiquidity and this would have been recognisable if such care had been exercised.

Once insolvency maturity has occurred, the managing directors are also obliged to file immediately for the opening of insolvency proceedings. The maximum period is three weeks in the case of illiquidity and six weeks in the case of over-indebtedness (§ 15a para. 1 InsO); that period is available only if promising restructuring efforts are undertaken during it. Otherwise, criminal liability for delayed filing for insolvency and civil liability towards company creditors loom.

So when is a company insolvency-mature, such that the payment prohibition and the duty to file for insolvency apply?

Short answer: when the company is illiquid or over-indebted. To determine illiquidity, a liquidity balance sheet must be prepared comparing liabilities that fall due and are called within the next three weeks with the funds that can be liquidated within that period.

Over-indebtedness exists where the company’s assets no longer cover its existing liabilities and continuation of the business is not more likely than not. Management must therefore prepare both an over-indebtedness balance sheet (on the basis of liquidation values) and a going-concern prognosis in order to examine the insolvency ground of over-indebtedness. Accounting over-indebtedness does not trigger a duty to file for insolvency if the corporate bodies intend to continue the business and an earnings and financing plan shows that, in the medium term, the company is more likely than not to have sufficient liquidity to meet its liabilities as they fall due in each period (= positive going-concern prognosis). For this prognosis, the decisive question is whether continuation of the business is more likely than not over the next twelve months (§ 19 para. 2 InsO).

5) Fiduciary duties: non-compete obligation, corporate opportunity doctrine and confidentiality

Even without an express provision in the service agreement or the articles, managing directors are subject to a non-compete obligation in the line of business of the company. This means, first, that they may not operate or manage a competing business, exercise controlling influence over a competing business or carry out individual transactions in that business line. In addition, a managing director must exploit for the company all business opportunities that arise, even if they learn of them privately, provided they fall within the company’s sphere of business.

Unsurprisingly, managing directors are also subject to an extensive duty of confidentiality where the company has an objective interest in keeping the matter secret. Breach of the duty of confidentiality is punishable under § 85 GmbHG. The duty of confidentiality continues even after the office of managing director ends. Particular attention is required in the context of a planned company sale or financing transaction. When disclosing sensitive information in a due diligence exercise, management should protect itself by obtaining a shareholders’ resolution. Whether unanimity is required depends on the specific circumstances; disclosure to competitors is especially sensitive.

6) Invoking special personal trust vis-à-vis contracting parties

If, during contract negotiations, a managing director gives the impression that they are personally standing behind the transaction to a special extent, this can give rise to direct external liability of the managing director. What is required, however, is the invocation of extraordinary trust that goes beyond ordinary negotiation trust and comes close to a personal guarantee. This may happen, for example, if the managing director states that they can use their influence over the shareholders to ensure that the shareholders will, if necessary, make further liquidity available to the company in order to perform the contract. Managing directors should therefore show restraint in contract negotiations when it comes to overly enthusiastic assurances.

7) Missing or incorrect legal form suffix

If the legal form suffix of the company name (“GmbH” or “UG (haftungsbeschränkt)”) is omitted in business dealings, the impression arises that one is dealing with an entity in which at least one natural person has unlimited liability. Where a managing director creates such a false appearance, they are personally liable to third parties who relied on it. The same applies if a managing director of a UG signs as “GmbH” instead of using the correct legal form suffix. In legal and business dealings, the company should always be described exactly as it is registered in the commercial register.

8) Infringement of third-party rights through deficient organisation and supervision – compliance

If a breach of the general duties of organisation and supervision leads to damage to legal interests of third parties, managing directors may incur direct external liability. For example, if a managing director fails, at the organisational level, to ensure that “their” GmbH does not infringe patents or other intellectual property rights of third parties, they may be personally liable to the injured right holders. Courts have also already recognised breaches of competition law by the company as grounds for personal liability of managing directors. Although the law in this area remains in flux, managing directors should draw one core lesson: the general principle of legality (that is, the duty to ensure lawful conduct by the company) is not only a duty owed to the company, but may in doubtful cases also operate directly for the benefit of third parties.

A compliance management system equipped with appropriate controls is the proper precaution against these liability risks. The German Act on Regulatory Offences expressly governs the duty to establish a compliance organisation.

Whether an extensively developed compliance system is necessary depends largely on the size and risk profile of the company. The following measures are generally recognised as suitable and, depending on the circumstances, may be required:

• appropriate allocation of tasks
• adequate instruction and onboarding
• establishment of a system of surprise spot checks
• investigation of possible violations
• measures to prevent future violations
• sanctions for violations that are appropriate to the individual case
• provision of suitable working tools
• continuous review and adjustment of the measures to actual circumstances

Any owner of a business or undertaking who, intentionally or negligently, omits the supervisory measures required to prevent, within the business or undertaking, breaches of duties incumbent on the owner and punishable by criminal penalty or administrative fine, commits an administrative offence if such a breach is committed and could have been prevented or made substantially more difficult by proper supervision.

The necessary supervisory measures also include the appointment, careful selection and supervision of supervisory personnel.

9) Liability for the GmbH’s taxes

Managing directors are responsible for proper bookkeeping, filing tax returns, and withholding and remitting taxes. This includes the duty to take precautions against the company’s inability to pay taxes that will fall due later. If an intentional or grossly negligent breach of these duties leads to an understatement of tax or an unjustified tax refund, the managing directors are directly personally liable to the tax authorities.

The tax courts generally accept, in the case of a multi-member management body, an allocation of responsibilities under which one managing director is primarily responsible for tax matters. However, that allocation must have been made in good time and in writing. Once a corporate crisis begins to emerge, the same applies as for the financial area generally: the allocation of responsibilities is suspended and all managing directors are equally responsible for ensuring compliance.

10) Liability for unpaid social security contributions

Failure to remit social security contributions for employees constitutes a criminal offence by managing directors under the conditions of § 266a para. 1 or para. 2 German Criminal Code. The offence requires at least conditional intent. It is sufficient if the managing director accepts as possible the withholding of contributions and fails to act to ensure that the claims are met. In terms of civil liability, the managing director must in that case reimburse the withheld contributions personally to the collection agency (in addition to the criminal consequences).

Particularly strict liability applies to the employee portions of the contributions. To avoid liability in a corporate crisis, these must be paid with priority over the company’s other liabilities, even where the general prohibition on payments under § 15b InsO already applies because of insolvency maturity (see above). In that case, management should ensure that, when making transfers to the collection agency, it specifies that the payments relate exclusively to the employee portions (for example, in the payment reference). Otherwise, the payments are booked half to the employer portions and half to the employee portions, so the stricter liability for half of the employee portions could still arise. If the social security charges cannot in practice be remitted because of insufficient liquidity, the managing directors must – in order possibly to avoid criminal conviction – notify the collection agency in writing, no later than the due date of the contributions, of the amount withheld and explain why timely payment was not possible despite serious efforts (see § 266a para. 6 German Criminal Code).

11) Liability where the shareholder list is not updated

Managing directors are generally responsible for maintaining the shareholder list filed with the commercial register. If they are notified of, and provided evidence for, a change in the data relevant to that list, they must prepare a new list and file it with the register. Breach of this duty may give rise to damages claims by both the shareholders affected by the change and the company’s creditors, insofar as the incorrect list caused the damage.

(1) The managing directors shall, without undue delay after any change becomes effective in the persons of the shareholders or in the extent of their participation, submit to the commercial register a list of shareholders signed by them […]. The list shall be changed by the managing directors upon notification and evidence. […]

(3) Managing directors who breach the duty incumbent on them under paragraph 1 shall be jointly and severally liable to those whose participation has changed and to the company’s creditors for the resulting damage. In practice, however, for many changes in the shareholder base the participating notary has exclusive responsibility, so management then does not have to prepare and file a new list (in particular in the case of share transfers and capital measures). The matters that do fall within the managing directors’ responsibility are changes of name and place of residence or registered office of shareholders, consolidations or splits of shares, redemption of shares, transfers of shares by succession and transformation transactions at shareholder level.

12) Determination of beneficial owners and the transparency register

Often overlooked is the duty of managing directors to identify the company’s beneficial owners and transmit the relevant information to the Transparency Register. The concept of beneficial ownership is defined in § 3 of the German Money Laundering Act and, in the present context, refers to the natural person (so not a legal entity or company) who ultimately owns or controls the company. This is any natural person who holds or controls more than 25% of the capital or voting rights, including through an intermediate holding company. Breach of the duties to obtain, retain, update and report this information constitutes an administrative offence by the managing directors and may be punished by substantial fines (see § 56 GwG).

Each beneficial owner is in turn obliged to cooperate in the fulfilment of these duties. Managing directors should therefore ask all shareholders on a regular basis (for example once a year and whenever there is a specific trigger) whether there have been any changes in beneficial ownership of the company.

Since the Transparency Register and Financial Information Act (TraFinG) 2021, GmbHs are subject to an independent notification duty to the Transparency Register. The fact that shareholding structures can be derived from the shareholder list filed with the commercial register may make identification easier, but it does not replace the filing. Particular care is required where trust arrangements, voting agreements or foreign holding companies are involved, because in those cases the actual control structure is not immediately apparent.

Anyone who, as a GmbH shareholder or managing director, steers clear of the cliffs described here is well on the way to minimising their liability risks. What should also have become clear, however, is this: the devil is in the detail.