Choosing a Legal Form: Which Legal Form Fits Your Business?

At the beginning of any entrepreneurial project comes the question of what legal “garment” the business should wear – in other words, which legal form the entrepreneur should choose. In this guide, we provide practical guidance for deciding on the appropriate legal form. That choice involves a large number of legal criteria that must be weighed against one another in light of the circumstances of the specific project. In addition, there are extra-legal considerations such as image and expectations about future developments. This guide is therefore intended as a thorough explanation of the topic, but it does not replace an assessment of the individual case.

An overview

German and European law provide entrepreneurs with a considerable number of possible legal forms for carrying on business activity. A particularly important dividing line runs between sole proprietorships and partnerships on the one hand and corporations on the other, because these categories are based on different core concepts, especially with regard to liability, management and taxation. Whereas sole proprietorships and partnerships are not legal persons, corporations are fully fledged legal entities that stand vis-à-vis their shareholders as separate third parties.

These are the legal forms relevant to business activity, grouped according to those two categories:

Sole Proprietorships and Partnerships	Corporations
e.K. (eingetragener Kaufmann – registered merchant) and non-merchant sole proprietors, including freelancers	GmbH (Gesellschaft mit beschränkter Haftung – limited liability company), including the entrepreneurial company (UG)
GbR (Gesellschaft bürgerlichen Rechts – civil-law partnership)	AG (Aktiengesellschaft – stock corporation)
OHG (Offene Handelsgesellschaft – general commercial partnership)	SE (Societas Europaea – European stock corporation)
KG (Kommanditgesellschaft – limited partnership), including hybrid forms such as GmbH & Co. KG, UG (haftungsbeschränkt) & Co. KG or SE & Co. KG	KGaA (Kommanditgesellschaft auf Aktien – partnership limited by shares)
PartG (Partnerschaftsgesellschaft – professional partnership) / PartGmbB (Partnerschaftsgesellschaft mit beschränkter Berufshaftung – professional partnership with limited professional liability)

As regards the GbR, one should also mention, since 1 January 2024, the registered civil-law partnership (eGbR), introduced by the MoPeG reform and capable of being entered in the company register (Gesellschaftsregister).

(There are also other legal forms, notably the silent partnership, the foundation, the association and the cooperative. For immediate entrepreneurial activity, however, these are relevant only rarely or in special structures, and they are therefore left aside here.)

The macroeconomic relevance of the individual legal forms

According to the German business register for 2024, Germany had around 3.54 million recorded legal units with VAT advance returns and/or employees. Of these, 861,720 were corporations and 440,951 were partnerships. The figures do not determine the right legal form, but they show that choosing between corporations, partnerships and hybrid structures is not an academic question; it affects a substantial part of German business practice.

Statutory concept ≠ practical use cases

The individual legal forms differ materially in their statutory basic structure. This concerns the rules on liability, taxation, management, co-determination, incorporation, transfer of interests, profit and loss allocation, bookkeeping, accounting and disclosure duties, contractual flexibility and internal organisation. Whereas the OHG as a partnership is structurally designed for close and active cooperation among the partners, stock corporations – at the other end of the spectrum – are designed as anonymous capital-raising vehicles in which ownership and management are strictly separated. These structural differences are reflected in almost entirely different statutory rules for the matters just mentioned.

That statutory basic structure does not, however, necessarily determine the practical use cases of a legal form. Through careful drafting of the articles of association and ancillary agreements, many of the differences can be reduced considerably in practice. It is therefore possible almost to reverse the archetypes, for example in the form of a “personalist” family SE or a “capital-market style” publicly held GmbH & Co. KG.

In practice, therefore, the decisive point is less the statutory basic concept than the limits of contractual freedom. This guide accordingly focuses on those characteristics that, because they cannot be shaped freely, are not under the users’ control. Those are the factors that are ultimately decisive in real-life legal-form choices.

These include, in particular, certain aspects of taxation, limitation of liability, management, supervision, flexibility in incorporation and transfer of interests, as well as employee co-determination at company level.

Preliminary considerations

So how should one approach a decision on legal form? First of all, by simplifying the options. If the following basic requirements are applied, the list above becomes considerably shorter:

1. No legal form without limited liability

For the purposes of this guide, it is usually sensible to eliminate, at the first step, legal forms that do not offer statutory limited liability. That is a simplification, not a general value judgment: partnerships may still be attractive for tax, organisational or investment-related reasons. Even so, if an operating business fails economically, many founders will instinctively prefer not to leave their personal liability exposure entirely open-ended.

If the business fails, entrepreneurs using a limited-liability entity are, in principle, not liable with their personal assets. What is initially at risk is only the property dedicated to the business. Caution: personal liability risks may nevertheless remain, for example under guarantees, management liability or abuse scenarios (for how this principle works and where its limits lie, see our article Limited liability in a GmbH). Since the introduction of the entrepreneurial company (UG), which in theory can be incorporated with share capital of one euro, there is no longer even the hurdle of raising substantial minimum capital.

If the business requires particular creditworthiness, the shareholders of a limited-liability entity can still provide selective personal security for the company. Once this criterion is applied, all of the sole proprietorships and partnerships listed above fall away (including the popular sole proprietorship or e.K.), with the exception of the corporation & Co. KG. A sole proprietor has unlimited liability. In a partnership, there is generally at least one partner who remains personally liable without limitation. Whether that unlimited-liability partner is a natural person or a legal entity does not change the point.

Although the PartGmbB is partially liability-limited (as regards claims arising from professional negligence), it is available only to the liberal professions. It therefore falls outside the scope of this guide.

2. Focus on operating businesses

This guide deals only with entities that carry on business operations directly. For other purposes, such as asset management, the assumption of particular group functions or as a building block in a tax structure, other legal forms may also be appropriate depending on the situation. There are, for example, use cases for a property-holding GbR or for a cooperation of several legal entities combining in an OHG. Those special structures, however, offer hardly any generalisable principles that could usefully be summarised in a broad overview.

On the partnership side, these preliminary considerations leave only the corporation & Co. KG (in particular the GmbH & Co. KG). Alongside it, all of the corporations listed above remain in the running.

The road map

The further decision path first runs through the choice between partnership and corporation and, within the corporate forms, then through the choice between GmbH/UG on the one hand and one of the stock-corporation forms on the other:

Part 2 of this guide deals with the first major decision: corporation or partnership. Part 3 then addresses the choice between the GmbH and the stock corporation and explains the respective variants of those two basic forms. Choosing the right legal form is an important step on the way to starting a business. But even an existing company should put its legal form under review every few years and adapt it in good time to changing circumstances.