GmbH or AG? Differences, Costs and How to Decide.

Once the choice has been made in favour of a corporation, the next strategic question arises: should the business be organised as a GmbH or as a stock corporation (AG)? In practice, the GmbH is the standard case. The AG, by contrast, offers structures and instruments that can be attractive where there are several investors, employee participation schemes or a later stock exchange listing is contemplated.

This article sets out the key differences between a GmbH and an AG and then turns to the variants UG, SE and KGaA.

The focus is on those features that cannot easily be neutralised by shareholder agreements or drafting in the articles of association.

GmbH versus stock corporation

To begin with, it is worth looking at a number of points that are not suitable as decision criteria between a GmbH and an AG:

• Separate legal personality vis-à-vis the shareholders: As corporations, both the GmbH and the AG are conceptually separate from their shareholders. In principle, the company therefore survives the death or withdrawal of a shareholder. Representation of the company by non-shareholders is unproblematic in both forms. In decisions by the holders of the equity interests, the majority principle generally applies in both structures.
• Limited liability of the shareholders: In both the GmbH and the AG, the creditors of the company generally only have recourse to the company’s assets. That should not obscure the fact, however, that the members of the corporate bodies (managing directors in a GmbH; members of the management board and supervisory board in an AG) may of course be personally liable for breaches of duty, and that the risk of such breaches is significantly higher in an AG because the statutory framework is stricter and more complex.
• Taxation: Both the GmbH and the AG are subject to corporation tax and are fiscally opaque entities (that is, the profits are not attributed directly to the shareholders). The same income tax regime therefore applies. The same is true in principle for inheritance and gift tax.
• Duties of loyalty among shareholders: As a matter of principle, GmbH shareholders and AG shareholders are subject to the same duty of loyalty toward the company and their fellow shareholders. The core of the duty is loyalty: they must avert impending harm and promote the corporate purpose. Until the BGH clarified the issue, it had been disputed whether AG shareholders were subject to loyalty duties comparable to those of GmbH shareholders. The intensity of the duty does not, however, depend on whether the company is organised as an AG or a GmbH, but on whether the company is structured in a more personalistic way (then the duty is stronger) or in a more capital-oriented way (then it is weaker).

The decisive points are instead the following eleven differences:

1) Differences in organisational structure and allocation of power

The internal organisation of a GmbH differs fundamentally from that of a stock corporation. A GmbH has only two mandatory corporate bodies: the shareholders’ meeting and management (exception: where there are more than 500 employees, a supervisory board must be established). Between these two there is a clear hierarchy, because the shareholders’ meeting appoints the managing directors and may remove them at any time. The shareholders’ meeting also has the power to issue instructions to management. Those rights are reinforced by each shareholder’s broad rights to information and inspection.

If necessary, the shareholders’ meeting of a GmbH can therefore always take the reins itself.

The stock corporation works on a completely different model. Here, there are mandatorily three bodies – the general meeting, supervisory board and management board. Shareholders exercise their control rights directly only in the general meeting. In the general meeting they elect the members of the supervisory board, which in turn is responsible for appointing, removing and supervising the management board. The general meeting has no right to issue instructions either to the management board or to the supervisory board. The shareholders’ powers are therefore almost entirely mediated through the supervisory board.

The independence of the AG management board goes further still. Even the supervisory board cannot issue instructions to it. Rather, the management board is bound solely by the interests of the company and must exercise its office under its own responsibility. The supervisory board controls the management board through legally required consent requirements for certain measures, typically those of particular significance. The supervisory board may also impose new consent requirements on an ad hoc basis. So while it cannot give direct instructions, it can certainly prevent measures that it considers contrary to the interests of the company (which is not the same as the interests of the shareholders).

Unlike GmbH shareholders, AG shareholders also have no comprehensive right to inspect the company’s business records. They can exercise only a right to ask questions within the general meeting, and generally only in relation to agenda items previously announced. The absence of a broad information right is an advantage where protection of business secrets is of overriding importance. Of course, GmbH shareholders are also bound by confidentiality obligations. But that does not change the fact that each GmbH shareholder initially has access to all business records of the company. That creates a risk for confidentiality interests.

Even the approval of the annual financial statements does not lie with the AG shareholders. In the statutory default case, the statements are merely approved by the supervisory board and thereby adopted. In a GmbH, by contrast, that power lies with the shareholders’ meeting, which can review and question the annual accounts before they become final. These differences shift control in the stock corporation away from the shareholders and toward the management board.

Whether that is positive or negative depends entirely on the specific needs of the case. The separation of control and capital built into the stock corporation is a sensible framework where a company has many shareholders whose role is meant to be limited essentially to that of capital providers and beneficiaries of the company’s success. That can be relevant not only in companies with many financial investors, but also in family businesses.

A GmbH can also establish a supervisory board or advisory board and transfer key powers of the shareholders’ meeting to it by way of the articles. In a stock corporation, however, this arrangement is largely cemented in place (short of a change of legal form), whereas in a GmbH the shareholders can in principle change the internal governance structure at any time by passing an amendment to the articles.

And that leads directly to the next key criterion for choosing between the two forms:

2) Flexibility of the articles vs. strict statutory framework

The articles of association of a GmbH can in principle be drafted freely unless the GmbH Act makes a provision mandatory. The opposite applies under the German Stock Corporation Act: its provisions are generally mandatory unless the law expressly permits deviation by the articles (§ 23 para. 5 AktG).

Stock corporations therefore exhibit a high degree of standardisation, but that comes at the cost of flexibility. The background is the possibility of listing shares on a stock exchange: an investor in the public capital markets should not have to review a company’s articles in order to understand the basic rights attached to a share. The consequence is that many formalities – for example around general meetings and supervisory board meetings – cannot be simplified by bespoke provisions in the articles. These processes therefore have to be prepared with great care in order to avoid legally ineffective resolutions.

The Stock Corporation Act is not merely largely mandatory; it is also lengthy and complex. The difference in regulatory density becomes particularly clear when one compares the size of the GmbH Act – roughly 30 A4 pages – with the Stock Corporation Act – roughly 100 A4 pages (excluding about another 10 pages of group law). Anyone managing an AG will therefore, as a practical matter, find it difficult to do without regular specialist legal advice.

The drafting of investment agreements and shareholders’ agreements is also more demanding legally, because such agreements regularly stand in tension with the mandatory nature of stock corporation law, and that tension is not always easy to resolve.

In short: the stock corporation is generally not the ideal vehicle for unusual bespoke structures. Nor should the officers of an AG have too strong an aversion to formalities, because otherwise they face considerable liability risk.

3) Strong position of the management board and corresponding liability risks

This point has already become clear above: the management board of a stock corporation manages the company free from instructions. The managing directors of a GmbH, by contrast, are in principle bound by instructions from the shareholders’ meeting. Once appointed, a member of the management board also cannot simply be removed at will – revocation of the appointment is possible only for good cause (§ 84 para. 3 sentence 1 AktG). A managing director of a GmbH, by contrast, can generally be removed at any time without cause.

As a counterweight to the independence of the management board, the Stock Corporation Act provides that appointment as a management board member may be made for a maximum of five years, and reappointment is possible only during the final year of the current term.

One point should always be kept in mind, however: autonomy and liability run in parallel.

Where necessary, a GmbH managing director can have a critical decision “signed off” by the shareholders’ meeting. The management board of an AG must usually make that decision itself. Approval by the supervisory board does not release the management board from liability (§ 93 para. 4 sentence 2 AktG).

The management board may, however, submit a specific proposal on day-to-day management to the general meeting (§ 119 para. 2 AktG) and thereby obtain relief from liability (§ 93 para. 4 sentence 1 AktG). In an AG, unlike in a GmbH, this may not go so far as to shift day-to-day management in substance to the general meeting. The relieving effect also applies only if the resolution of the general meeting is adopted in full compliance with all formal requirements for convening and holding the meeting and if the management board has fully informed the shareholders in advance of all facts relevant to the decision.

Important: this decision-making power of the general meeting presupposes a corresponding request by the management board. The general meeting cannot intervene in management on its own initiative.

4) Capital protection

Protection of the company’s equity is far stricter in a stock corporation than in a GmbH. That gives the AG an advantage of trust in dealings with third parties and investors. In a GmbH, § 30 GmbHG protects only the registered share capital against distributions to the shareholders. In an AG, by contrast, no unilateral payment to shareholders may be made outside a proper distribution of distributable profits – not even out of freely available assets of the company (this is generally derived, on a generous reading of the wording, from § 57 AktG).

Where the articles permit it, a GmbH may in principle make interim distributions at any time. In an AG, by contrast, interim dividends are permissible only under the strict conditions of § 59 AktG – and only if the articles expressly authorise the management board to make them. In particular, the general meeting cannot resolve such a payment. The decision lies solely with the management board, with the consent of the supervisory board, and requires interim financial statements. Even then, the interim dividend is capped at half of the expected distributable profit.

§ 150 AktG does not create a blanket “reserve fund” of 10% of share capital. Rather, 5% of the annual profit, reduced by any loss carryforward, must each year be allocated to the statutory reserve until the statutory reserve together with certain capital reserves reaches 10% of the share capital (or a higher amount fixed in the articles). The use of those amounts is also restricted: as long as the threshold has not been exceeded, they may essentially be used only to offset an annual loss or loss carryforward; if the threshold has been exceeded, they may additionally be used for a capital increase out of company funds. In a GmbH, the creation and release of comparable reserves is much more flexible.

In one respect, however, capital protection in stock corporation law is less strict than in a GmbH: in an AG there is no joint and several liability of the shareholders for unpaid contributions of the other shareholders (whereas § 24 GmbHG provides such co-liability in a GmbH).

5) Minority rights

As outlined at the beginning, the control rights of the capital providers are more limited in the stock corporation.

Despite those restrictions affecting the shareholder body as a whole, the position of minority shareholders with small shareholdings is in principle stronger than that of minority shareholders in a GmbH:

Even a 1% shareholding gives an AG shareholder the right to request the appointment of an independent special auditor to review management measures, the valuation of assets in the balance sheet or transactions with group companies (§ 142 para. 2 AktG, § 258 para. 1 AktG and § 315 sentence 2 AktG). A special audit is a sharp tool, because the auditor has broad investigatory and questioning powers (including vis-à-vis group companies) and produces a report that is published in the commercial register. For that reason alone, the special audit is often a more powerful instrument than the individual information and inspection rights of a GmbH shareholder.

A 1% shareholding in an AG also allows the shareholder to initiate proceedings for leave to bring a derivative claim in the company’s name against members of the management board or supervisory board for damages (§ 148 para. 1 AktG). In a GmbH, by contrast, enforcing claims against managing directors generally requires a majority resolution of the shareholders.

A 5% shareholding in an AG gives the right to demand the convening of a general meeting or the addition of items to the agenda – in a GmbH, the threshold is 10%. A 10% shareholding entitles the shareholder to object to the waiver by the company of damage claims against members of the management board or supervisory board (§ 93 para. 4 sentence 2 AktG and § 116 sentence 1 AktG). In a GmbH, by contrast, a simple majority can resolve such a waiver.

Particularly when it comes to ensuring the lawfulness of management conduct, minority shareholders in an AG are therefore often in a stronger position than minority shareholders in a GmbH.

6) Possibility of creating conditional capital

Sections 192–201 AktG provide for the possibility of a “conditional capital increase”. This is a capital increase that becomes effective only upon the occurrence of certain predefined events. It is the standard instrument for backing share options and convertible bonds, thereby securing the subscription rights arising from them. Once the conditions are met (for example exercise of the options) and the shares are issued by the management board, the share capital of the stock corporation increases immediately, without any further resolutions or commercial register filings. The subsequent filing with the commercial register merely updates the registered amount of share capital.

Where conditional capital is used, special statutory protections for the holders of subscription rights apply: under § 192 para. 4 AktG, resolutions of the general meeting that conflict with the resolution on the conditional capital increase are void. That means later interference is difficult. The provision does not, however, mean that conditional capital can never under any circumstances be revoked. In the event of later capital increases out of company funds, dilution of the holders of subscription rights is compensated through an automatic increase of the conditional capital. Existing shareholders also have no statutory pre-emptive right to participate in the conditional capital increase.

In a GmbH, by contrast, share options and conversion rights can be secured only through more cumbersome structures (combinations of authorised capital, trustee models, voting arrangements and the like). Even then, the position of the beneficiaries cannot be protected as effectively as in an AG, because the shareholders always retain the practical ability to block the issuance of shares to the beneficiaries – at least until a court intervenes.

7) (Partial) anonymity of shareholders

In a GmbH, the law requires a list of shareholders, which is publicly available in electronic form via the commercial register. In a stock corporation, the position depends first on the class of shares: only in the case of registered shares does the company maintain a share register (§ 67 AktG), and that register is not public. In the case of bearer shares, no such register exists. It should be noted, however, that since the 2016 Stock Corporation Act reform (Aktienrechtsnovelle 2016) non-listed stock corporations may in principle only issue registered shares; bearer shares are admissible only where the right to individual certification is excluded and the shares are deposited in a global certificate with a central securities depository (§ 10 para. 1 AktG). For the typical newly formed AG, the classic individually certificated bearer share is therefore practically ruled out – the following discussion of anonymity and transferability accordingly applies primarily to registered shares. Any anonymity is further limited by the disclosure requirements under § 20 para. 6 AktG (see our article here) and by the management board’s duty to disclose beneficial owners (that is, any shareholder controlling more than 25% of the capital or voting rights) to the Transparency Register (§ 20 Geldwäschegesetz).

Further limitations on anonymity arise, for example, in capital increases with the issue of new shares, because in that case the management board must file with the commercial register a list of the subscribers for the new shares, which is also publicly accessible. Where anonymity matters, a trustee must be used. The same applies to the founding shareholders, who are visible in the publicly accessible incorporation documents.

8) Transferability of the equity interest (fungibility)

Shares in an AG are in principle transferable by informal assignment (or, in the case of certificated registered shares, by endorsement; and in the case of bearer shares, by transfer of possession of the certificate). The transfer can be made effective immediately and, as a matter of civil law, does not depend on registration in the company’s share register. For registered shares, such registration is still practically important for the shareholder’s legitimacy vis-à-vis the company. Shares are therefore highly transferable.

The position in a GmbH is very different. Here it was the declared intention of the historical legislator to restrict speculative trading in company interests. Accordingly, both the agreement to sell GmbH shares and the actual transfer itself require notarial deed. Especially where the shares are valuable, transaction costs are therefore substantially lower in an AG. Notarial fees for the transfer of GmbH shares can quickly reach five figures. The same applies to shareholders’ agreements that oblige the parties to transfer shares under certain conditions: in an AG such agreements do not require notarisation, which can also result in significant cost savings. Of course, one then loses the evidentiary value of a notarial deed.

9) Higher incorporation effort for stock corporations

Both a GmbH and an AG are formed by a notarised incorporation deed. A GmbH requires minimum share capital of EUR 25,000, of which at least half must be paid in initially. An AG requires minimum share capital of EUR 50,000, but only one quarter must initially be paid in (that is, EUR 12,500 – the same initial cash amount as in the GmbH).

The incorporation of an AG involves significantly more formalities, because formation reports and audit reports have to be prepared. Under the conditions of § 33 para. 2 AktG (for example if, as is often the case, a member of the management board or supervisory board is among the founders), an external formation auditor must be appointed, which increases the burden further. In the case of certain restructuring measures during the first two years after incorporation, a fresh audit is required (post-formation acquisition, § 52 AktG).

It should not be forgotten either that a GmbH can be founded and operated by a single person, whereas an AG always requires at least four people (one management board member and three supervisory board members).

10) Social security status of managers

A frequent concern of founders is to avoid being subject to compulsory social insurance as managers. In a GmbH, the answer requires a case-by-case assessment of whether, given the specific ability of the managing director to influence the company and resist instructions, he or she qualifies as an “employee” within the meaning of § 7 para. 1 SGB IV. This can be difficult to assess in minority-shareholding scenarios. An incorrect classification of the managing director’s social security status can later prove very costly (Tip: in doubtful cases, a formal status determination procedure under § 7a SGB IV should be carried out).

For management board members of a stock corporation, the position is only partly clearer. As a matter of statute, they are generally exempt from compulsory insurance in the statutory pension insurance system and unemployment insurance (§ 1 sentence 3 SGB VI, § 27 para. 1 no. 5 SGB III). There is no such blanket exception, however, for health insurance and long-term care insurance. Holding office as a management board member therefore does not, by itself, mean that no social security obligations can arise; the relevant requirements must be reviewed separately.

11) Stock exchange eligibility

The shares of a stock corporation can be admitted to trading on a public securities exchange. Interests in a GmbH are not eligible for stock exchange listing.

Conclusion: GmbH or AG?

The decision between a GmbH and a stock corporation requires an individual balancing of interests. The AG shows its strengths especially where a company wants to bring in many investors, limit information rights of the shareholders or use instruments such as conditional capital. Stricter capital protection and minority rights such as the special audit also create investor-side safeguards.

A further advantage is the high transferability of shares. Where interests are likely to be transferred more frequently, employee programmes are planned or mezzanine instruments such as convertible bonds are contemplated, the AG may have a structural advantage. Its external appearance in business dealings is also often perceived as more formal and larger-scale.

Set against this is a significantly higher administrative and advisory burden. Stock exchange eligibility alone will only rarely be decisive, because an IPO usually lies much further down the road, leaving sufficient time for a later change of legal form from a GmbH to an AG.

The special forms: UG, SE and KGaA

In addition to the standard forms GmbH and AG, both basic types also have variants and offshoots.

Variant of the GmbH: the entrepreneurial company (UG)

The entrepreneurial company (Unternehmergesellschaft, or UG) is a variant of the GmbH that differs from the basic form only in a few respects. It is literally regulated in a single provision: § 5a GmbHG. The key difference is that the UG can be incorporated with share capital of just one euro. In return, it must always use the legal-form suffix “UG (haftungsbeschränkt)” in business dealings – otherwise apparent authority liability may arise. Formation by contribution in kind (for example through the contribution of an existing business) is not permitted.

The second key difference is that the UG must allocate one quarter of its annual profit (after deduction of any loss carryforward) to a special reserve, and may therefore not distribute that portion to its shareholders. Once enough equity has been accumulated, the UG’s share capital can be increased to EUR 25,000 by way of a capital increase out of company funds (nominal capital increase), and the legal-form suffix can then be changed to “GmbH”. Only after that capital increase does the reserve obligation fall away.

The UG therefore offers an inexpensive entry point into the world of corporations and allows the company to build up the minimum share capital of a GmbH over time. One thing to bear in mind, however, is the signal sent to the market: choosing a UG suggests that the founders did not want or were not able to raise even EUR 12,500 of start-up capital. Since the share capital of a GmbH may in fact be used immediately for business purposes, that can raise doubts as to the seriousness of the venture. A UG will therefore usually find it harder to attract debt or equity finance and to win contracts with larger corporates. For that reason, the UG is only rarely the best choice for an operating business.

Special form of the stock corporation: the Societas Europaea (SE)

The “European Company” (Societas Europaea – SE) is an EU-law-based variant of the stock corporation, introduced in broadly the same form across all Member States (although the relevant national stock corporation law of the Member State still applies to the SE – it is therefore not a uniform European legal form).

Besides image advantages, the SE offers two significant benefits compared with the ordinary German AG:

1) Greater flexibility through the option of a monistic management system

The SE can, like an ordinary AG, be managed by a management board and a supervisory board (dualistic system). In that case, the provisions of the Stock Corporation Act apply to a large extent. But the SE may also opt by provision in its statutes for a monistic management system, in which the supreme governing body is an administrative board whose members are elected by the general meeting.

The administrative board elects a chair who has a casting vote in the event of a tie. The administrative board appoints managing directors, who may however themselves be members of the administrative board. That said, the majority of the administrative board must consist of non-executive members (§ 40 para. 1 SEAG). The administrative board has the power to issue instructions to the managing directors.

So even in a monistic SE there are two management levels, but without a strict separation between them. In that sense, the monistic system is modelled on the board structure familiar from Anglo-American jurisdictions.

This allows very individual structures that are not possible in a regular AG. The management architecture can be tailored much more closely to particular individuals – for example by concentrating the role of chair of the administrative board and that of managing director in one hand. The law does not, however, permit complete concentration of power in a single person, because the majority of the administrative board must remain non-executive. Conversely, it is also possible to appoint a “weak” managing director who does not sit on the administrative board and merely handles the day-to-day business while all major decisions remain with the administrative board, which then makes active use of its instruction rights.

This opens up structures that can be particularly attractive for family businesses. In any case, however, the shareholders in a monistic SE gain a stronger position than in a regular AG, because they are not merely appointing a supervisory body (the supervisory board), but a management body with genuine executive powers (the administrative board).

2) Avoidance of entrepreneurial employee codetermination

Companies with more than 500 or 2,000 employees must establish a supervisory board to which employee representatives are appointed (for the details, see the relevant section in Part 2 of this series).

The SE is special because codetermination can be negotiated with the employees under the SE Participation Act. If no agreement is reached, the status quo on supervisory-board codetermination is simply frozen. If that happens before the threshold of 500 employees is reached, the company remains free of supervisory-board codetermination even if it later grows beyond that threshold. Instead, “only” an SE works council is established. The SE is therefore a commonly used vehicle for avoiding employee codetermination on the supervisory board.

Those benefits come with substantial obstacles, however.

In many cases, the formation procedure for an SE is highly burdensome, because an SE can be formed only with the involvement of other companies and always requires a cross-border element. Formation takes place either

• by merger of two stock corporations from different EU Member States,
• by formation of a joint holding company for existing corporations in different Member States,
• by formation of a joint subsidiary by companies from different Member States, or
• by change of legal form of an existing AG that has had a subsidiary in another EU country for at least two years.

Depending on the starting point, it may first be necessary to form a foreign stock corporation and then merge it cross-border into a German stock corporation in order to arrive at an SE. Corporate acts under different legal systems must then be coordinated. At the same time, the employee negotiation procedure must be carried out, which can take up to a year. The minimum capital for an SE is EUR 120,000. Taken together, this is therefore a lengthy and costly process.

Tip: an especially interesting alternative for the SE is the purchase of a shelf company from a professional provider. The cost is highly market-dependent and should be checked at the time; in any event, the minimum capital of EUR 120,000 plus notary and registration costs must still be provided. If a new business is to be formed and the SE is the desired legal form, this is often the fastest and most straightforward route.

Another obstacle is the even higher advisory burden compared with an AG, which can usually only be handled by specialised lawyers. The law of the SE results from a combination of the SE Regulation, the German SE Implementation Act, the Stock Corporation Act and the SE Participation Act. For the incorporation process, German and possibly foreign transformation law must be added. Since these statutes are not perfectly aligned, unresolved legal questions continue to arise and must be handled as carefully as possible through specialist advice.

Even so, the SE is on the rise. Greater flexibility and a more international appearance make it a more attractive alternative than the classic AG for some companies. In most cases, however, the effort will be worthwhile only if the company actually wants an AG-style corporation with a monistic board system or is approaching employee codetermination thresholds.

Further special form of the stock corporation: the partnership limited by shares (KGaA)

Even though the term Kommanditgesellschaft suggests otherwise, the KGaA is a corporation, not a partnership. It is relatively “leanly” regulated in §§ 278–290 AktG, which then refer extensively to the rest of stock corporation law and in part to the law of the limited partnership. Similar to an ordinary limited partnership, there is at least one shareholder who is personally and unlimitedly liable for the company’s obligations (general partner, or Komplementär) and at least one limited shareholder (Kommanditaktionär), whose liability is limited to its contribution (although unlike in a KG there is no external liability even in that respect). As in an AG, the minimum share capital is EUR 50,000.

The general partners of the KGaA manage the company and represent it externally, much like the general partners of a KG and the management board of an AG. They are not required to contribute to the share capital unless they are also limited shareholders. The articles may, however, impose a special contribution obligation and grant them a profit entitlement. The particular feature is that this profit share is taxed under the tax rules applicable to a partner in a partnership (income from trade or business). In individual cases, that may accommodate specific tax structuring requirements.

Since in practice natural persons rarely want to assume unlimited liability, the personally liable partner is usually itself a corporation (the legal-form suffix then reads, for example, GmbH & Co. KGaA). As with a GmbH & Co. KG, two companies therefore have to be formed and administered, and their internal organisation has to be interlocked, which makes the structure considerably more cumbersome overall.

A KGaA also mandatorily has a supervisory board, but its powers differ from those of the supervisory board of an AG. The key difference is this: whereas the supervisory board of an AG appoints the members of the management board, the supervisory board of a KGaA has no such power. The general partners are instead designated in the articles, and their position is therefore “cemented”. The articles cannot be amended without their consent, even if all limited shareholders vote in favour in the general meeting. As in a partnership, the general partners can be expelled only for good cause.

And that is precisely the unique selling point of the KGaA among corporation forms: the general partners who run the company cannot be removed by the shareholders – not even indirectly through the supervisory board. That makes the structure attractive for companies that want to raise significant equity capital, especially on the stock market, without being exposed to a hostile takeover. The KGaA is considered “takeover-resistant”, because even the acquisition of more than 50% of the shares does not confer corresponding control over management. Probably for that reason, a number of listed blue-chip companies in Germany are organised as KGaA.

Unlike an AG, the KGaA generally enjoys freedom in drafting its articles. That freedom permits interesting structures. Contrary to what applies in an AG, it is even possible to grant the general meeting very far-reaching powers, including the right to issue instructions to the general partners. Beyond the goal of takeover resistance, other highly individual governance goals can therefore be achieved. Cases in which those goals cannot be implemented more simply through another legal form are, however, very rare.

For that reason, the KGaA has always remained a niche form: across Germany there are only a few hundred companies of this type. That, in turn, means there is relatively little case law and literature on the KGaA, and many legal questions remain unresolved. For reasons of caution, even lawyers rarely recommend this variant of the stock corporation.

The KGaA is a special tool for unusual constellations.

Closing observations

This essentially completes the decision path for choosing the legal form of a newly established business. The first step is the choice between partnership and corporation; the second, where applicable, is between GmbH and stock corporation.

In most cases, the choice of legal form will involve one or two compromises. The differences between the various legal forms outlined in this series can, however, be used to create a weighted scoring of the relevant factors, making it easier to determine which form combines the greatest advantages for the specific case without triggering any knock-out criteria.

At the same time, it should always be kept in mind that German transformation law makes it possible to change legal form later on. This is particularly straightforward – especially from a tax perspective – when moving from one corporate form to another. In any event, every few years it is worth reviewing whether the current legal form still meets the company’s present and foreseeable needs.