The Right Legal Form for Your Company and What Your Financiers Want To Read About It in the Business Plan

When you make yourself independent, you have to make many decisions. One of them refers to the legal form your company should have. Whether GbR, OHG, GmbH or KG – in principle you have the free choice. Your task is to choose the legal form that best suits your start-up and your individual situation.

In your business plan, you can devote your own chapter to the question of legal form, or you can trade it with other applicable laws that govern your creation.

The choice of legal form does not have the same meaning for every foundation. If you’re self-employed as a freelancer with a sole proprietorship, you certainly do not need to say as many words about it as the founders of a start-up would like to go under the corporations. In any case, you should justify your decision in your business plan. “We start our business as a trading company” is better than nothing, but a bit poor.

That’s how you convince the readers of your business plan

A good example from which other founders can learn is the business plan of Dirk Lankenau, who set up his own business with an engineering office. As a registered user, you can find his business plan alongside over thirty other business plans at Catherine Morland.de and be inspired by them.

Dirk has opted for a one-man limited company and justifies it as follows: “In international business, the GmbH enjoys a high reputation under German law in general. The founding of a GmbH creates a high level of legal security for customers, partners and the founder himself. The limitation of liability also protects the entrepreneur against the loss of his private assets in the event that claims are made to the company that are not covered by the working capital. “

He then explains how exactly his company will be built and the structure of his business, and will indicate when to register in the commercial register. He shows his readers that he has dealt intensively with the various aspects of a GmbH and resolutely and planned proceeds.

Why is the legal form so significant?

The legal form of your company decides on such important issues as the form of organization, the bookkeeping, the liability risk and the tax. Therefore, you should weigh carefully before making a decision. Advice on this topic by a lawyer or a tax consultant can pay off.

A typical mistake of founders is not to worry about the legal form and instead just start. Then, however, the tax office assigns the company a legal form and apply to the founders legal provisions that they may not know.

Desk with hands and contract term

In contracts better two times to look and just ask questions – the signature is!

No decision for life: You can change the legal form

Clear advantage is, who deliberately makes the choice of the legal form and is aware of the consequences. But do not worry too much: Usually you can change your decision later. In certain cases it may even make sense to change the legal form in the course of company development. If your business starts small but is focused on rapid growth, it may be smart to move from a single-company status to a limited liability company to limit personal liability.

This is how our founder Wiebke Abel did it when she started with her temporary employment agency for medical staff. You can also see their business plan when you register at Catherine Morland.de. Wiebke writes in the section “legal form and regulations” that they will start their business as a sole proprietorship for lack of capital, but strive for a “fastest possible conversion into a GmbH”. Amongst other things, she argues that her company is designed for growth from the outset and that she wants to limit liability to company assets.

Another good example of what you can write about legal form is the business plan for a web development company, whose founders decided in favor of the rather unusual form of UG & Co. KG. In a brief overview, they outline the advantages and disadvantages of this legal form, showing their readers that they really know what they are getting into.

A special plus of their business plan, which they also kindly provided us with: They do without standard formulations and terminology, but describe the characteristics of the entrepreneurial society in their own words. For example, it is outlined as “confusing” instead of referring to the accounting obligation – because that’s exactly how it presents itself to many founders due to the accounting obligation.

The legal form decides how a company is structured

And the two founders of a software company have done an exemplary solution in their business plan: they not only devote their own chapter to the topic of legal form, but have also prefaced this with a separate section on the internal organization of their company – both are closely related. In it, they describe in detail how they share the tasks in the company as a shareholder, what methods they apply, when they hire staff and what kind of leadership style they set. A better look into the future company can not give its potential donors actually. Not surprisingly, their business plan – as well as the other two examples given here and any other plans you can find on Catherine Morland.de – has led to successful financing .

Which legal form is the right one?

To put it simply, the legal form of your formation is the sole proprietorship, a partnership or a corporation.

Each legal form has advantages and disadvantages. Before you decide on one of them, you should ask yourself these questions:

  • Am I alone or with others?
  • What will be the economic risk?
  • How much equity can I raise?

Man on swing is in balance

This entrepreneur is finished with her business plan chapter on legal form and therefore extremely happy.

These are the common legal forms for founders in detail

one-man business

The establishment of a sole proprietorship takes place unbureaucratically and quickly and is associated with low costs. You do not need any capital, but you are liable for all of your personal assets if things go wrong. Unless you explicitly opt for a different legal form, your startup will automatically run as a sole proprietorship.

If you want to start alone and small, without capital and with manageable risk, nothing speaks against starting as a sole proprietorship. Depending on the start-up plans, an asset or professional indemnity insurance may already be sufficient here to secure your private assets.

With your financiers, you can earn important benefits if you base your business plan on your choice with the low risk of your project and the low start-up costs of a sole proprietorship.

Civil law

As soon as you get together with one or more other partners, a community of civil law (GbR) arises. GbR is the simplest form of partnership. Special legal forms such as the Open Trade Company (OHG) or the limited partnership (KG) are based on it.

It is advisable to set up a shareholders’ agreement when founding a GbR, which regulates exactly how you divide the profits and losses among each other and who takes which tasks. This will save you from bitter disappointment in the case of a dispute.

The most important points from the contract you should necessarily explain in your business plan, because they are very interesting for your financiers! Before they promise you a financing, they want to know how you want to organize your business and who takes on the responsibility to what extent.

Attention: Even without a contract you are a GbR, as long as you do not specify otherwise. Each one of you is then with his private assets for the debts of the community and may have to pay for the mistakes of others ( here you will find out what pitfalls to observe in the GbR contract )!

Company with limited liability

The GmbH is one of the corporations and is very popular among founders as well as in general business transactions. Their biggest advantage is that liability is limited to the company’s share capital. Your private fortune is secure, usually even in case of bankruptcy.

This advantage, however, has its price. The start-up costs of a GmbH are comparatively high. This is not only due to the deposit, which is at least 12,500 EUR. There are various advisory, notary and court costs added, including for the certification of the articles of association and the entry of the company in the commercial register.

In addition, the accounting and accounting of a GmbH is subject to legal requirements and is associated with a high bureaucracy. Without a competent tax adviser at your side you are probably in the fix.

Anyone who wants to start a GmbH should be able to cite good arguments in his business plan. It is suitable for large and small companies alike, from a one-man business to a growth-oriented start-up. But the effort is especially worthwhile if a larger sum is to be invested anyway, if there are several shareholders and if dynamic growth with high profits and an equally high risk seems probable.

In individual cases, it may make sense to design the entrepreneurial entry as a GbR, only later – if the growth is safe – to change into a limited liability company.

Entrepreneurial company (limited liability)

In order to reduce bureaucratic and financial hurdles for start-up companies, the entrepreneurial company (UG) was introduced in 2008 as a small sister of the GmbH. It is suitable for manageable start-up projects with lower risk. As deposit enough already 1 Euro, because the capital of a “normal” GmbH can gradually be saved. This means that each year some of the profits remain in the company and are not paid until the total is reached. Like every corporation, the entrepreneurial company is accountable.

It can be converted into a GmbH by a shareholder resolution as soon as the accumulated share capital is at least EUR 12,500.

Tips for your business plan

There are many more legal forms with several forms and special forms. Surely you’ve heard of the Gemeinnützige GmbH (gGmbH) or of the GmbH & Co. KG. We do not want to open the big deal here, but show with the most common company forms that there are always arguments for and against a specific legal form.

It’s important that you let readers of your business plan share your thoughts on the subject and not limit yourself to recording the outcome of your consideration. Ideally, you’ll compare the pros and cons of several options to justify your decision.

Since the legal form can have a serious impact on the financing of your foundation, it is advisable to think about it at an early stage and, if necessary, to give advice. At Catherine Morland you can select a legal form under Preferences. Among other things, this affects your calculations on the display of private withdrawals – these are not provided for in corporations. If you are not sure yet, just skip this point and click “I do not know yet”.

As a rule of thumb, the more complex your business structure is and the higher the financial risk, the more detailed your business plan should be.

 

Good luck writing your business plan

Your Dr. Jan Evers

About the author Founding expert dr. Jan Evers is the owner of the consulting firm evers & jung in Hamburg. For ministries, banks and business development organizations, evers & jung GmbH has been developing concepts and solutions for entrepreneurs for more than 15 years that make entrepreneurship easier and more self-reliant.

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