Set up a gGmbH company in Germany

| Date: 03.04.2023

Germany has a highly competitive business environment that attracts entrepreneurs and investors from around the world. The country is renowned for its advanced infrastructure, highly skilled workforce, and stable political and economic system. One of the most popular company forms for entrepreneurs to set up in Germany is the GmbH, a limited liability company. The GmbH has earned a strong reputation with investors and businesspeople because of its flexible structure, limited liability, and favourable tax treatment.

However, an alternative form of GmbH has gained popularity among entrepreneurs in recent years: the gGmbH. The "g" in gGmbH stands for "gemeinnützig," which means charitable or nonprofit. A gGmbH is a limited liability company that operates on a nonprofit basis to pursue a charitable cause rather than generating distributable profits. This type of company is highly attractive to entrepreneurs who want to create a positive social impact while benefiting from the legal and financial advantages of a GmbH.

What are the differences between a gGmbH and a GmbH?

For entrepreneurs and businesspeople looking to start a nonprofit organisation in Europe, it can be an attractive option to set up a gGmbH in Germany. As a unique form of GmbH, it combines the benefits of limited liability with the ability to operate as a charitable organisation.

The gGmbH formation process in Germany is similar to that of a regular GmbH. The company requires a minimum share capital of 25,000 EUR, with at least half of this amount (12,500 EUR) paid in at the time of formation. You can find other requirements and information in our article on GmbH formation in Germany, linked here.

What sets the gGmbH apart from a regular GmbH is the "g" at the beginning of its name. This "g" stands for "gemeinnützig," which means "nonprofit" in German. This designation allows the gGmbH to operate as a charitable organisation and provides certain tax advantages.

While foundations are another popular option for nonprofit organisations in Germany, they can be quite complex to set up and maintain. On the other hand, the gGmbH is a more straightforward structure that is easier to establish and manage.

One of the main advantages of the gGmbH is that it can be partially or fully exempted from corporate taxes. This can provide significant cost savings for the organisation and allow it to direct more resources towards its charitable activities. To qualify for tax exemption, however, the gGmbH must meet certain requirements and demonstrate that its activities are in the public interest.

In addition to tax benefits, the gGmbH offers other advantages for nonprofit organisations. For example, it allows for the distribution of profits to shareholders, which can be an important incentive for investors and supporters. At the same time, it provides a legal framework for ensuring that the organisation's resources support charitable purposes and that its activities are transparent and accountable.

In conclusion, the gGmbH is a compelling option for entrepreneurs and businesspeople looking to establish a nonprofit organisation in Germany. Combining the benefits of limited liability with the ability to operate as a charitable organisation provides a flexible and cost-effective structure for pursuing philanthropic goals.

Nonprofit gGmbH in Germany

Requirements of the establishment of a gGmbH

In Germany, a gGmbH is a special form of a limited liability company that operates as a nonprofit organisation. While the basic requirements for forming a gGmbH are similar to those of a regular GmbH, there are certain additional obligations that entrepreneurs need to fulfil in order to set up a gGmbH in Germany.

One of the crucial requirements for forming a gGmbH in Germany is to obtain nonprofit status from the tax office. This status is granted based on the activities and purposes of the organisation and determines the company's exemption from corporate income tax and trade tax. Entrepreneurs need to apply for nonprofit status at the time of formation and provide all the necessary documentation to the tax office to receive a positive decision. Without this status, no gGmbH can be founded.

Once the gGmbH is established, the profits generated by the company can only be used in two ways. Firstly, they can be retained within the company and reinvested in its activities. Secondly, they can be donated to other nonprofit organisations, associations or foundations. This means that shareholders of a gGmbH cannot distribute profits among themselves, which is a fundamental difference from a regular GmbH.

Like other charitable forms worldwide, the gGmbH includes an "asset lock" in the articles of incorporation. In the event of a gGmbH dissolution, all of the company's assets would transfer to a nonprofit organisation. This regulation ensures that the company's resources are used for charitable purposes and aligned with its nonprofit objectives.

Shareholders of a gGmbH who want to receive remuneration for their work must become employees or managing directors of the company. As the company is nonprofit, the shareholders can only pay themselves a salary. However, the salary must be reasonable and not exceed market standards. It must also comply with the 'arm's length' principle, which means that it must reflect the actual value of the work performed and not be excessively high.

Who Should Start a gGmbH in Germany?

The gGmbH is a type of GmbH that exists to serve a social or charitable purpose, which makes it eligible for tax-exempt status. This is one of the most important and distinctive requirements - that the company's purpose must be exclusively charitable or social. This means you must establish the company to promote the common good rather than generate profits for shareholders or owners. Some common examples of social or charitable purposes include environmental protection, education, and public health.

Another requirement is that the company's profits can only be reinvested in the social or charitable purpose of the organisation or (if the company is dissolved) distributed or donated to another charitable organisation. This means that while you can pay yourself a fair salary, any surplus the company generates cannot be distributed to shareholders or owners as dividends but must be used to further the company's social or charitable goals.

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How to Start a gGmbH in Germany?

To form a gGmbH, you must follow the same steps as setting up a regular GmbH in Germany. You will need to draft articles of association, have them notarised, and register the company with the commercial register. You will need to fulfil additional requirements to qualify for gGmbH status, and you will still need to observe all the usual requirements of Germany's decentralised incorporation process.

If you meet all of the requirements to start a gGmbH in Germany, you can benefit from several tax breaks and exemptions available to this form, such as the exemption from corporate income tax and trade tax, potentially leading to significant savings. Donations to gGmbHs are also tax-deductible for the donor, making it potentially easier to attract funding for your social or charitable projects.

To summarise, while setting up a gGmbH in Germany follows similar procedures to the ordinary formation of a GmbH in Germany, entrepreneurs must fulfil additional requirements and obligations because it is a nonprofit organisation. Obtaining nonprofit status, adhering to the restrictions on profit distribution, and following the guidelines for salaries are crucial aspects that entrepreneurs need to consider when starting a gGmbH.

Bottom Line

If you want to do something good for society and do not want to act profit-oriented but also benefit from tax breaks up to complete tax exemption, forming a gGmbH in Germany may be a good option for you. While additional requirements exist, the benefits of gGmbH status can make it a worthwhile investment for social entrepreneurs and charitable organisations.