Gesellschaft mit beschränkter Haftung (GmbH) is a type of legal entity very common in Germany (where it was created in 1892), Austria (adopted in 1906), Switzerland, and other Central European countries. It is governed by a federal law called "GmbH-Gesetz" (GmbH law) [1] [2].
Literally translating as company with limited liability, the concept mit beschränkter Haftung inspired the creation of the limited liability company form in other countries. The name of the GmbH form emphasizes the fact that the owners (Gesellschafter, also known as members) of the entity are not personally liable for the company's debts. Other variations include mbH (used when the term Gesellschaft is part of the company name itself), and gGmbH (gemeinnützige GmbH) for non-profit companies.
The GmbH has become the most widespread company form in Germany, since the AG (Aktiengesellschaft), the other major company form corresponding to a stock corporation, was until recently much more complicated to form and operate.
It is widely accepted that a GmbH is formed in three stages: the founding association, which is regarded as a private partnership with full liability of the founding partners/members; the founded company (often qualified with "i.G.", meaning "in Gründung"); and the fully registered GmbH. Only the registration of the company in the Commercial Register (Handelsregister) provides the GmbH with its full legal status.
The founding act and the articles of association have to be notarized. The GmbH law outlines the minimum content of the articles of association, but it is quite common to have a wide range of additional rules in the articles.
Under German law, the GmbH must have a minimum founding capital of €25,000, of which 25% but at least €12,500 has to be contributed by its members (when the GmbH has only one member the law is even stricter regarding the required capital contribution). A supervisory board (Aufsichtsrat) is required if the company has more than 500 employees, otherwise the company is run only by the managing directors (Geschäftsführer) who have unrestricted proxy for the company. The members acting collectively may restrict the powers of the managing directors by giving them binding orders. In most cases, the articles of association list the business activities for which the directors must obtain prior consent from the members. Under German law, a violation of these duties by a managing director will not affect the validity of a contract with a third party, but the GmbH may hold the managing director in question liable for damages.
Because a legal entity with liability limited to the contributed capital was regarded in the 19th century as something dangerous, German law has many restrictions unknown to common law systems. A number of business transactions have to be notarized, such as transfer of shares, issuing of stock, and amendments to the articles of association. Many of those measures have to be filed with the company registry where they are checked by special judges or other judicial officers. This can be a tiresome and time-consuming process as in most cases the desired measures are only legally valid when entered into the registry. Because there is no central company registry in Germany but rather several hundred connected to regional courts, the administration of the law can be rather different between German states.