Why Do the Majority of German Businesses Prefer to Structure Their Companies as GmbH Instead of AG ?

The majority of German businesses prefer to structure their companies as GmbH rather than AG. In this article, we will explore why German businesses generally opt for GmbH, focusing on the key differences between GmbH and AG.

In most European legal systems, the predominant forms of companies operating with shares are the private limited liability company and the stock corporation.In Germany, the form of private limited liability company is called GmbH (Gesellschaft mit beschränkter Haftung) and the form of stock corporation is called AG (Aktiengesellschaft).Generally, the private limited liability company tends to be more widespread, although stock corporations are also reasonably common.For example, the number of stock corporations in European jurisdictions such as France, Switzerland and Turkey all exceed 100.000 while the number of AG-type companies in Germany does not even reach 20.000. Conversely, the popularity of GmbH is notably higher, with over a million companies of this type in Germany.

The reason for the vast discrepancy between the number of AG and GmbH type companies results from the peculiar legal infrastructure of company law in Germany.In most European jurisdictions, the main legal provisions relevant to companies are to be found under a comprehensive Company Code. Germany on the other hand has a multitude of legal instruments for the regulation of companies. The GmbH is governed by the Limited Liability Companies Act (GmbH-Gesetz) while the AG is governed by the Stock Corporation Act (Aktiengesetz). The vastly different presumptions made by these two pieces of legislation explain why the GmbH is much more suitable to most German businesses compared to the AG.

The main difference between the Aktiengesetz and the GmbH-Gesetz is that the Aktiengesetz is much more restrictive and makes a lot of assumptions about how an AG is to be run. Below are some of the main differences which show that the GmbH is the more appropriate form in a majority of cases

  1. Flexibility: § 23 para. 5 of the Aktiengesetz restricts the articles of association ofan AG as it only permits deviations from defaults found in the Act when the Actexplicitly permits so. A GmbH on the other hand has more freedom to design itsarticles of association, which can be tailored to the specific needs and goals ofthe company. A GmbH can also make changes to its share capital, shareholders,and management more easily than an AG, which has to follow stricter rules andprocedures.
  2. Cost: The amount of share capital required to set up a GmbH is €25.000 whilethe amount necessary for an AG is €50.000. The setting up and the operation ofa GmbH will also be simpler and cheaper as the disclosure and reportingobligations of a GmbH are not as complicated as an AG.
  3. Control: The default management structures of a GmbH and an AG arefundamentally different. The AG has a two-tier board system which consists of amanagement board and a supervisory board. The management board isresponsible for running the company while the supervisory board is responsiblefor monitoring the management of the company. One of the main functions of thesupervisory board is its veto right over the decisions of the management boardthrough a resolution. There is a hard separation between the two organs as themanagement board cannot delegate its duties to the supervisory board. Also, amember of one of the boards cannot be a member of the other. The shareholdershave limited influence on the running of an AG as they can only affect therunning of the company through the two boards or the general assembly. Thislegally prescribed governance scheme cannot be modified. The GmbH has amuch more flexible management structure and is not subject to a mandatory two-tier board system like the AG. The default control structure is the shareholdersinstructing the managing directors. If they wish, the shareholders can intervene inthe day-to-day operation of the company.
  4. Privacy: A GmbH can keep its affairs more private compared to an AG.Publication requirements for the GmbH are not as heavy in comparison.
  5. Transferability of shares: A GmbH and an AG have different degrees of sharetransferability. A share of a GmbH is not freely transferable, as it requires theconsent of other shareholders of the company, and the transfer must benotarized and registered in the Commercial Register. An AG share, on the otherhand, is more easily transferable, as it can be done by a simple agreement, or bytrading on the stock exchange, if the company is listed. An AG share can also beissued in different forms, such as bearer shares, registered shares, or preferenceshares, which can have different rights and privileges attached to them.

As evident, GmbH proves to be a significantly more flexible and versatile structure when compared to AG. While the private limited liability company is typically more suitable for small and medium-sized enterprises in numerous jurisdictions, GmbH stands out as an all-encompassing structure adaptable to virtually any scenario. Remarkably, there are instances where even companies with hundreds of thousands of employees and tens of billions in revenue opt for the GmbH form.