Mistakes When Forming a GmbH: Five Classic Pitfalls That Undermine Limited Liability

In many cases, a GmbH (German limited liability company) is formed precisely so that its shareholders are not personally liable. Yet it is during the formation phase that mistakes are made which undermine exactly this protection – often unnoticed, and only years later, for instance in insolvency, with full force. Five classic pitfalls:

1. The money is paid in too early: Before the application for registration with the commercial register (Handelsregister), at least one quarter must have been paid in on each share, and in total at least half of the minimum share capital (§ 7 Abs. 2 GmbHG), i.e. EUR 12,500. Many founders transfer the money before the notary appointment. This is risky: before notarisation, there is not yet a company to which payment can be made. For advance payments made in connection with capital increases, the Federal Court of Justice (BGH) requires that the amount still be available, unchanged, in the company’s assets at the relevant point in time (judgment of 15 March 2004 – II ZR 210/01). Whether, and under which conditions, this applies to the formation stage has not been conclusively settled. In the worst case, the contribution has to be paid a second time. The only safe course: notarise first, then pay into an account of the GmbH in formation (GmbH in Gründung).

2. Contracts concluded before registration: Until it is registered, the GmbH does not exist “as such” (§ 11 Abs. 1 GmbHG). Anyone who concludes tenancy agreements, leasing agreements or employment contracts in its name beforehand is personally liable (§ 11 Abs. 2 GmbHG). In addition, the founders are liable to the company for losses incurred before registration; if the share capital has already been wholly or partly used up at the time of registration, they must make up the shortfall (BGH, judgment of 27 January 1997 – II ZR 123/94). The share capital is therefore already “tied up” before registration – anyone who depletes it through early transactions will ultimately pay for it themselves.

3. The money flows straight back (Hin- und Herzahlen): If the GmbH pays the contribution back to the shareholder as a loan shortly after it has been paid in, the shareholder is only discharged if the GmbH has a fully recoverable repayment claim that is due at any time or can be called in without notice (§ 19 Abs. 5 GmbHG). Otherwise, the contribution remains outstanding.

4. A cash contribution that is in fact a contribution in kind (verdeckte Sacheinlage): A typical case: the shareholder pays in EUR 25,000, and the GmbH then buys his vehicle or office equipment from him. Economically, he has thereby contributed an asset without complying with the rules for contributions in kind. He remains obliged to make the cash contribution; the value of the asset is merely credited against it (§ 19 Abs. 4 GmbHG). If the asset was worth less, he must pay the difference – and the burden of proving its value lies with him (§ 19 Abs. 4 S. 5 GmbHG).

5. The false declaration: When applying for registration, the managing director must declare that the contributions have been made and are finally at his free disposal (§ 8 Abs. 2 GmbHG). If this is incorrect, the shareholders and managing directors are liable to the GmbH for the missing amounts (§ 9a Abs. 1 GmbHG). False statements are also a criminal offence, punishable by imprisonment of up to three years or a fine (§ 82 Abs. 1 GmbHG).

Conclusion: Most formation mistakes arise not from intent but from haste. Those who keep to the correct sequence – notarise, pay in, apply for registration, and enter into major obligations only after registration – and have any payments back to shareholders reviewed in advance preserve the limited liability for which they formed the GmbH in the first place.