The foundation costs of limited liability corporations

The (reasonable) foundation costs for a UG (limited liability) or limited can exceptionally be imposed on the company. This requires careful handling: Such shifting of costs to the company requires an explicit provision in the articles of association as well as a careful assessment if the costs are reasonable.

Background: Capital maintenance requirement also for the formation of the company

German law knows two kinds of limited liability corporations: the “classical” limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) and – since 2008 as smaller versions of GmbHs which can be founded with a smaller share capital – also entrepreneurial companies (Unternehmergesellschaft, UG).  As they are only liable with their capital and there is no liability of the shareholders, strict capital maintenance regulations apply to them in order to preserve the liability assets for the benefit of the company creditors. Therefore, in particular, all payments to the shareholders (or comparable measures such as the assumption of liabilities) are prohibited if they are not covered by a valid compensation or restitution claim).

This capital maintenance requirement already begins at the time of the company's foundation. The foundation costs - e.g. taxes, notarial costs, costs for entry in the commercial register and legal and tax consultancy costs (so-called formation expenses) – are costs of the shareholders. This means that, if the company bears such costs, this concerns the company’s capital maintenance. For this reason, the newly founded company is only allowed to pay the foundation costs itself under certain conditions. The details are repeatedly the subject of court decisions, for example, this year, of the Higher Regional Court of Hamm (OLG Hamm).

The decision of the OLG Hamm of February 16, 2021 (Ref. 27 W 130/20)

The case decided by the OLG Hamm concerned the foundation costs of an UG. The company had been established with a share capital of 3,000 euros. The articles of association provided that the formation expenses up to the amount of 2,500 euros were to be borne by the company. The commercial court objected to this high amount to which the company should bear the foundation costs and  refused to enter the foundation in the commercial register. The appeal against this decision was ultimately decided by the Higher Regional Court of Hamm which shared the commercial court’s view.

Practical advice

A number of decisions have already been issued on the reasonableness of the foundation costs, and the decision of the Higher Regional Court of Hamm is one of them. In principle, the following applies: The company may only assume the formation expenses if this is provided for in the articles of association. The individual expenses (notary costs, registration costs, etc.) and the total amount of the costs assumed must be specified in this provision. The specification of a lump sum is sufficient as long as it is not excessive (as in the case decided by the OLG Hamm where it reached 83 % of the company’s share capital). Usually the registry courts accept - at least in the case of GmbHs with the minimum share capital of 25,000 euros - costs up to the amount of 10% of the share capital. In the case of UGs - depending on the amount of the share capital - in some cases even higher amounts in percentage terms are accepted. As a rule, the assumption of the legally mandatory foundation costs (registration fees and notarization costs) remains unobjected to. However, it depends on each individual case.

If the foundation costs cannot be borne by the company, the shareholders continue to be personally responsible for payment. This therefore applies in particular to non-mandatory costs in connection with the (e.g. start-up costs for the company or the remuneration of the first managing directors).

In this respect, the articles of association are carefully reviewed by the registration courts. Ineffective provisions on start-up costs can - as in the case of the Higher Regional Court of Hamm - even prevent the company from being entered in the commercial register. Therefore, this topic should be dealt with carefully when drafting of the articles of association.