Legal forms

Basic terms, individual entrepreneurs, civil law partnership, association and limited liablity company

Several legal forms are relevant when working in the performing arts, whether as an individual entrepreneur or as a group or collective. Which legal form is right for you and what the characteristics of a civil law partnership [Gesellschaft bürgerlichen Rechts (GbR)], limited liability company [Gesellschaft mit beschränkter Haftung (GmbH)] and entrepreneurial company [Unternehmergesellschaft (UG)] and a (registered) association are and the difference between self-employment and employment and between freelancers and traders is explained here.

Links

Freelance work:
Distinction between self-employment and employment [Abgrenzungskatalog]

Non-profit association:
Section 52(2)(5) of the German Fiscal Code [Abgabenordnung (AO)]

Non-profit limited liability company [gemeinnützige Gesellschaft mit beschränkter Haftung (gGmbH)] & non-profit entrepreneurial company [gemeinnützige Unternehmergesellschaft (gUG)]:
Section 51 et seq. of the German Fiscal Code

Basic terms

Self-employed persons and companies may use various legal forms. Some of these legal forms are explained below. They differ in by whom they are represented internally and externally as a so-called ‘body’, in their formation formalities, in the freedom to choose their name, in liability, in their ability to be considered non-profit, in their treatment for VAT and social security purposes, in whether they can be considered a trade and in the requirements for their articles of incorporation or articles of association.

  • Legal forms for formation by individuals include individual entrepreneur, limited liability company and entrepreneurial company with limited liability.
  • For groups or collectives, a civil law partnership, a limited liability company or an entrepreneurial company with limited liability or, if non-profit, a registered association or cooperative may be suitable.
Overview of legal forms for entrepreneurs. Alone: individual entrepreneur; limited liablity company/entrepreneurial company. Several: civil law partnership; association; limited liability company/entrepreneurial company; cooperative.
© Graphic: Panatom

To understand the various legal forms, two distinctions must be clear: between freelancers and traders and between self-employment and employment.

Freelancers and traders

Common misconception: self-employed is not the same as ‘freelance’—a trade is also a form of self-employment. The difference between a trade and freelance works is twofold:

Regulatory law: Traders must register with the Trade Licensing Office [Gewerbeamt] and become a member of the chamber of commerce and industry [Industriehandelskammer (IHK)] or Chamber of Crafts and Trades [Handwerkskammer]. Freelancers only have to register with the tax office.

Tax law:

  • Trade income is defined in Section 15 of the German Income Tax Act [Einkommensteuergesetz (EStG)] and, in theatre, includes selling drinks, books or DVDs and, normally, production management.
  • Freelance income is defined in Section 18 of the German Income Tax Act and includes services requiring higher education. The law specifies professions which are considered freelance if performed through self-employment, including artistic work.

Benefits of freelance work: Freelancers don’t have to …

  • … pay trade taxes 
  • … prepare financial statements
  • …. use double-entry bookkeeping (required of traders whose revenue exceeds EUR 600,000 or profit exceeds EUR 60,000)
  • … register their trade
  • … join a chamber of commerce and industry
  • … argue as much with the Artists’ Social Insurance Fund which checks the eligibility of traders more strictly
Difference between traders and liberal professionals
© Graphic: Panatom
Careful when combining trade and freelance income

Although trade and freelance income is not always clearly distinguished, the tax office treats all income as trade income. An exception is only made if trade income does not exceed EUR 24,500 and 3% of total income (German Federal Fiscal Court judgment of 27 August 2014, VIII R 16/11).

The income of a civil law partnership consisting of a director, dancer and set designer (who are all freelancers) may therefore be considered trade income due to the involvement of a production manager (who is a trader). Experts speak of the ‘infection’ of freelance income with trade income or the ‘staining’ of the freelance share by the trade character.

This problem can be solved by systematically separating such income. Splitting a mixed civil law partnership into two companies may provide clarity.

Self-employment and employment

Typical features of self-employment:
  • Self-employed persons bear entrepreneurial risk. Their fee may therefore claim part of the admission fee.
  • Self-employed persons bear entrepreneurial risk. Their fee may therefore claim part of the admission fee.
  • Self-employed persons perform their work freely. They don’t merely follow instructions, such as for costumes.
  • Self-employed persons have their own manpower. This allows them to serve several clients.

Employees, by contrast, are integrated into their company and receive instructions from their employer about the tasks, place, length and time of their work. They also usually don’t use their own work equipment.

The exact distinction differs depending on whether it is made for employment law, social security law or tax law.

Difference between employed and self-employed
© Graphic: Panatom

Social security obligations of self-employed persons and employees differ:

  • Employees must pay mandatory contributions. Health, nursing care, pension and unemployment insurance contributions are split between the employee and the employer.
  • Self-employed persons must pay mandatory health and nursing care insurance contributions, but pay their contributions themselves, even when insured by their statutory health insurance provider voluntarily. Self-employed artists, however, receive health, nursing care and pension insurance from the Artists’ Social Insurance Fund and only have to pay half of their contributions themselves.

Caution: False self-employment cannot be prevented by calling a service contract that results in employment subject to social security obligations a work contract. The actual contractual relationship is what matters.

With certain self-employed artists there are often conflicts about status. According to the distinction between self-employment and employment of the German Pension Insurance [Deutsche Rentenversicherung (DRV)], performers must even be employed for guest performances or shorter bookings. However, directors are considered freelancers. Performers who want to be self-employed must phrase their contracts carefully. The text should state that both parties agreed on the rehearsal times, will develop the play together, etc.

Further information

The law firm Laaser provides additional information on its website:

  • Information about preparing contracts between venues and artists
  • Information about a judgment of the Gotha Social Court which confirms the false self-employment of a performer at a theatre who was integrated into the company
  • Another judgment of the same court which ruled an actress who only had to perform on 2 dates to be a freelancer

Questions and answers:

  • The Detmold Social Court has since ruled on the status of another opera singer. The judges did not feel bound by the decision of the German Federal Court of Labour (Detmold Social Court, 26 May 2014 – S 7 R 614/10). The German Federal Court has not ruled on the matter and the conflict between the labour courts and the social courts remains unresolved. The Parsifal decision only has limited application because it referred to a well-known singer who received few instructions.

    The Detmold Social Court has since ruled on the status of another opera singer. The judges did not feel bound by the decision of the German Federal Court of Labour (Detmold Social Court, 26 May 2014 – S 7 R 614/10). The German Federal Court has not ruled on the matter and the conflict between the labour courts and the social courts remains unresolved. The Parsifal decision only has limited application because it referred to a well-known singer who received few instructions.

Individual entrepreneur

This status is obtained when permanently or regularly carrying out artistic work, being paid for it and performing on the market. If you perform such work alone and did not choose another legal form, you are an individual entrepreneur.

  • The formation requires a contractual commitment to self-employed work for a fee. Freelancers must register with the tax office, traders with the Trade Licensing Office.
  • Individual entrepreneurs are naturally represented by themselves. Contracts with and invoices to themselves are not possible. However, internal receipts may be used as proof of use of funds if necessary.
  • The name under which individual entrepreneurs market themselves must include their legal name. This applies, e.g. to business correspondence, invoices and website imprints. However, a work description or made-up name may be added (‘Paula Miller Theatre Costume Design’).

Question and answers:

  • To do so, you may either found a company and remain self-employed on the side, or you can conclude a cooperation agreement and form a civil law partnership not recognizable to the public. However, only one self-employed representative may represent you and conclude funding agreements. Liability may be shared internally. Be sure to determine what to do in case of claims, e.g. due to copyright infringements or if funds are requested back.

    To do so, you may either found a company and remain self-employed on the side, or you can conclude a cooperation agreement and form a civil law partnership not recognizable to the public. However, only one self-employed representative may represent you and conclude funding agreements. Liability may be shared internally. Be sure to determine what to do in case of claims, e.g. due to copyright infringements or if funds are requested back.

Be aware of trademarks when choosing your name!

Whether a company’s name may be entirely made up or must include the first and last name of all partners depends on the legal form. If you choose a made-up name, please be sure that it is not already used by another company or a registered trademark.

You can check this on the German Company Register or the DPMAregister. Tips are also provided by the Chamber of Commerce and Industry Berlin.

  • Individual entrepreneurs are personally liable to the full extent of their assets for obligations from self-employment.
  • Non-profit purposes are excluded for individual entrepreneurs.
  • VAT requirements depend on the work performed.
    Individual entrepreneurs may also request VAT exemption for theatres (Section 4(20)(a) of the German VAT Act). VAT also does not have to be paid by small businesses if the previous year’s revenue does not exceed EUR 22,000 and revenue of no more than EUR 50,000 is projected for the current calendar year (Section 19 of the German VAT Act). What matters is revenue, not profit! Real grants are not considered revenue. Small businesses may nonetheless choose to pay VAT to receive input tax refunds.

Civil law partnership [Gesellschaft bürgerlichen Rechts (GbR)]

A civil law partnership is a partnership with legal personality that consists of at least 2 partners who may be natural or legal persons.

  • Bodies of a civil law partnership: The partners are jointly responsible for management, make decisions unanimously and represent the civil law partnership together. However, (simple or qualified) majorities may be required and individual partners may be given powers of representation in the partnership agreement.
  • Formation: A civil law partnership that engages in entrepreneurial activities must be registered with the tax office and, if applicable, with the Trade Licensing Office. However, its establishment does not require an intentional formal formation act. It is automatically created as a non-publicly-recognizable civil law partnership, even without such intent, if 2 or more persons pursue joint aims. If they all act as representatives, a publicly-recognizable civil partnership will also be created—with full liability (see above).
Non-publicly-recognizable civil law partnership Publicly-recognizable civil law partnership
  • Specifications for internal organisation
  • Only 1 representative
  • All partners and their connection to the company are visible to the public 

 

A written civil law partnership agreement is not required, but useful in practice. Without such an agreement, requesting funds or opening an account may be difficult. Name rights, copyrights and profit distribution may also be specified. The legal provisions that apply without such an agreement will not help a civil law partnership.

  • Name: A civil law partnership is a partnership with legal personality that does not have to be registered. The name may not be completely made-up and must include the first and last name(s) of the partner(s), such as ‘Paula Miller Peter Mayer Traumtanz GbR’.
  • Liability: The partners of a civil law partnership are jointly liable, i.e., all are personally liable to the extent of their assets for all obligations of the partnership. Every partner of a civil law partnership may be liable for debts caused by another partner.

    ►►► Liability risk: One partner causes the civil law partnership debts. The creditors contact the other partners
     
  • Non-profit purposes are excluded for civil law partnerships as partnerships with legal personality.
  • VAT requirements: Civil law partnerships are subject to VAT taxation. If the revenue of the entire civil law partnership is less than the small business limit (see above), its transactions are exempt from VAT. Civil law partnerships may also qualify for VAT exemption for theatres under Section 4(20)(a) of the German VAT Act.
    If partners of a civil law partnership also perform self-employed work, the revenue of the civil law partnership will not affect their personal small business status and vice versa. These are two separate processes for VAT.
  • Profit distribution: Unless stipulated otherwise, legal provisions apply: all partners, irrespective of the work performed, are equally entitled to the profit of the civil law partnership which will be paid at the end of the calendar year.
    Profit may only be distributed based on the work performed if specified in the partnership agreement or decided by a resolution.
  • Withdrawal: In addition to distributing profit, private withdrawals may also be made during the year if permitted by a resolution or the partnership agreement. Such withdrawals will be deducted from the profit distributed at the end of the year.
Civil law partnership: equal or unequal distribution of profits among all members
© Graphic: Panatom
  • Resignation: Under the German Civil Code, any partner may resign from a civil law partnership. If there is no continuation clause in the partnership agreement, the partnership will then be dissolved. A civil law partnership will be liquidated when all partners except for 1 have left, unless the rights and obligations of the civil law partnership are transferred to the only remaining person who will then become an individual entrepreneur.
  • Social security: Profit distributions of civil law partnerships do not require Artists’ Social Insurance Fund contributions, even if artistic work is performed. This is often the motivation for forming a civil law partnership: if a choreographer hires a self-employed dancer for her performances, the fee will be subject to Artists’ Social Insurance Fund contributions. But if they form a civil law partnership, the dancer can remain self-employed without having to pay such contributions. Of course, this does not apply to false self-employment.
    Civil law partnership partners who perform artistic work may be insured under the Artists’ Social Insurance Fund. In a civil law partnership, the rule that persons insured under the Artists’ Social Insurance Fund may employ no more than one employee permits every partner to employ one employee.

Questions and answers:

  • As explained above, all partners will then be entitled to equal shares, e.g. of what is left of admission fees, artists’ compensation and funding after deducting all expenses. If the amount of time and work required differ, this may easily lead to conflict! Such disputes are common if no or a sample partnership agreement is used to form the civil law partnership.
    A lawyer or tax advisor can help adjust profit distribution rules. If the civil law partnership receives funding, a resolution may be worded as follows, ‘Profit shall be distributed according to the proportion of the cost items specified in the funding application.’ This phrasing ensures that not only funding, but also additional income will be distributed ‘according to the proportion’ of the share of the work.
    New distribution rules may also be decided each year. However, profit may not be distributed according to the number of hours or days worked because this represents compensation for a service.

    As explained above, all partners will then be entitled to equal shares, e.g. of what is left of admission fees, artists’ compensation and funding after deducting all expenses. If the amount of time and work required differ, this may easily lead to conflict! Such disputes are common if no or a sample partnership agreement is used to form the civil law partnership.
    A lawyer or tax advisor can help adjust profit distribution rules. If the civil law partnership receives funding, a resolution may be worded as follows, ‘Profit shall be distributed according to the proportion of the cost items specified in the funding application.’ This phrasing ensures that not only funding, but also additional income will be distributed ‘according to the proportion’ of the share of the work.
    New distribution rules may also be decided each year. However, profit may not be distributed according to the number of hours or days worked because this represents compensation for a service.

  • To illustrate this, imagine a loan from which the profit share is repaid at the end of the year. But first, the withdrawals are deducted from the distributed share of the profit. If this results in a loss, all withdrawals must be repaid to the civil law partnership.

    To illustrate this, imagine a loan from which the profit share is repaid at the end of the year. But first, the withdrawals are deducted from the distributed share of the profit. If this results in a loss, all withdrawals must be repaid to the civil law partnership.

  • You should adjust your profit distribution rules. Otherwise, they will stay as specified in the partnership agreement. To change the distribution rules, simply have all partners sign a resolution stating, ‘Profit distribution is adjusted as follows …’ You could also formally amend your partnership agreement, depending on whether you intend to change your distribution rules for only 1 year or permanently. Any changes must be reported to the tax office for your profit distribution to be taxed correctly.

    You should adjust your profit distribution rules. Otherwise, they will stay as specified in the partnership agreement. To change the distribution rules, simply have all partners sign a resolution stating, ‘Profit distribution is adjusted as follows …’ You could also formally amend your partnership agreement, depending on whether you intend to change your distribution rules for only 1 year or permanently. Any changes must be reported to the tax office for your profit distribution to be taxed correctly.

  • No, withdrawals are made and profit is distributed based on resolutions or partnership agreement provisions which serve as evidence, e.g. for funders.

    No, withdrawals are made and profit is distributed based on resolutions or partnership agreement provisions which serve as evidence, e.g. for funders.

  • Although profit, if paid, is deducted from the parental allowance for each month of parental leave, this is not done if the person on parental leave declines profits and withdrawals. This was confirmed by the German Federal Social Court (German Federal Social Court, 13 December 2018 – B 10 EG 5/17 R). However, profit may then not be distributed after the parental leave ends.

    Although profit, if paid, is deducted from the parental allowance for each month of parental leave, this is not done if the person on parental leave declines profits and withdrawals. This was confirmed by the German Federal Social Court (German Federal Social Court, 13 December 2018 – B 10 EG 5/17 R). However, profit may then not be distributed after the parental leave ends.

  • Yes. For example, while serving as a partner of the civil law partnership, this person may also perform self-employed work and request funding in this capacity. This way, only this person will be liable if funds are requested back. However, Artists’ Social Insurance Fund contributions will be charged if part of the funds are provided to other partners of the civil law partnership. Be sure to determine how the imprint applies and who will be liable.

    Yes. For example, while serving as a partner of the civil law partnership, this person may also perform self-employed work and request funding in this capacity. This way, only this person will be liable if funds are requested back. However, Artists’ Social Insurance Fund contributions will be charged if part of the funds are provided to other partners of the civil law partnership. Be sure to determine how the imprint applies and who will be liable.

Business account problems

Business accounts of civil law partnerships with many partners may cause problems. For example, an account may be needed to receive funds on short notice, but the account application has to be signed by all partners.

In such cases, the civil law partnership should first be formed by only 2 persons. Other partners may be added later.

Advantages and disadvantages of civil law partnerships:

The advantages are preventing Artists’ Social Insurance Fund contributions and VAT taxation of profits and working together without false self-employment.

The biggest disadvantage is personal liability, e.g. for damages or repaying funds. Non-profit purposes are also not possible and naming choices are as limited as for individual entrepreneurs.

Civil law partnership advantages Civil law partnership disadvantages
  • Less work
  • No Artists’ Social Insurance Fund contributions
  • No VAT
  • Self-employment
  • Every partner liable
  • No non-profit purposes
  • Limited naming choices

 

Association [Verein (registered (e.V.) and unregistered)]

An association is a structured organisation established for an indefinite period of time for the pursuit of a common purpose. A registered association is a legal person and therefore has legal capacity.

An unregistered association is a partnership with legal personality and organised like a corporation and similar to a civil law partnership in certain aspects. Similar rules apply to their legal capacity.

  • Bodies: An association has at least 2 bodies: the general meeting and the board. The highest body of an association is the general meeting. The board consists of one or more persons. Other bodies may be added, such as an advisory board. The exact composition and competences of the board are specified by the articles of association which may define the board chairperson as the managing director responsible for internal management and external representation, e.g. for transactions. The board and management may also be separate. In this case, the managing director may be appointed as a special representative (Section 30 of the German Civil Code) to represent the association externally.
Overview of different organs of a (registered) association
© Graphic: Panatom

Formation:

  • A registered association must have 7 members during its formation and at least 3 members thereafter. The inaugural meeting will appoint at least one board chairperson and decide on articles of association. These must be certified by a notary and submitted to the association register of the local court.

Important: The articles of association should be submitted to the tax office for corporations before the inaugural meeting. Points that may prevent non-profit purposes may then be changed without a general meeting or certification by a notary.

  • An unregistered association only needs 3 members. Once registered, neither certification by a notary nor articles of association are necessary.
  • Name: Associations may have made-up names—but be sure to check that these aren’t already registered trademarks.
  • Liability: Members of a registered association are largely exempt from liability. However, the board and the association are jointly liable, i.e., even board members may be personally liable to third parties and to the association. Further information is provided at https://www.vereinsrecht.de/persoenliche-haftung-von-vereinsorganen.html. Members and the board of an unregistered association are personally liable, but only for the obligations into which they entered.
  • Non-profit purposes: Both registered and unregistered associations may be recognized as non-profit associations if they exclusively and directly serve public-benefit, charitable or religious purposes. The ‘advancement of art and culture’ is recognized as a non-profit purpose under German law (Section 52(2)(5) of the German Fiscal Code[U1] ). The non-profit purpose must be specified in the articles of association and implemented by management.

Important: Non-profit purposes may depend on the details. Support artists (instead of art) or renting space for cultural presentations does not qualify. The advantages of a non-profit association are the tax benefits. Non-profit associations are not subject to trade or corporate taxation of regular association activities, asset management or dedicated activities. However, commercial activities, such as selling drinks at theatre performance, may be subject to trade or corporate taxation, though only if the generated income exceeds EUR 45,000 (Section 64(3) of the German Fiscal Code).

  • VAT:
    • Regular association activities of non-profit associations are exempt from VAT.
    • Asset management and dedicated activities (e.g. a theatre association selling tickets or producing enactments) are subject to reduced VAT. Dedicated activities of theatres may be exempt from VAT under Section 4(20)(a) of the German VAT Act.
    • Commercial activities are subject to normal VAT taxation. The small business provision may also apply if its requirements are met (see above).
  • Volunteer and trainer flat rate: Associations may pay a trainer flat rate, which is tax and contribution-free for up to EUR 3,000 per calendar year (Section 3(26) of the German Income Tax Act), to trainers and group leaders and for artistic work. Non-artistic work may also be compensated at the volunteer flat rate for up to EUR 840 per year.

Important: The board chairperson may only be paid the volunteer flat rate if expressly permitted by the articles of association. Further information is provided on the website of the law firm Laaser.

Questions and answers:

  • Yes, the contract must be updated. Otherwise, she will only be entitled to EUR 2,400.

    Yes, the contract must be updated. Otherwise, she will only be entitled to EUR 2,400.

  • Yes. However, the board chairperson’s remuneration must be specified in the articles of association. Otherwise, the tax office may view this as non-compliance with non-profit purposes.

    Yes. However, the board chairperson’s remuneration must be specified in the articles of association. Otherwise, the tax office may view this as non-compliance with non-profit purposes.

Traps in articles of associations for the board chairperson:

  • The board chairperson may only be remunerated if expressly permitted by the articles of association.
  • Remuneration must be appropriate. Payment up to the volunteer flat rate is not a problem. But if the articles of association require greater remuneration, you may have to talk to the tax office.
  • If members of the board start working more as part of the association’s professionalization, their employment should be reviewed. Otherwise, work integrated into the association’s operations and compensated through a fee agreement may result in false self-employment. Because the highest body is the general meeting, board members are bound to instructions.

Advantages and disadvantages of associations:

Associations are suitable for non-profit, but not entrepreneurial purposes. To earn money through artistic work, you must be a company or an individual entrepreneur.

Associations are structured very democratically and offer participation in a number of activities. Joining and leaving is also easy.

However, associations may experience fluctuations and the admission of new members cannot be limited. Board members can only be dismissed by the general meeting.

Compared to registered associations, there is little advantage to unregistered associations which are only useful as easily-formable preliminary organisations, e.g. to meet application deadlines.

Registered association advantages Registered association disadvantages
  • Democratic structure
  • Non-profit purposes
  • Participation open to many
  • Frequent fluctuations
  • Not limited to a specific group
  • Commercial restrictions for non-profit purposes (use of funds)

 

Limited liability company [Gesellschaft mit beschränkter Haftung (GmbH)] and entrepreneurial company with limited liability [Unternehmergesellschaft (UG) (haftungsbeschränkt)]

Like an entrepreneurial company with limited liability, a limited liability company is a legal person, always commercial, dependent on its business activity, required to prepare financial statements and may have a single shareholder. Shareholders’ liability is limited to their capital contribution.

Shareholders ►►► own and make the rules of the limited liability company

Managing directors ►►► manage the company’s day-to-day operations

 

Both functions may be performed by one person!

  • Bodies: Limited liability companies and entrepreneurial companies have at least a shareholders meeting and management as their bodies. Other bodies, such as a supervisory board or advisory board, are possible. Management represents the company and is legitimized by the company’s register entry.
  • Managing directors may or may not be shareholders, but require a management service agreement.
    • German tax law normally classifies shareholding managing directors as employees who must therefore pay income tax. Under EU law, managing directors are also entitled to paid leave and continued remuneration in case of illness.
    • Whether managing directors must pay contributions must be determined. Non-shareholding managing directors are always employees and must therefore pay contributions. Whether shareholding managing directors must pay contributions depends on whether they are bound to instructions or may prevent resolutions at shareholders meetings, e.g. by holding the majority of shares or having a blocking minority. Shareholding managing directors of a one-person company are therefore exempt from contributions. If there are no social security obligations, Artists’ Social Insurance Fund contributions must be paid for fees for primarily artistic work.

Risk of false self-employment

A realistic example: A civil law partnership consisting of 5 performers transforms into a limited liability company. The performers all become shareholding managing directors. A status assessment of the German Pension Insurance then finds this to be employment requiring contributions because every shareholder can be outvoted. The limited liability company must therefore pay the missing contributions.

This could have been prevented if the articles of incorporation allowed all shareholders to block resolutions passed by a simple majority. If the shareholders also have sole power of representation and the ability to contract with themselves (Section 181 of the German Civil Code), they will be considered self-employed under German social security law. This may be confirmed by an assessment of the German Pension Insurance.

  • Formation:
    • Forming a limited liability company requires articles of incorporation that must be certified by a notary. The limited liability company and its managing directors must be registered in the commercial register. The minimum share capital is EUR 25,000. EUR 12,500 may also be enough for formation, though the shareholders will be jointly and personally liable for the missing amount. It is therefore better to pay the necessary EUR 25,000 immediately, if possible, to limit liability.
    • Forming an entrepreneurial company with limited liability (‘small limited liability company’) requires a share capital of no more than EUR 1. However, a quarter of annual profit must be invested in the share capital. After generating EUR 12,500, the entrepreneurial company may be transformed into a limited liability company.
  • Names: Because limited liability companies and entrepreneurial companies with limited liability must be registered, they may have made-up names. However, check for trademark infringements first!
  • Liability:
    • The liability of a limited liability company is limited to the company’s assets. After the share capital is fully paid, liability of its shareholders will be limited to their contribution to the share capital.
    • However, managing directors will be liable in case of breaches of duty and negligence, such as failing to pay taxes or contributions or not filing for bankruptcy. In such cases, managing directors may be personally liable. Protection is available in form of D&O insurance.

Liability at limited liability companies

Shareholders ►►► are only liable to the extent of their capital contributions

Managing directors ►►► may easily be personally liable for negligence and mistakes (risks!)

  • Non-profit purposes: If the purposes of the articles of incorporation are non-profit (Section 51 et seq. of the German Fiscal Code), a limited liability company may be non-profit as a non-profit limited liability company [gemeinnützige Gesellschaft mit beschränkter Haftung (gGmbH)] or non-profit entrepreneurial company [gemeinnützige Unternehmergesellschaft (gUG)].
  • VAT: Limited liability companies and entrepreneurial companies may use the small business provision if they stay below the income limit. If such companies provide theatre services, they may also request VAT exemption under Section 4(20)(a) of the German VAT Act. Otherwise, they will be subject to VAT.
    Profit distributions of limited liability companies to shareholders are not subject to VAT. However, managing directors’ remuneration that does not require social security contributions is subject to VAT if the managing directors are not small businesses.
  • Articles of incorporation: The articles of incorporation of a limited liability company specify management provisions, such as the number and authority of managing directors, and may require, e.g. transactions exceeding EUR 10,000 to be completed jointly by two managing directors. Such requirements only apply internally and are not binding on third parties. Another common feature of articles of incorporation is a settlement when leaving the company.

Two ways to be paid

Limited liability companies may distribute their profit among shareholders or use fee or managing service agreements to pay their managing directors—and shareholders. This is an important difference to civil law partnerships which cannot employ their own partners.
Paying fees or remuneration instead of distributing profit has the advantage of being exempt from trade taxes.

► Profit distributions to shareholders

► Remuneration of freelancers and managing directors who may be shareholders

Low profit ►►► No corporate or trade taxes!


 

Joining the Artists’ Social Insurance Fund despite performing commercial activities

For tax purposes, a limited liability company always performs commercial activities—even if it provides artistic services. Nonetheless, a limited liability company’s managing directors or shareholders who perform artistic work may be insured under the Artists’ Social Insurance Fund.

 

Questions and answers

  • Yes, the artistic work may be paid for separately through a fee agreement. However, the fee must be appropriate and should be agreed in advance, e.g. in a framework agreement. Otherwise, there may be accusations of a constructive dividend which may require back taxes. Such separation makes invoicing easier, but will lose the health and nursing care insurance of the Artists’ Social Insurance Fund if management’s remuneration exceeds EUR 450 per month. If profit is distributed to a self-employed shareholding managing director under such an arrangement, Artists’ Social Insurance Fund contributions will not be charged. However, this profit may be considered income from artistic work which may increase Artists’ Social Insurance Fund contributions (further information is provided by the law firm Laaser).

    Yes, the artistic work may be paid for separately through a fee agreement. However, the fee must be appropriate and should be agreed in advance, e.g. in a framework agreement. Otherwise, there may be accusations of a constructive dividend which may require back taxes. Such separation makes invoicing easier, but will lose the health and nursing care insurance of the Artists’ Social Insurance Fund if management’s remuneration exceeds EUR 450 per month. If profit is distributed to a self-employed shareholding managing director under such an arrangement, Artists’ Social Insurance Fund contributions will not be charged. However, this profit may be considered income from artistic work which may increase Artists’ Social Insurance Fund contributions (further information is provided by the law firm Laaser).

  • Tax advisory costs depend on the company’s revenue and the advisor’s hourly rate. Nonetheless, the formation and accounting of a limited liability company are more expensive than those of a civil law partnership. Whether this is compensated by the liability privileges and other benefits must be decided by you.

    Tax advisory costs depend on the company’s revenue and the advisor’s hourly rate. Nonetheless, the formation and accounting of a limited liability company are more expensive than those of a civil law partnership. Whether this is compensated by the liability privileges and other benefits must be decided by you.

  • Difficult to say without more information. Perhaps the funder wrongly assumed the ‘appointed managing director’ to be ‘self-employed under employment law’? However, this is unjustified because power of representation does not affect employment.

    Difficult to say without more information. Perhaps the funder wrongly assumed the ‘appointed managing director’ to be ‘self-employed under employment law’? However, this is unjustified because power of representation does not affect employment.

Advantages and disadvantages of limited liability companies:

Limited liability companies may appear more legitimate than civil law partnerships. They can also claim funding that is only available to legal persons and may pursue non-profit purposes. Unlike associations, they may also have fixed and distinct structures. Limited liability companies and entrepreneurial companies may also be formed by a single person. If the articles of incorporation are solid, the risk of managing directors’ false self-employment is lower than at associations.

The greatest advantage is liability: shareholders’ liability is limited to their share capital contributions. Shareholders are not liable for other shareholders or mistakes of management. Managing directors are not liable for third-party claims, except in case of negligence.

The disadvantage: possible personal liability, especially of shareholding and non-shareholding managing directors. The formation and accounting of limited liability companies are also more expensive than those of civil law partnerships and usually require tax consultation.

For small-scale performer collectives with manageable business risk, a limited liability company doesn’t have to be the only suitable legal form. But this must be determined by the individual circumstances.