German Company Law: It was Time for change

In its August 8, 2009 edition, The Economist article on Germany (Unbalanced Germany) urged the country to use the current crisis as an opportunity to embrace economic reform. The article highlights that “Germans struggle to create companies,” and that “[s]tart-up capital is scarcer than it is elsewhere.”

 

Citing the World Bank’s “Doing Business 2009” report, the article also notes that Germany ranked 102 of 181 economies on the ease of starting a business.  This year, Germany is expected to move up in the ranking thanks to new reforms of business regulation.

 

Although it took more than 100 years, last year Germany approved a new regulation to reform the 1892 GmbH Law (MoMiG) that regulates the functions and rules of establishing Limited Liability Companies (LLC) -the most widely used legal framework.

Although the GmbH is Germany’s most common form of a limited liability company, the major issue with the GmbH Law was always the cumbersome and costly start up process. After three years debating the draft law, German lawmakers finally agreed on the need to strengthen the GmbH by substantially reducing the cost, time, procedures and minimum capital associated with starting a business.  

Germany’s recent reform is a huge departure from previous requirements for an entrepreneur to pay a minimum capital of € 25,000 (of which 12,500 € must be provided immediately at incorporation). With the new reform, it is possible to achieve GmbH-style limited liability with a minimum capital of € 1.00 encouraging more entrepreneurs to start up business and freeing the company assets for business-operations.

Germany faced both internal and external pressure to reform its LLC law. At home, the administrative and fiscal burden affected the number of entrepreneurs thinking of starting businesses in Germany pushing many of them to register their businesses in the UK because it was easier and cheaper to do so.

The European Court of Justice (ECJ) landmark-decision interpreting the freedom-of-establishment clause of the European Community Treaty spurred Germany and other European countries to action. The decision allowed businessmen to legally incorporate their businesses anywhere in the European Union, even if this happens for the sole reason of avoiding a stricter national corporate regime. In other words, businesses can establish a UK Ltd company and conduct business anywhere in Europe. Companies, therefore, can be established much faster, and, importantly, they do not need to pay any minimum share capital.

At the European Union level, much work has been done towards ensuring more harmonious LLC regulations to support Small and Medium- Sized Enterprises (SMEs). In June 2008, the European Commission  proposed the introduction of (Societas Privata Europaea) (SPE) as a legal form for companies of limited liability across the EU. It aims to remove the current need for limited companies to reincorporate themselves in the corresponding legal form in all the EU member countries in which they want to trade –which currently represents a substantial administrative burden for SMEs. The SPE company form will be introduced across the EU in July 2010.

It will be interesting to see the impact of these reforms on Germany’s entrepreneurs. For now, let us see the impact on Germany’s Doing Businesses ranking in the 2010 report –to be released on 9^th September, 2009. Stay tuned.