Choosing the right legal form for an online store is often a question of liability risk, so it is not surprising that in 2020, according to statistics, around 55% of the 1,000 largest online stores in Germany will be run as a GmbH (limited liability company) and another 17.4% as a GmbH & Co KG. Those who rely on limited liability and a certain degree of protection are therefore well protected with a UG or GmbH.
However, not every retailer wants to open a GmbH immediately upon formation, so in addition to the liability risk, other factors such as company size, equity, type of products, taxation and number of shareholders play an important role in choosing the right legal form for your online store.
Whether a sole proprietorship or a GbR, OHG, KG, AG, UG or GmbH makes sense can only be determined by weighing up the liability risk, the taxation and the organizational effort. Accordingly, the different business forms always offer advantages and disadvantages for your entrepreneurial venture. In the following article we will explain what you should pay attention to.
What are the legal risks for online retailers?
Unfortunately, running an online store also comes with numerous risks that merchants should consider in advance. Choosing the right legal form for the online store is therefore primarily about legal protection for the entrepreneur. Therefore, the question necessarily arises as to what legal risks can arise for online retailers in the first place.
The main dangers include:
- Property damage
- Personal injury and property damage
- Product damage and/or building damage (warehouse, office)
- Theft
- IT security vulnerabilities and hacker attacks (e.g., also data protection breaches)
In the event of insufficient coverage, financial, personal or/and property damage can quickly jeopardize the existence of a company, which is why it is important to choose the right legal form in e-commerce right from the start. If sensitive customer data falls into the wrong hands as a result of hacker attacks or if defective products injure the consumer, claims for damages of several thousand euros can arise.
Likewise, theft, damage to the warehouse, or trademark and copyright infringement can put the retailer’s assets at risk. In this case, choosing the right legal form and having sufficient insurance coverage can reduce the risk as well as settle claims.
Important criteria when choosing the legal form for an online store
Before making a well-thought-out decision on choosing the right form of operation, some important questions need to be addressed. In this context, the following criteria are crucial:
- What is the liability risk?
- Are other shareholders involved?
- What taxation and taxes should I expect?
- Type of products: Can personal injury or property damage occur?
- What level of sales can be expected?
- Who should have the decision-making authority?
- How much equity can and do you want to raise?
- Is an entry in the commercial register necessary?
- How much bureaucracy is involved?
- Are succession plans important for the company?
- Should additional investors be brought in?
Every online store is different, so different features play a role in the decision. In addition to the type of liability, the minimum capital, the entry in the commercial register and the formation costs are also important for the online trader. In this context, the advantages and disadvantages of the individual types of business must always be evaluated with regard to the respective online store with its individual characteristics (products, customers, sales, etc.).
Which legal forms are possible for an online store?
Anyone who operates an online store is acting commercially. An online store without a business is not legally possible; a business registration is required in advance. Then the desired legal form can be chosen and all the necessary steps can be taken. A distinction is made between limited and unlimited liability companies and the type of business (sole proprietorship, partnership, corporation).
For a quick and uncomplicated start in the e-commerce business, many merchants opt for a sole propriet orship or a civil-law partnership(GbR). However, the partners are personally liable for the liabilities of the company; this also applies to the registered merchant(e.K.) and the partners of the general partnership(OHG).
In principle, you can operate an online store with a trade license, but if there is a high liability risk, you should choose the limited liability company(GmbH) or the business corporation(UG) as the legal form. In this case, liability is limited to the assets of the company. In the case of a GmbH & Co. KG, the liability of the general partner is limited to the company’s assets and, in the case of the limited partner, to the contribution. In the case of a stock corporation(AG), liability is limited to the shareholder’s share.
Furthermore, it is possible to run an online store in the legal form of a limited partnership(KG), whereby there is also personal liability for at least one general partner.
The sole proprietorship as a legal form for the online store
The sole proprietorship is considered the simplest and most straightforward form of business and is already opened with a business registration, so it is very popular with online retailers. Although the sole proprietor is personally liable with his private assets for all liabilities, there are also some advantages to consider the sole proprietorship as the legal form of the online store:
- No minimum capital required for incorporation
- Low bureaucratic effort
- Sole decision-making power and disposal of business assets
- No consultation with partners necessary; decisions can be made quickly
- Uncomplicated bookkeeping and tax declaration through income surplus accounting (double-entry bookkeeping or balance sheet accounting from € 50,000 profit)
- Trade tax from € 24,500 profit
- No profit sharing necessary (advantageous when requesting loans from banks)
In contrast, some disadvantages speak for the choice of a sole proprietorship:
- Financial risk due to unlimited liability with private assets
- Overload and over-indebtedness possible
Operate an online store as a registered trader (e.K.)
If a sole proprietor achieves a higher turnover than € 250,000 and has more than 5 employees, he is obliged to register in the commercial register. If required, however, this registration can also be made on request by the sole proprietor registering as a registered trader (e.K.). However, this legal form is very rare for online stores, as it has few advantages and the merchant is still liable with all his private assets.
Those who need to register in the commercial register usually set up a business company (UG) or GmbH as a sole proprietor in order to benefit from limited liability.
Partnerships
As soon as more than two persons join together to run a commercial enterprise, a partnership can be formed. In this case, the online store can be run in the legal form of a limited partnership (KG), a civil partnership (GbR) or as a general partnership (OHG ). Unlike the corporation, the partnership is not a legal entity, i.e. the partners are personally and unrestrictedly liable with their private assets. In a limited partnership (KG), however, only the general partner has unlimited and personal liability; the limited partner has limited liability and is only liable for liabilities to the extent of his contribution.
Furthermore, however, there are further subtleties and special features to be taken into account for the individual company forms, which we explain below.
Online store with a civil law partnership (GbR)
If an online store is operated as a partnership under civil law (GbR), each partner must register a business, as this is a trade-related activity. An essential difference of the GbR to the other two forms of partnerships – OHG and KG – is that the GbR does not have to be registered in the commercial register and is subject to the BGB.
The online traders are considered two individual entrepreneurs who operate the store together.
Characteristics of the civil law partnership (GbR):
- Shareholders are personally and unconditionally liable for liabilities
- Profit distribution among the shareholders
- GbR is managed under joint management of all managing directors
- The GbR is subject to trade tax
- No share capital or shareholders’ agreement necessary
- Bookkeeping and tax return with income statement (double-entry bookkeeping or balance sheet accounting from € 50,000 profit)
- After the end of the financial year, the profit shares of the shareholders must be determined and reported separately
- Trade tax from € 24,500 profit
- No legal company, therefore no company and fantasy names possible
Note
As soon as the GbR generates a turnover of more than € 250,000, has more than 5 employees and business assets of more than € 125,000, it becomes a (OHG).
Online store as general partnership (OHG)
Unlike the GbR, a general partnership (OHG) requires entry in the commercial register anda partnership agreement.
Features of the OHG:
- Entry in the Commercial Register
- No share capital
- Incorporation by notarization of a notary
- Partnership agreement between the shareholders
- Management by several managing directors
- Liability of shareholders with private and business assets
- Higher creditworthiness due to liability with private and business assets
- Legally valid company name, i.e. the shareholders can choose a company name
- Annual financial statements including balance sheet necessary
- Trade tax liability
Choosing the general partnership as the legal form for the online store is worthwhile if several people want to act as equal partners.
Limited partnership (KG)
This type of company is rather rare in e-commerce. A limited partnership (KG) has one limited partner and several general partners, whereby the limited partner is the capital provider of the company and is liable with the contribution. In contrast, the general partner has unlimited liability with his contribution and his private assets. When establishing the KG, the partners must negotiate a partnership agreement. In addition, each shareholder is required to register in the Commercial Register.
Other features of a limited partnership (KG):
- Unlimited liability of the general partner with business and private assets
- Limited liability for the limited partner with his contribution
- No minimum capital required for incorporation
- The company capital is the contributions of the shareholders
- The general partner is the management, which can assign the limited partner the company representation or procuration
- Subject to balance sheet and trade tax
Corporations
Corporations such as the Unternehmensgesellschaft (UG), Gesellschaft mit beschränkter Haftung (GmbH)or Aktiengesellschaft (AG) are considered to be private law entities, whereby the corporation as a legal entity has specific rights and obligations. The general conditions are regulated in the partnership agreement. In addition to the AG and the GmbH, there is also the Kommanditgesellschaft auf Aktien (KGaA) in Germany.
Share capital is always required for formation; €25,000 for the GmbH and €50,000 for the AG and KGaA.
Only the business company (UG) can already be founded with a minimum capital of € 1. In the case of corporations, liability is limited to the business assets. With regard to taxes, corporations are subject to corporate income tax.
Company (UG (haftungsbeschränkt))
Basically, a business company (UG (haftungsbeschränkt)) is a so-called mini-GmbH, as it is similar to it in terms of notarization, entry in the commercial register, liability and taxation .
What is particularly practical, however, is that the minimum capital contribution of €25,000 is no longer required and a foundation with €1 is possible. However, at least 25% of the profits must be paid in as a reserve as share capital. As soon as € 25,000 of share capital is available, the UG (haftungsbeschränkt) be converted into a limited liability company by resolution. If you do not want to make any deductions with regard to the limitation of liability, you should set up a UG (haftungsbeschränkt) found.
This legal form is particularly interesting for online stores if they are setting up their e-commerce business with little equity. Nevertheless, share capital should not be dispensed with, as at least €1500 should be available to pay suppliers’ invoices. If you need financial support for the financing of goods, Fulfin offers you interesting financing solutions at lucrative conditions.
Limited liability company (GmbH)
In online retailing, the most popular legal form is the limited liability company (GmbH); all larger stores are operated in this legal form. Moreover, the limited liability company has a tradition and enjoys a good reputation in Germany, which is important to many online store operators as well as their customers. Customers associate a limited liability company with success and trust; it signals that it is a reputable, serious and larger online company that is well established in e-commerce. It is always the right choice as the legal form for an online store when there is a high liability risk.
Features of a limited liability company:
- GmbH is a legal entity
- Flexible partnership agreements
- Liability limited to the company’s assets
- Minimum capital of € 25,000 required
- In case of 2 or more shareholders, it is possible to split the capital contribution
- Entry in the commercial register
- Notarial certification
- liable for corporate income tax and trade tax
- subsequent sale of the company is uncomplicated
Anyone who expects a high liability risk or wants to negotiate loans with lenders should establish a GmbH. Although the liability is limited, the managing director is liable with his private assets if he violates the articles of association or breaches his duty of care. Due to the limited liability of the GmbH, the private liability of the managing director is often assumed when taking out financing.
Stock corporation (AG)
Similarly, a joint stock company is a legal entity which is liable with its business assets and can be established by one or more natural persons or legal entities. However, these do not have to be entered in the commercial register.
Other features of the joint stock company:
- Minimum capital for the foundation is € 50,000 (division into shares)
- Partnership agreement is required
- The AG has statutory bodies (Management Board, Supervisory Board, Annual General Meeting)
- The unrestricted representative of the AG is the Executive Board
- The Supervisory Board is responsible for monitoring the Executive Board
- The AG is liable to a limited extent with the company assets; each shareholder with his contribution
- The AG is obliged to pay corporate income tax and trade tax
- Succession is simple, as the company is transferable by sale of shares
Compared to the GmbH, an AG offers some advantages. Through an uncomplicated transfer of shares, shareholders can easily participate in the company and be included. Likewise, the Supervisory Board may include experts or business partners as members. Furthermore, there are more possibilities for raising equity capital and the image is better than with a GmbH.
The disadvantages include, above all, the extensive formation formalities, the high share capital, the obligation to appoint board members and audit obligations.
Alternative “small AG
It has a smaller number of shareholders and can be formed by only one shareholder. It is granted relief with regard to the composition of the Supervisory Board and disclosure requirements. Furthermore, it is not listed on the stock exchange.
GmbH & Co KG
A combination of two corporate forms is the GmbH & Co. KG, in which the unlimited liability of the general partner is replaced by the GmbH as a legal entity. Accordingly, the GmbH assumes the liability of the general partner, which limits his liability to the share capital or company assets of the GmbH. This is not a corporation, but a special form of partnership.
A GmbH & Co. KG offers the advantage that
- Shareholders can hold back from operational business, but still invest
- Debt and equity is more flexible
- The succession of the partners in the event of the death of the general partner is regulated
Disadvantages of the GmbH & Co.KG are:
- High start-up costs for two companies
- High organizational and bureaucratic effort
Although the GmbH & Co.KG is rarely chosen as the legal form for an online store, there are still some stores with this business model.
Special legal forms for online stores
Furthermore, there are still some noteworthy exotic company forms that are seen rather less frequently. Nevertheless, we would like to mention them for the sake of completeness. Three other forms of partnership are the silent partnership, the partnership company (PartG) and the partnership company with limited professional liability (PartG mbB). However, the silent partnership is not a trading company.
Another special case is the registered cooperative, which is neither a partnership nor a corporation. It is suitable for medium-sized companies as a cooperation model.
Similar to the GmbH & Co. KG, other company forms can be combined, which would also be a possible choice for the legal form of an online store. Conceivable here are mergers of Ltd. & Co. KG, GmbH & Co. OHG or B.V & Co. KG.
Conclusion
Anyone who anticipates a high liability risk and wants to limit the risk of financial loss and personal insolvency should establish a limited liability company. It is considered the safest legal form for an online store. If the necessary start-up capital for the formation of a GmbH is lacking, new founders can alternatively open a business company (UG (haftungsbeschränkt))with a small capital contribution.
However, if you as an online store operator are afraid that a UG (haftungsbeschränkt) will enjoy less prestige than the traditional GmbH (limited liability company) due to the low share capital contribution, Fulfin can support you with the expansion of your trading company with the help of financing. Effective financing is one of the most important success factors in e-commerce. We offer you innovative and uncomplicated financing options and have many advantages over banks in store for you. We know the business processes of e-commerce and – unlike banks – we are not bound by rigid specifications, but evaluate the growth of your company based on the sales of the last three months.
Secure simple and fast business financing now so that nothing stands in the way of the growth and success of your online store!
FAQ
Which legal form for an online store?
When choosing the right legal form for the online store, traders are not limited. In e-commerce, you can simply register a business and operate the store as a sole proprietor. Furthermore, there is also the possibility to choose an OHG, UG or GmbH as a company form.
Which legal form for dropshipping?
Sole proprietorship is the easiest and most straightforward choice for many store owners, but caution is advised regarding liability. As a reseller, you are also liable for the products of the suppliers. A sole proprietor would therefore be liable with his private assets. It becomes particularly critical with products where there is a risk of injury and which do not comply with EU standards or have the necessary certificates.
What are the most common legal forms in e-commerce?
In Germany, the most common legal forms in e-commerce are the sole proprietorship and the GmbH. Due to the low bureaucratic effort, many online store operators decide to establish a sole proprietorship.
Which legal form for Amazon FBA?
Likewise, with Amazon FBA, sole proprietorship seems to be a popular choice, as the startup as well as the red tape is inexpensive and straightforward. Nevertheless, one should think more carefully about the liability risk and check whether the establishment of a corporation is worthwhile.
What must be considered with the various legal forms?
When choosing the optimal legal form for the online store, many factors play an important role, e.g. the liability risk, the number of shareholders, the taxation, the amount of turnover, the amount of equity and the bureaucratic effort.