Choosing the right legal form for an online store is often a matter of liability risk, so it's no surprise that in 2020, according to Statistics around 55% of the 1000 largest online shops in Germany are run as GmbHs and a further 17.4 % as 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 trader wants to open a GmbH immediately upon foundation, therefore, 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 shop.
Whether Sole proprietorship or GbR, OHG, KG, AG, UG respectively Ltd The question of whether it makes sense to set up a company can only be answered by weighing up the liability risk, taxation and organisational costs. Accordingly, the various business forms always offer advantages and disadvantages for your entrepreneurial venture. In the following article we explain what you should pay attention to.
What are the legal risks for online retailers?
Unfortunately, operating an online shop is also associated with numerous risks that traders should consider in advance. Choosing the right legal form for the online shop is therefore primarily about legal protection for the entrepreneur. Therefore, the question necessarily arises as to which legal risks can arise for online traders in the first place.
Chief among the dangers are:
- Property damage
- personal injury and property damage
- Product damage and/or building damage (warehouse, office)
- IT security vulnerabilities and hacker attacks (e.g. also data protection breaches)
In the event of inadequate protection, damage to assets, persons and/or property can quickly jeopardise 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 due to 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 infringements of trademark rights and copyrights can endanger the assets of the retailer. The choice of the right legal form and sufficient insurance cover can reduce the risk and settle damages in this case.
Important criteria when choosing the legal form for an online shop
Before making a well thought-out decision on the choice of the right form of operation, some important questions need to be clarified. In this context, the following criteria are crucial:
- Which Liability risk exists?
- Are others Shareholder involved?
- With which Taxation and taxation do I have to calculate?
- Type of products: Can personal injury or property damage occur?
- With which Amount of turnover is to be expected?
- Who shall have Decision-making authority ?
- How much Equity can and do you want to raise?
- Is an Entry in the commercial register necessary?
- How high is the bureaucratic expenditure?
- Are Succession plans important for the company?
- Should further Investors be brought in?
Every online shop is different, so different characteristics play a role in the decision. In addition to the type of liability, the minimum capital, the entry in the commercial register and the start-up costs are also important for the online trader. The advantages and disadvantages of the individual types of business must always be evaluated with regard to the respective online shop with its individual characteristics (products, customers, turnover, etc.).
Which legal forms are possible for an online shop?
Anyone who operates an online shop is acting commercially. An online shop without a business is not legally possible; a business registration is necessary in advance. Then the desired legal form can be selected and all 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 into the e-commerce business, many merchants opt for a Sole proprietorship or the private company (GbR). However, the shareholders are personally liable for the liabilities of the company; this also applies to the registered merchant (e.K.) and the shareholders of general partnership (OHG).
In principle, you can run an online shop with a trade license, but if there is a high risk of liability, you should limited liability company (Ltd) or the Company (UG) as the legal form. In this case, the liability is limited to the assets of the company. With a GmbH & Co. KG the general partner's liability is limited to the company's assets and the limited partner's liability is limited to the contribution. With the Incorporated (AG), liability is limited to the shareholder's share.
Furthermore, there is the possibility to set up an online shop in the legal form of the 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 shop
The sole proprietorship is considered the simplest and most straightforward form of business and is already opened with a business registration, which is why 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 the sole proprietorship as the legal form of the online shop:
- 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 as of € 24,500 profit
- No profit sharing necessary (advantageous for loan requests from banks)
In contrast, some Disadvantages for the choice of a sole proprietorship:
- Financial risk due to unlimited liability with private assets
- Overload and over-indebtedness possible
Run an online shop as a registered trader (e.K.)
If a sole trader achieves a higher turnover than € 250,000 and has more than 5 employees, he is obliged to be entered in the commercial register. If required, however, this registration can also be made on request by the sole trader registering as a registered merchant (e.K.). However, this legal form is very rare for online shops, as it brings only a few advantages and the merchant is still liable with all of his private assets.
Those who need to be registered in the commercial register usually set up a business company (UG) or GmbH as a sole trader in order to benefit from limited liability.
As soon as more than two people join forces to run a commercial enterprise, a partnership can be formed. In this case, the online shop can be operated in the legal form of the Limited partnership (KG)that Civil law partnership (GbR) or as general partnership be managed. Unlike a corporation, a partnership is not a legal entity, i.e. the partners are personally and unrestrictedly liable with their private assets. With 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 up to the amount of his contribution.
In addition, however, there are further subtleties and special features to be taken into account for the individual forms of enterprise, which we explain below.
Online shop with a civil law partnership (GbR)
If an online shop is operated as a GbR, each partner must register a trade, as it is a trade requiring activity. A significant difference between the GbR and the other two forms of partnerships - OHG and KG - is that the GbR does not have to be entered in the commercial register and is subject to the BGB.
The online traders are considered to be two individual entrepreneurs who operate the shop together.
Characteristics of the civil law partnership (GbR):
- Shareholders are personally and unconditionally liable for liabilities
- Allocation of profits 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 declaration 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 as of € 24,500 profit
- No legal company, therefore no company and fantasy names possible
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 shop as general partnership (OHG)
In contrast to the GbR, a general partnership (OHG) requires the registration in the trade registerand one Articles of Association.
Features of the OHG:
- registration in the trade 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 OHG as the legal form for the online shop is worthwhile if several people want to act as equal partners.
Limited partnership (KG)
This type of company is rarely found in e-commerce. A limited partnership (KG) has a limited partner and several general partners, whereby the limited partner of the investors 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 founding the KG, the partners must negotiate a partnership agreement. In addition, each partner is obliged to register in the commercial register.
More Characteristics 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 such as the Company (UG), Limited liability company (GmbH)or Stock corporation (AG) are considered to be a corporation under private law, whereby the corporation as a legal entity has specific rights and obligations. The general conditions are regulated in the articles of association. In addition to the AG and the GmbH, Germany also has the Partnership limited by shares (KGaA).
With the foundation always share capital required; € 25,000 for the GmbH and € 50,000 for the AG and the KGaA.
Only the business corporation (UG) can be founded with a minimum capital of € 1. In the case of corporations, the Liability limited to business assets. With regard to taxes, corporations are required to Corporation tax obligated.
Company (UG (Limited))
Basically, a company limited by shares (UG (Limited)) around a so-called Mini-GmbH...since they have not been able to Certification, Entry in the commercial register, Liability and Taxation is similar.
Particularly practical, however, is the fact that the minimum capital contribution of € 25,000 does not apply and a Foundation with 1 €is possible. However, one must pay in at least 25 % of the profits as a reserve as share capital. As soon as 25,000 € of share capital are available, the UG (Limited) be converted into a GmbH by resolution. If you do not want to make any deductions with regard to the limitation of liability, you should form a UG (Limited) found.
This legal form is particularly interesting for online shops if they start their e-commerce business with little equity capital. Nevertheless, you should not do without share capital, as at least 1500 € should be available to be able to pay suppliers' invoices. Should you need financial support with the Financing of Goods Fulfin offers you interesting financing solutions at lucrative conditions.
Limited liability company (GmbH)
In online retail, the most popular legal form is the GmbH, all larger shops are operated in this legal form. In addition, the limited liability company has a long tradition and enjoys a good reputation in Germany, which is important to many online shop operators and their customers. Customers associate success and trust with a GmbH; it signals that it is a well-known, reputable and larger online company that is well established in e-commerce. It is always the right choice as the legal form for an online shop when there is a high liability risk.
Characteristics of a limited liability company:
- GmbH is a legal entity
- Flexibly formable partnership agreements
- limited liability
- Minimum capital of €25,000 required
- If there are 2 or more shareholders, the capital contribution can be split up.
- Entry in the commercial register
- Notarial certification
- liable to corporation 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 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 public limited company is a legal entity which is liable with its business assets and can be founded by one or more natural persons or legal entities. However, these do not have to be entered in the commercial register.
More Features of the public limited company:
- Minimum capital for the foundation is 50,000 € (division into shares)
- Articles of association are required
- The AG has statutory bodies (Management Board, Supervisory Board, Annual General Meeting)
- The Management Board is the unrestricted representative of the AG.
- The Supervisory Board is responsible for monitoring the Management Board
- The AG is liable to a limited extent with the company's assets; each shareholder is liable with his contribution.
- The AG is obliged to pay corporation tax and trade tax.
- Succession is easy as the company is transferable by sale of shares
Compared to the GmbH, an AG offers several advantages. Through an uncomplicated transfer of shares, shareholders can easily participate in the company and be admitted. Likewise, experts or business partners can be accepted as members of the supervisory board. 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 formalities involved in setting up a company, the high level of share capital, the obligation to appoint members to the company's governing bodies and auditing obligations.
Alternative "small AG
It has a smaller number of shareholders and can be founded by only one shareholder. It is granted facilitations with regard to the composition of the supervisory board and the 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, whereby his liability is limited 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 Advantagethat
- Shareholders can refrain 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 rather rarely chosen as the legal form for an online shop, there are still some shops with this business model.
Special legal forms for online shops
Furthermore, there are a few exotic company forms worth mentioning, which are seen rather less frequently. Nevertheless, we would like to mention them for the sake of completeness. Three further forms of partnership are the silent partnership, which 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 cooperativewhich 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 shop. Conceivable here are mergers of Ltd. & Co. KG, GmbH & Co. OHG or B.V & Co. KG.
If you expect a high liability risk and want to limit the risk of financial losses and private insolvency, you should set up a limited liability company. It is considered the safest legal form for an online shop. If the necessary start-up capital for founding a GmbH is lacking, new founders can alternatively form a company limited by shares (UG (Limited))with a small capital contribution.
However, if you as an online shop 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 in 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 innovative and uncomplicated financing options and hold many advantages over banks. Advantages ready for you. We know the business processes of e-commerce and - unlike banks - are not bound by rigid specifications, but evaluate the growth of your company based on the sales of the last three months.
Secure yourself now a simple and fast Corporate Financeso that nothing stands in the way of the growth and success of your online shop!
Which legal form for an online shop?
When choosing the right legal form for the online shop, traders are not limited. In e-commerce, you can simply register a trade and operate the shop as a sole trader. Furthermore, it is also possible to choose a general partnership, limited liability company or limited liability company as the form of business.
Which legal form for dropshipping?
The sole proprietorship is the simplest and most straightforward choice for many shop operators, but caution is advised with regard to liability. Even as a reseller, you are liable for the products of the suppliers. A sole trader would therefore be liable with his private assets. It is particularly critical with products that pose a risk of injury and that 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 shop operators decide to found a sole proprietorship.
Which legal form for Amazon FBA?
Similarly, the Amazon FBA the sole proprietorship is a popular choice, as the foundation and the bureaucratic effort are inexpensive and uncomplicated. Nevertheless, one should think more carefully about the liability risk and check whether the formation of a corporation is worthwhile.
What has to be considered with the different forms of law?
When choosing the optimal legal form for the online shop, 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.