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Founding a non-profit limited liability company (gGmbH)

Would you like to pursue a charitable cause as a“social entrepreneur“? But you are not sure how to realise your project?

Then you may be wondering whether setting up a non-profit limited company (gGmbH) is an option. In a gGmbH, you can make a contribution to the common good and pursue complex projects with determination.

What exactly is a gGmbH?

The non-profit GmbH (gGmbH) is a special form of GmbH (limited liability company) that pursues exclusively and directly non-profit purposes and for this reason enjoys tax advantages. A commercial business may only ever be run on a small scale and may not make a loss.

The purpose of the company is important for the recognition of non-profit status (Section 52 of the German Fiscal Code). Simply put, the gGmbH must pursue a charitable purpose in all its activities.

This also means that their goal is not economic and that there can be no profit for the founders at the end of the day. This results in restrictions on the use of any profit made, which cannot simply be distributed. Similarly, salaries must always be in proportion to the company’s performance and are therefore usually lower.

gGmbH foundation: The most important facts in brief

  • The gGmbH is a special form of GmbH
  • Non-profit status means that exclusively and directly charitable purposes are pursued; only then does the GmbH enjoy tax advantages
  • There is no corporation tax, trade tax or inheritance tax, so there is also no solidarity surcharge
  • The gGmbH may be exempt from VAT or subject to a reduced tax rate of 7 percent under certain circumstances
  • The articles of association of the gGmbH must be notarised, as with any GmbH
  • As with every GmbH, the share capital is at least EUR 25,000
  • The gGmbH must be entered in the commercial register
  • You must register a business
  • The articles of association must specify the charitable purpose and also contain the selflessness of all participants
  • Profits may not be distributed to the shareholders
  • Salaries must not be too high and must always serve the fulfillment of the charitable purpose

What is meant by non-profit status in a gGmbH?

The normal GmbH has a clear intention to make a profit. In contrast, gGmbHs focus on the common good, just like other non-profit legal forms such as charitable associations and foundations. Without exception, its profits must be used for the charitable purposes defined in the articles of association.

The tax office checks the non-profit status. The tax benefits only apply if the tax office confirms the non-profit status. The legal basis for the requirements for non-profit status can be found in the German Fiscal Code (AO ), namely in Sections 51 ff. AO.

The charitable purpose must be clearly defined in the articles of association. § Section 52 AO contains a list of fields of activity that are considered charitable. These include, for example (not exhaustive!):

  1. The promotion of science and research
  2. Promotion of youth and elderly care
  3. The promotion of animal welfare
  4. The promotion of sport

You must observe the following points so that your GmbH can be classified as a non-profit organisation:

  1. Your company must selflessly promote the general public and must not pursue any self-serving economic goals
  2. Your entrepreneurial activity may only serve to fulfill the non-profit purpose of the company
  3. Profits may not be distributed to the shareholders, nor may salaries be disproportionately high
  4. If you dissolve your gGmbH, its assets must be transferred to another non-profit entity; they may not be paid out to the shareholders

Of course, your gGmbH must really be a non-profit organisation. That means you actually have to do something for the general public. It is not enough for the articles of association to state a charitable purpose. Your work must be selfless, i.e. you may not pursue any selfish economic goals – not even in secret. This means that profits only ever benefit the charitable purpose. They may not be distributed to you or to potential investors. You cannot circumvent this restriction by paying a higher salary, as salaries must not be disproportionately high.

How do you set up a non-profit limited company?

In principle, the formation process for a non-profit GmbH is the same as for a traditional GmbH. We explain the details of the start-up process in our Checklist for Founders series. However, you should always consult experts when setting up a gGmbH. Because without charitable status, you cannot benefit from the tax advantages. Only a detailed consultation will give you a realistic assessment of whether you can achieve non-profit status with your project.

Here you will find the most important steps for founding your non-profit GmbH:

  • Formulation of your business idea

Especially when founding a non-profit GmbH, you should formulate your project as concretely and clearly as possible in advance. This is the only way for experts to check whether the requirements for non-profit status are met. You also need to think specifically about financing your project. Investors cannot make any profits with the gGmbH. With the exception of individual lighthouse projects, investors will have no interest in participating.

  • Drawing up the articles of association

Your articles of association must be drawn up correctly in order for you to achieve non-profit status. The articles of association should clearly define the charitable purpose and the activities intended to achieve it. The tax office will also look at the articles of association when examining the non-profit status. It is therefore advisable to seek advice from experts.

  • Examination of the shareholders’ agreement by the tax office

You can ask the tax office responsible for you to check your partnership agreement in advance. This will give you an assessment of whether your articles of association meet the requirements for non-profit status before the notary appointment.

  • Notarisation of the articles of association by a notary

The articles of association must be notarised. If not all founders are able to attend in person, an online foundation is possible. You can find out more here.

  • Payment of the capital contribution into the business account

After the notary appointment, you must open a business account into which the share capital is paid. At least an initial contribution of EUR 12,500 must be made in cash when the company is founded.

  • Entry in the commercial register and the transparency register

Once you have paid in the share capital and submitted proof of this to the notary’s office, the notary can arrange for your gGmbH to be entered in the commercial register.

  • Registering your business

You must register a business with the local trade office in order to officially start your activity.

  • Receive your tax number

You also need a tax number and a VAT ID. There is a questionnaire for tax registration, which you must complete and submit to the relevant tax office.

  • Registration of the gGmbH with the IHK or, if applicable at the HWK

You must register with the relevant IHK and/or, if applicable register with the relevant Chamber of Crafts. Compulsory membership is independent of the non-profit status of your company.

Conclusion:

The gGmbH is an option for social entrepreneurs who want to serve the general public without economic ulterior motives. A GmbH only receives non-profit status if its articles of association meet certain requirements. You must be aware that you cannot derive any private economic success from a gGmbH. Selflessness is the motto. You should also clarify the financing beforehand because it will be very difficult to attract investors for your gGmbH.

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