Founding a Non-Profit Limited Liability Company (gGmbH)

You would like to pursue a charitable purpose 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 liability company (gGmbH) is an option. In a gGmbH, you can contribute to the common good and pursue complex projects with determination.

What Exactly Is a gGmbH?

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

The purpose of the company is important for the recognition of non-profit status (§ 52 of the Tax Code). Simply put, the gGmbH must pursue a non-profit purpose in everything it does.

This also means that its purpose is not economic and at the end of the day there can be no profit for the founders. 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: The Most Important Facts in Brief

- The gGmbH is a special form of the GmbH

- Non-profit status means that only such purposes are pursued which are exclusively and directly charitable; only then does the GmbH have tax advantages

- There is no corporation tax, trade tax or inheritance tax; accordingly, there is no solidarity surcharge

- Under certain circumstances, the gGmbH can be exempt from turnover tax or be subject to a reduced tax rate of 7 percent

- The articles of association of the gGmbH must be notarised, as with any GmbH

- As with any GmbH, the share capital must be at least 25,000 euros

- The gGmbH must be entered in the commercial register

- You must register your business

- The articles of association must specify the charitable purpose and also contain the selflessness of all participants

- Profits must not be distributed to the shareholders

- Salaries must not be too high and must always serve the fulfilment of the charitable purpose

What Is Meant by Non-Profit Status in a gGmbH?

The normal GmbH has a clear profit-making intention. With the gGmbH, on the other hand, the focus is on the common good, just as with other non-profit legal forms, for example non-profit associations and foundations. Their profits must, without exception, go to the charitable purposes set out in the articles of association.

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

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

- the promotion of science and research

- the promotion of youth and old people's welfare

- the promotion of animal welfare

- the promotion of sport

The following points must be observed for your GmbH to be classified as a non-profit organisation:

1. Your company must selflessly promote the general public and may not pursue any selfish economic goals

2. Your business activities may only serve to fulfil the charitable purpose of the company

2. Your entrepreneurial activities must exclusively serve the fulfilment of 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 and may not be paid out to the shareholders.

Of course, your gGmbH must also be genuinely non-profit-making. This means that you must actually do something for the general public. It is not enough that the articles of association state a charitable purpose. And your activities must be selfless, i.e. you must not pursue any selfish economic goals - not even on the quiet. Thus, profits only 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, because salaries may not be disproportionately high.

How Do You Set up a Non-Profit Limited Liability Company?

Basically, the formation process for a non-profit limited liability company is the same as for a classic limited liability company. We explain details of the foundation process in our series Checklist for Founders. However, you should always consult experts when founding a gGmbH. Without non-profit 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 limited liability company:

• Formulate your business idea

Especially when founding a non-profit limited liability company, you should formulate your project as concretely and clearly as possible in advance. This is the only way experts can check whether the requirements for non-profit status are met. You also need to think about the financing of your project. Investors cannot make a profit with a gGmbH. With the exception of a few lighthouse projects, investors will not be interested in participating.

• Drafting the articles of association

Your articles of association must be properly drafted to obtain non-profit status. The articles of association should clearly define the non-profit purpose and the activities aimed at achieving it. The tax office will also look at the articles of association when examining your non-profit status. It is therefore advisable to seek expert advice.

• Examination of the articles of association by the tax office

You can ask the tax office responsible for you to check your articles of association 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 public

The articles of association must be notarised. If not all founders can appear in person, it is possible to form the organisation online. You can find more information here.

• Payment of the capital contribution to the business account

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

• Registration in the commercial register and the transparency register

Once you have paid in the share capital and submitted a receipt for 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 trade at the local trade office in order to officially start your business.

• Obtaining your tax number

You also need a tax number and a VAT ID. There is a questionnaire for tax registration that you have to fill out and submit to the responsible tax office.

• Registering the gGmbH with the IHK or, if applicable, with the HWK

You must register with the competent Chamber of Industry and Commerce (IHK) and/or, if applicable, with the competent Chamber of Crafts (HWK). Compulsory membership is independent of the non-profit status of your company.