Social entrepreneurship: Start smart with your own non-profit company

Are you ready to become a social entrepreneur? An entrepreneurial mindset and social responsibility aren’t mutually exclusive but make a great combination to tackle big changes. There is an ideal way to accomplish both: Learn about the non-profit corporate forms gGmbH and gUG and their benefits to set up your social start-up.

Decisions, decisions — and smart choices

Getting started is always the first step towards accomplishing your mission. Some would argue that it’s even the most important one because it defines the direction you’re taking. Social entrepreneurs have several options to give their cause a shape: Besides associations, charitable societies, the German law offers two non-profit limited liability companies: gemeinnützige Gesellschaft mit beschränkter Haftung (gGmbH) and gemeinnützige Unternehmergesellschaft (gUG). Their general characteristics are similar to those of any limited liability company such as the British Ltd. or the US-American LLC:

• You can found it solo or with partners.

• Your liability is limited to company assets.

• You can manage the company yourself or hire external experts.

• Individual regulations are laid down in the articles of association.

• You benefit from tax savings.

Both gGmbH and gUG are special variants of a regular limited liability company so the German Limited Liability Companies Act applies to them as well. The main difference: The non-profits versions are based on a charitable corporate purpose.

gGmbH vs. gUG

The main difference is the shareholders’ required capital stock. gUG founders only need a minimum of € 1 per shareholder to start their business. To set up a non-profit GmbH founders have to account for € 25,000.

A gUG is a smaller version of a gGmbH. It was added to the existing law in 2008 allowing founders to start a limited liability company despite low seed capital. In addition, a gUG offers a real alternative to starting a public charity. To compensate for the difference in capital the gUG is required to build up annual reserves until the company's capital stock has reached € 25,000. In a nutshell, this means that 25 percent of your gUG’s profits have to be retained to secure your liability rather than contribute to your charitable goals. So if you or your team of founders are able to put up a capital stock of € 25,000, you can ensure 100 % financial focus on your objectives by setting up a gGmbH.

If you’ve already started your social enterprise you can convert an existing association into a non-profit company. Please note that any conversion is complex and creates costs. That’s why any decision before setting up your social enterprise is crucial.

Security and transparency

Securing your own livelihood is part of any enterprise. So separating personal capital from entrepreneurial finances is a vital factor when it comes to protecting yourself. Non-profit gUGs and gGmbHs offer limited liability, i.e. your social enterprise is only liable with company assets, while your personal assets are protected from any claims. Every limited liability company needs to be listed in the commercial register. Consequenty, your chosen corporate form, your share capital and your management structure are transparent to the public. These circumstances translate into security and trustworthiness — for anyone who wants to invest, donate or support you otherwise.

In contrast, associations do not offer similar securities. In a worst case scenario all of its members are personally liable. This is a financial risk many founders underestimate. German limited liability companies are very popular and have an excellent reputation internationally. Experienced donors will evaluate both your cause and the likelihood of its longterm success. That’s why your corporate strucuture should evoke trustworthiness, transparency and stability.

Another bonus for your supporters: The legal entities gGmbH and gUG are allowed to issue donation receipts for donors’ tax deductions.

Tax privileges

Non-profit companies benefit from several tax exemptions. In particular, the corporate forms gGmbH and gUG are (partially) exempt from corporate income tax und trade tax. To be eligible for said exemptions your business has to comply with the German laws regulating non-profit companies (Gemeinnützigkeitsrecht) and maintain its non-profit status.

Independent decision-making

Unlike public charities or associations (gemeinnützige Vereine or Genossenschaften), non-profit companies offer a clear leadership structure — both internally and externally. The managing director of a gUG or gGmbH represents the company. Managerial positions are either given to shareholders or experienced employees. Associations are usually run by members on a voluntary basis, who may lack expertise and management skills.

Another huge difference is the general decison-making process. Whereas associations base their business decisions on democratic votes, the only decision-making entity of a gGmbH or gUG is the shareholders’ meeting. This circumstance facilitates and accelerates strategic planning for your company goals.

If you are interested in founding a non-profit company in Germany, is the digital partner at your side. We help you set up your social business, support all bureaucratic steps and provide our combined expertise. Your personal formation consultant guides you through the entire process. Benefit from advice by specialized lawyers and tax consultants from our network. Make your start into social entrepreneurship a smooth one — with

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