US/ German Startup differences – Legal Differences on Founder Liability

Similar to in the US, officers and directors of a German GmbH can also be held personally liable for their actions or for the liquidity of the company.  The penalties, however, can be very different from those to which a US entrepreneur is accustomed. As before, I offer this information informally and I strongly recommend checking with a German attorney on the finer points.

The Managing Director of a GmbH can in some situation be personally liable for his or the company’s actions.  D&O insurance and the corporate shield are of little protection in many of these situations.  A CEO taking on a leadership role (and officially becoming Geschäftfuhrer) in a German Start Up needs to inform himself of the liabilities to which he is exposed.  The issue of bankruptcy is course likely the most relevant for entrepreneurs, though there are a few others (including fraudulent activity and not respecting the minimum capital requirements for a GmbH).  For example, when the cash on hand drops below half of the minimum required capital reserves (“stammkapital”), the CEO is required to inform all the shareholders.

At the most extreme, founders can be held criminally liable.  Even if criminal activity hasn’t been committed, in some situations the officers may be officially barred from participating in management of a company for a period of time.

The German Law Journal has a great treatise on the subject which can be found here.