(epn) European company law: advantages of the English Limited (review) *
*by Dr. Johannes Fiala, Lawyer (Munich), Mediator (Univ.), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Lecturer in Civil and Insurance Law (Univ. of Cooperative Education), Banker (fiala4instalive.instawp.xyz)
“He who is late is punished by life” (Gorbachev).
Liability trap – German GmbH: The German GmbH is gladly called “society with limited hope”, and not only therefore approximately each third business startup failed after the first years. Behind more than 35,000 corporate insolvencies over the years is the entrepreneurial experience that the limitation of liability can be “as full of holes as Swiss cheese”. So why a limited company for the entrepreneur, and why then an English Limited?
Asset protection for entrepreneurs: For the entrepreneur there are two areas – private assets and company assets. The two areas must be separated in order to minimise the risks. In such considerations, it makes sense to plan and design risks, including a detailed analysis of the options available through insurance solutions.
In the case of private assets, for example, a “nest egg” can be protected from creditor access by means of the bankruptcy privilege of foreign life insurance policies.
In the case of business risks, liability risks can be shifted to a corporation: Such a “liability brake” can often prevent business risks from spilling over into the private sphere.
Corporation as a liability brake: The additional costs of a corporation, compared to a sole proprietorship or partnership with unlimited personal liability, are estimated by experts to be in the low four-digit range…. Even if insurance is not an effective cover, the corporation can often absorb a residual risk.
Advantages of an English Limited: The book of the same name by the authors Silberberger/Schwendemann gets right to the heart of the matter – the advantages of a Limited – on the first few pages, which are also very easy to understand for legal laymen. In contrast, the German GmbH has numerous disadvantages – especially when it comes to “pass-through liability, equity replacement, limitation of liability, necessary equity”. Using the example of the non-possible silent partnership, the authors also show that disclosure obligations are of great importance in the case of the limited company. The decisive factor is that the limitation of entrepreneurial risks to the entrepreneurial sphere can be better achieved with the Limited.
Manager liability: In the case of the German GmbH, the managing partner is particularly likely to be the target of a later liability for damages. This often turns out to be a design error only in retrospect. However, the director of a limited company can also be personally liable. The authors very professionally point out the possibility of insuring management errors through D&O insurance. The possibility of the liability isolation of the director via a further limited company is also presented in this work. This provides the reader with an initial basis for further liability and risk management, as well as for his or her own design together with his or her lawyer and insurance broker.
Business splitting – separation of business areas: What many a tax or business consultant can hardly explain to his client is the division of business. The authors succeed in doing this almost masterfully. Germans still like to run their GmbH, possibly the medium-sized company also owns its own small AG. The alternative of a “& Co. KG”, i.e. a business split, also because of inheritance tax advantages, is probably used too rarely. The book reveals how to protect business assets (equipment, machinery, etc.) from insolvency, as well as how to split up different business areas of a business enterprise in a targeted manner in terms of liability through segmentation. Incidentally, losses can be immediately offset for tax purposes by the shareholders in the case of the “& Co.KG” – in the case of a simple GmbH they regularly remain “trapped” in the corporation without tax effect.
Holding structure as a fiduciary alternative: And the work presents yet another strategic approach, the minimization of liability and taxes through a holding structure. In short, distributed profits are taxable for the shareholders – retained profits, on the other hand, unnecessarily increase the liability mass in the Limited or GmbH. Of course, every construction in connection with corporations leads to administrative costs – these must be weighed up economically in each individual case.
In the case of the sale of a company, the shareholder is currently subject to the half-income procedure. In a holding company, however, only 5% of the sales profit is taxed. Again, it is important to plan for the long term, as the tax benefit is currently denied if the holding structure is less than 7 years old.
Tax advantages through Limited: The study of the book reveals itself as a fund for fruitful discussions with one’s own tax advisor. Also for the owner of an AG or GmbH it can be a profit from this point of view – even if it comes then to the immediate change of the fiscal advisor because of an “overcharge” recognized by the entrepreneur only now. The most important topics, i.e. the classics in structuring advice, from company pension schemes to social security are addressed. Particularly worth reading is the comparison between GmbH & Co.KG, and the Limited variant: If the owner of a German “&Co.KG” gets hold of this work, many a serious word with his own advisors may follow.
Insolvency Issues: The next edition is already marked out, as it appears that new case law on local jurisdiction in the insolvency of a limited company has emerged only after the book went to press. In principle, an insolvency practitioner will be appointed and have jurisdiction in the place where the limited company carries on its business. Even if numerous GmbH regulations, also in criminal law, cannot be applied by analogy, it must not be overlooked that there is no legal vacuum in the case of property offences. Thus, the director may also be liable to prosecution for a fraud in the first place. It is therefore advisable for every capital company to ensure professional support by competent honorary professionals – and to have its own risk management from the very beginning.
Limited for the Restart despite personal insolvency: The book supplies in addition, suggestions for entrepreneurs with an “oath of disclosure”, in order to make a prompt Restart possible in the working life – an attorney consultation in the individual case, which the authors point out, can replace this however in no case.
In this work the consulting field of the detailed organization consultation for the optimization of wages and salaries was excluded: In this area taxes can be noticeably reduced, the seizability examined, and the social security planned.
Those who discover the Limited only after their personal insolvency will be punished by life – because of the increased design effort and the advantages given away until then.
Practical implementation at the financial service provider: The financial service provider can be active in various areas – for example, in the brokerage of investments and insurance brokerage. If both areas were transferred to a limited or limited liability company, this would have the consequence, in the event of an uninsured liability case, that the holdings would also have to be sacrificed in the insolvency. The insolvency administrator would use these to help pay costs and debts. Therefore, a separation into different companies, and also for tax reasons at least a business split is an interesting option. A holding structure can further complement optimization in the case of sales organizations.
Conclusion: All in all a very successful work. It is basically required reading for every business owner and manager. The content is fundamental to entrepreneurial risk, and provides an easy-to-understand comparison of the types of businesses presented.
Works statements: Silberberger/Schwendemann: Advantages of the English Limited. Publisher: Bundesanzeiger (March 2007) ISBN-13: 978-3898175791
(www.experten.de on 01.03.2007)
Courtesy of/by www.experten.de.