How entrepreneurs can protect their private assets

Starting your own business and being self-employed is often a great fulfillment. If you have a good order situation, you don’t think much about finances. The costs can then be covered and ongoing loans paid, and if you are already making profits after a relatively short start-up period, you can consider yourself lucky as a self-employed person. However, the situation can change at any time: Investments are in vain, a prolonged illness forces you to cut back on your career and may soon no longer be able to cover the running costs. A legal dispute can also lead to entrepreneurial throttling and ultimately declare bankruptcy got to. Depending on the legal form of the company, the question then arises to what extent one is liable for the debts of the business start-up with one’s private assets. As a rule, sole proprietorships and partnerships are liable with their private assets, corporations are not. But can sole proprietorships and GbR shareholders also protect their private assets from possible insolvency, and is the private property of shareholders in a GmbH fundamentally untouchable? We have compiled answers to these and other questions in the following article.

Liability for sole traders and partnerships

Individual entrepreneurs such as sole traders, small business owners and freelancers have in common that they are liable with their private assets. In the event of insolvency, the entrepreneur’s private assets are also at risk. This also applies to partnerships such as civil-law partnerships (GbR) or partnerships (PartG), in which several entrepreneurs join forces for a joint business activity.

The question of liability is independent of whether the company is listed in the commercial register or whether the entrepreneur is an actual, qualified or non-merchant. The latter applies e.g. B. for freelancers such as doctors, tax consultants or artists, but also for small businesses. Since the so-called non-merchants usually also generate lower sales, their liability risk is also low. However, liability can arise if an entrepreneur causes damage to another in the course of his activity.

For this a example: A service technician causes water damage while repairing a washing machine at a customer’s home. In this case, company liability insurance usually kicks in, provided the damage was not caused by grossly negligent behavior on the part of the technician. The service technician, who acts as a sole proprietor, can protect himself against such cases with appropriate liability insurance. But also a freelancer such. B. Mishaps can happen to web designers in other ways, for example if the website they have designed for their client contains security gaps or if photos are used for which no usage rights (external link) have been purchased. It depends on the individual case whether one can speak of grossly negligent action in these cases, because a web designer should know, especially when selecting photos, that he is not allowed to use every photo. Ultimately, it also depends on the drafting of contracts between web designer and customer. If a contract has been concluded that the web designer may only use licensed or license-free photos, the customer assumes that the web designer has clarified the rights beforehand. In this respect, the web designer is also liable if the photographer of a photo used without permission sues for damages.

In principle, the self-employed can also exclude certain liability risks through general terms and conditions (GTC), e.g. B. with a clause, in which the customer exempts the entrepreneur from third-party claims if he has acted at the express request of the customer. Claims for damages can also generally be excluded, provided they have not been made intentionally or negligently. The amount of the possible claims for damages can also be limited in the General Terms and Conditions to the amount that applies to comparable cases. Statutory limitation periods also limit liability in the event of defects.

at partnerships like the GbR, all partners are equally liable. In the case of partnerships, only those shareholders are liable who carried out the respective order or were involved in it, for whom liability claims may be asserted. Another way of limiting the liability of the shareholders of a PartG is to act as a partnership with limited liability (PartG mbB), in which the liability risk is limited to the sum insured under the business liability insurance.

In order not to have to experience any surprises in liability issues in the course of business activity, you should look at the for your own industry important liability risks and get a specialist lawyer on board who should also take care of the drafting of general terms and conditions.

liability in corporations

In order to further limit liability, it makes sense for start-ups to choose the GmbH as the company form. In the event of higher sales and the associated increased risks, entrepreneurs are also advised to rename their previous sole proprietorship or GbR. For the GmbH, a share capital of at least 25,000 euros is required. At least half of this must be in a business account, the other half can be in real assets. If you cannot raise the share capital, you have the option of founding an entrepreneurial company (limited liability), UG for short (limited liability). Only one euro of share capital is required for this. The share capital required for the GmbH can thus be generated from the current profits. In the case of the GmbH and the UG, the entrepreneur or entrepreneurs are only liable with their business assets, private assets remain untouched.

With the UG (limited liability), however, there is a risk of the so-called penetration liability. In this case, the partners are also liable with their private assets. Penetration liability occurs when, for example, there is a mix of assets and spheres, in the case of smaller companies, e.g. B. if the shareholder lives on the premises of the company and there are private items in it. Even those who exploit the freedom from liability and cheat creditors, for example, can be liable with their private assets – this is referred to as abuse of legal form.

Anyone who deliberately damages the company by making generous use of the business capital or dealing with it in a risk-taking manner and thus damages the company foundation so much that it insolvent commits an existence-destroying intervention and can also be liable with his private assets. Those who avoid all of these constellations are best protected against personal liability.

In a limited partnership (KG), the company is liable with its assets, but only for as long as assets exist. According to this, the general partner is liable with his private assets, the liability of the limited partner (external link) is limited to the amount of his contribution. In order to exclude the private liability of the general partner, it makes sense to set up a GmbH & Co. KG. Instead of the fully liable general partner, the GmbH acts as a shareholder, i.e. a legal entity instead of a natural person. Private liability is therefore excluded. The liability of the limited partner is limited to their liability sum (external link), which can also be provided in material assets.

Other ways to limit liability

Even in the case of small sole proprietorships, where liability always also affects private assets, or in the case of general partners of a limited partnership, certain private assets to be protected. So e.g. B. the private house can be transferred to a non-liable spouse. It is also possible to set up a family company in which the shareholder shares can be gradually distributed to the descendants by contract. In the case of credit agreements, too much private wealth should also be avoided as collateral. In addition, individual assets can be contractually excluded from liability or individually assigned to specific loan agreements. The retransfer after the repayment is also not to be forgotten.

In the case of a GbR or other company with several shareholders who do not belong to the corporations, the risk of private liability can be reduced by appropriate Drafting of the partnership agreement to reduce. The distribution of the areas of responsibility and, in particular, the powers for business activities should be precisely defined in advance. For example, powers of attorney can B. can only be agreed for certain shareholders, which concerns, for example, the signing of contracts or account powers. Company assets can also be built up, which remain in the company so that private assets are spared in an emergency. When concluding transactions with a GbR, you should always keep an eye on the risks that may be associated with it. If more capital is involved in the execution of an order than the current GbR assets comprise, or if the profit or turnover reaches a certain level, you should change the company name to a GmbH.

If you have any questions about these topics, you can contact the start-up center of the “Germany starts” initiative.