Amendment of the Austrian Act on Limited Liability Companies ("GmbH"): A lower share capital does not necessarily result in less liability

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Amendment of the Austrian Act on Limited Liability Companies ("GmbH"): A lower share capital does not necessarily result in less liability

Monday, 21 October, 2013

On 1 July 2013 the Amendment of the Austrian Act on Limited Liability Companies entered into force. The minimum share capital of a limited liability company has been lowered from € 35,000.00 to € 10,000.00. In case of a contribution-in-cash an amount of at least € 5,000.00 instead of € 17,500.00 has to be paid in upon incorporation.

The intention of the legislator regarding the amendment was to make limited liability companies more attractive for start-ups and to facilitate the foundation of a company by lowering the preliminary expenses. Due to the lower minimum share capital, the assessment basis for the costs of the intervening notary is reduced. As a result of the fact that the registration of the established company with the commercial register according to the new law is solely published in the Edicts Archive (www.edikte.justiz.gv.at), a fee-required announcement in the "Wiener Zeitung" is no longer necessary.

In the clarifications to the federal law it is noted, that the costs of the notarial deed for certain one-man companies are being further reduced by using standard articles of association. In this case, the necessary content of the articles of association is restricted to information about the name of the company, the registered office, the business purpose, the amount of the share capital, the paid-in capital stock, the appointment of the managing director and the compensation of founding costs. However, in the long run, this minimum content will not provide sufficient legal security for the founder and shareholder. Concise legal advice regarding the incorporation of a limited liability company is essential even after lowering the minimum share capital. In particular rules regarding the admittance of new shareholders to the company, a special right in connection with the appointment of the managing directors, a call option in case of bankruptcy of a shareholder, in case of death or withdrawal of a shareholder as well as specific regulations on the distribution of profits shall be discussed in the context of the incorporation and, as the case may be, included in the articles of association.

In any case, the lowering of the minimum share capital shall not be equated with saving of equity. The amount of required equity is based on the business activity and the respective business area. Therefore, the decision to incorporate a limited liability company makes only sense in case that a suitable business plan has been established and the company is equipped with sufficient working capital to operate on a sustainable basis.

It has to be taken into account that as an exception even a shareholder of a limited liability company may be held liable. The principle of restriction of liability to the amount of the respective paid-in capital stock and the assets of the company can be broken in case the company was already undercapitalised at the moment of its foundation. This applies if the company was equipped with insufficient capital in relation to the expected and actually realised business activity. Due to the low equity, a failure to the disadvantage of the creditors is in this case very likely and therefore may result in the liability of the shareholder.

A shareholder as managing director in a one-man company may also be held liable if he violates his duties and fails to act with the attention of a diligent businessman. The liability as a managing director can therefore also result in an indemnification claim against the shareholder and his private assets.

In summary it can be said, that the founder shall seek specific legal advice when considering the incorporation of a limited liability company for the planned business activity. The question of the actual capital requirements, the detailed drafting of the articles of association regarding certain issues of liability, coverage and corporate governance shall be discussed with the legal counsel to procure a successful start of the company.