Germany: The Choice Of Legal Form In E-Sports

In view of the constantly growing variety of games and tournaments in e-sports, the number of new e-sports players is also increasing rapidly. Each e-sports player has their own specific idea of what position they would like to take in the world of e-sports.

These ideas can be realised in the best possible way with the right choice of legal form. With this in mind, we are providing a guide to distinguishing between unsuitable and more useful legal forms, which is tailored to the individual goals and needs of e-sports.

The first step is to decide what level of professionalism is to be achieved. Players who aspire to participate in professional tournaments with the support of investors and sponsors should choose different structures than those suitable for someone who only wants to play as a hobby. Relevant questions, for example, are how high a player's own start-up capital is, or whether liability risks are to be avoided. Above all, a decisive factor is whether players want to operate as individual players or whether they want to operate jointly with other e-sport players in legal transactions.

1. Individual players

Players who want to become commercially active in the e-sports sector as individual players can found a sole proprietorship or a limited liability company (GmbH or UG).

The establishment of a sole proprietorship is possible without a minimum capital contribution, but leads to the unlimited personal liability of the self-employed e-sports player as the proprietor of a company. This means that the e-sports player is fully liable with their private assets for any financial obligation that arises, be it an obligation to fulfil a contract or an obligation to pay damages. A player interested in the professional and competitive practice of e-sports, including tournament participation, complex sponsoring and merchandising contracts, always runs the risk of committing a costly breach of duty. The legal form of the sole proprietorship therefore entails a certain financial risk for the e-sports player.

For this reason, the formation of a GmbH or UG is the more suitable option for professional e-sports players. In order to found a GmbH, share capital of EUR 25,000.00 has to be raised. In contrast, a UG, as a transitional stage to a GmbH, can already be founded with a share capital of EUR 1.00. In this way, only the GmbH or UG is liable as a legal entity and possible creditors can only fall back on this share capital. The company name of the limited liability company can also be freely chosen by the shareholder, which means that the chosen in-game name can be used for effective marketing to fans as well as for a professional demeanour in legal transactions.

Status as a GmbH also gives the e-sports player a higher degree of international credibility and signals economic stability. This also increases the willingness of potential investors and sponsors to invest in the e-sports GmbH or, for example, to conclude cooperation agreements. A sole proprietorship or a UG does not enjoy this reputation.

Such a GmbH can also be used as the general partner of a limited partnership. This "GmbH & Co KG" would therefore consist of the e-sports player as limited partner and the GmbH as general partner with power of representation, represented by the e-sports player. Thus, only the GmbH would bear unlimited liability and this would be limited to the share capital. The professional e-sports sector is also and especially characterised by its dynamism and fast-pace: sponsorships for imminent tournaments are offered, new investors show interest once a tournament has been won or when the popularity of a video game suddenly increases. Here, the advantage of a GmbH & Co. KG is that investors can participate in the company informally as new limited partners, whereas in the case of a pure GmbH, a notarial deed is required to admit new shareholders.

The structure of the "GmbH & Co KGaA", a legal form that is nowadays known partly from the professional football sector, is not necessarily recommendable for e-sports. Rather, this legal form serves the implementation of the so-called "50 + 1 rule" of the German Football League (DFL), which stipulates that investors are not allowed to assume a majority of votes in the corporations into which football clubs have spun off their professional teams. Since such a rule does not exist in e-sports, there is no need for any special regulation to address the issue.

2. Teams

As soon as several e-sports player engage in e-sports together, a GbR or the founding of an association or club ("Verein") is an option in addition to the GmbH or UG.

2.1 Professional sector

A GbR can be founded without any share capital with at least two partners and fundamentally already exists in any event if at least two persons participate together in e-sports tournaments and have thus impliedly concluded a partnership agreement on the pursuit of a common purpose. All partners of the GbR bear unlimited personal liability for the liabilities of the GbR, but at the same time are all involved in the management, unless otherwise agreed. While this parity-participation concept may serve the interests of the amateur sector, in the professional sports sector it complicates the required decision-making process for swift business transactions in the fast-paced world of games. It is therefore not advisable to allow the GbR, which is in principle an available option, to exist as a legal form in the professional sports sector.

Besides the limited liability, the establishment of a GmbH makes it possible to agree on individual shareholding quotas and to retain an expert third party as an external managing director. In this way, the costs and time spent by each individual team member can be reflected in a manner that serves their interests and a professional external demeanour can be ensured by a managing director with expertise in the field of e-sports.

Furthermore, such GmbH shares are fundamentally freely transferable. This enables potential investors to acquire shares in such a corporation and consequently to participate directly as shareholders in shareholder resolutions. External financiers thus have the opportunity to have a say in advertising deals as well as in the organisation of and participation in public streaming events or merchandise productions in order to achieve the desired financial success. These corporations are therefore attractive legal forms when players seek external investors in order to remain competitive in the professional sector with their expensive equipment, travel to tournaments, coaches and their own training rooms.

The professional e-sports sector is also subject to a high fluctuation of e-sports players who regularly change teams in order to remain successful. Here, the free transferability makes it easier for individuals to leave a formerly chosen team association and ensures the e-sports player's uninterrupted flexibility. In contrast to a partnership, the corporation also always remains independent of the number of shareholders. The resignation of a team member therefore does not immediately lead to the dissolution of the company.

2.2 Amateur sector

In the amateur sector, on the other hand, the legal form of a registered association ("eingetragener Verein") is suitable to ensure structured decision-making when there is a large number of team members. In addition to having at least seven members, the foundation of an association also requires a written constitution and the election of a board of directors. The board manages the association as a centralised management and representative body and is bound by the decisions of the general meeting, which are subject to the majority principle. A further advantage of the association is that, within the framework of the association's structure, the members are not personally liable with their private assets and, in contrast to a GmbH, no share capital has to be deposited.

However, the association's purpose of the "promotion of e-sports" is currently not recognised as a promotion of general interests within the meaning of Sec. 52 German Fiscal Code (Abgabenordnung, "AO"), as is the case with analogous types of sports, for example. This means that the association is not classified as non-profit for tax purposes and cannot take advantage of the associated tax benefits, such as the exemption from corporation tax.

However, the legal classification of e-sports as non-profit has been discussed at the political level for quite some time. To be specific, the grand coalition began discussing its interest in recognising e-sports as a separate type of sport in 2018. The current federal government has, as it were, taken on the task of making e-sports non-profit in the coalition agreement. Since 2020, however, in view of the critical stance taken by the German Olympic Federation (DOSB), these efforts to give e-sports non-profit status have been limited to recognising "electronic sports simulations". This covers games for which there is an analogue counterpart, such as football simulations. Meanwhile, recognition of "e-gaming", i.e. the playing of all other virtual forms of competition, such as League of Legends or shooter games such as CS:GO, is not yet envisaged. This is due in particular to the stated desire not to promote depictions of violence by recognising them as non-profit.

Hence, if a player founds an association with different e-sports players and wants to ensure potential non-profit status as soon as the political endeavours have been implemented, the association should initially limit itself to the practice of sports simulations and structurally separate them from other sports, especially shooter games. One way to do this would be to set up a separate sub-company or department within the association. The same applies to commercially oriented teams within the association; if the primary goal of the association is to participate in tournaments with high prize money in order to generate a high profit, this fundamentally puts its recognition as a non-profit organisation at risk.

In addition, the purpose of the association can initially be limited to playing electronic sports simulation games. In order to be able to react flexibly to a future legislative amendment, the scope and concrete formulation of which is not yet foreseeable, it makes sense to facilitate a future change in the association's purpose in advance. A change in the purpose of the association requires a unanimous decision of all members in accordance with Sec. 33 (1) sentence 2 German Civil Code (Bürgerliches Gesetzbuch, "BGB"), unless the statutes of the association provide otherwise in accordance with Sec. 40 sentence 1 BGB. The statutes may, however, stipulate that the purpose of the association may be changed by majority decision in order to be able to respond more quickly to a legislative amendment.¹

However, in view of the variety of implementation options and complex individual ideas, it is always worth obtaining detailed le

Footnote

1. SpuRt 2020, 75

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.