The gUG (haftungsbeschränkt): Everything you need to know about the non-profit legal form of the UG

updated on 18. January 2023 14 minutes reading time
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What is a gUG (haftungsbeschränkt)? What advantages and disadvantages does it have and how does your UG (haftungsbeschränkt) get granted non-profit status? In our article, you will learn everything you need to know to set up a non-profit limited liability company.

 

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Andreas Munck

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The gUG (haftungsbeschränkt) legal form: Definition

The term “gUG (haftungsbeschränkt)” is the abbreviation for “gemeinnützige Unternehmergesellschaft (haftungsbeschränkt)”. In English, this translates to a non-profit enterprise company (limited liability). The gUG (haftungsbeschränkt) legal form is particularly attractive for entrepreneurs with little share capital who do not want to waive the limitation of liability when setting up their company. You can establish a gUG (haftungsbeschränkt) for as little as one euro of share capital.

If €25,000 in share capital is saved through reserves, the gUG (haftungsbeschränkt) can be converted into a gGmbH. If this threshold is exceeded, no additional reserves are necessary. Contributions are generally excluded when setting up a gUG. The non-profit business purpose is characteristic for the gUG (haftungsbeschränkt) legal form. This is the difference to the UG (haftungsbeschränkt), which does not pursue charitable purposes, but rather primarily economic interests. Beyond that, the non-profit UG (haftungsbeschränkt) is the baby-brother version of the non-profit GmbH (gGmbH). In short, this means that both the legal form gUG (haftungsbeschränkt) and gGmbH have a non-profit purpose and they’re both bound by the GmbH-Gesetz (limited liability companies act).

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How does UG (haftungsbeschränkt) become non-profit?

In order to be recognised as a non-profit UG (haftungsbeschränkt), you must specify certain features in the articles of association (Gesellschaftsvertrag). Only if you observe these, can your gUG (haftungsbeschränkt) be provisionally recognised as non-profit by the tax office.

What does this “provisional recognition of charitable status” mean for your gUG (haftungsbeschränkt)?

If you establish your gUG (haftungsbeschränkt), you will only receive a preliminary determination of non-profit status from the tax office. You’re allowed to call your company a non-profit limited liability company (UG) and handle the day-to-day business accordingly, but the final recognition is always done after the annual tax declaration. If you do not sufficiently fulfil your charitable purpose, the tax office can revoke your non-profit status (Status der Gemeinnützigkeit). In the worst case, you will have to pay additional taxes.

Non-profit purpose

The GmbH-Gesetz (limited liability companies act) stipulates that the purpose of your gUG (haftungsbeschränkt) must be non-profit, charitable and/or ecclesiastical. When the company is founded, this purpose is checked by the tax office. You can read about a non-profit business purpose in our professional article about the business purpose of the non-profit GmbH.

Asset commitment for your gUG (haftungsbeschränkt)

A beneficiary organisation must be specified in the articles of association when the company is formed. In the event of dissolution of the non-profit UG (haftungsbeschränkt), it will receive any surpluses earned. It must also be non-profit. These include, for example, non-profit associations, gGmbHs, foundations or other gUGs (haftungsbeschränkt). Alternatively, there is the possibility of determining only the charitable purpose, which is to be supported with any surpluses in the event of dissolution.

When drafting the gUG statutes, a model protocol should be dispensed with

The formation with a sample protocol is not possible for gUG / gGmbH, as the sample protocol cannot be changed.

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Avoiding certain pitfalls in ongoing business operations

Altruism of the non-profit UG (haftungsbeschränkt)

Altruism essentially means that only persons who are directly involved in the fulfilment of the business purpose may benefit. This means that generally no profits can be distributed to the shareholders of gUG (haftungsbeschränkt). Salaries or wages must also be related to performance. For example, if you have opened a language school for migrants and enjoy high income, you cannot simply distribute these profits to the partners, increase salaries disproportionately or transfer the money to people who have nothing to do with the language school. That doesn’t mean that the salaries of employees shouldn’t be increased, but only that these increases should be within a normal range. The profits are ultimately intended to serve the common good.

Directness of the non-profit company

If your gUG (haftungsbeschränkt) has profits or income to register, then these must be supplied in principle directly to the non-profit business purpose. This also means that the charitable purpose should be fulfilled directly. A company that works for a company that pursues a non-profit purpose is not a non-profit organization. For example, if you start a cleaning company that cleans changing rooms in a non-profit sports club or rents property to non-profit organizations, such companies are generally not recognized as non-profit. However, even here there are some gaps in the legislation. That’s why consulting a tax consultant or lawyer is worthwhile.

The employment contract and the salary of the managing director of your non-profit UG (haftungsbeschränkt) should be checked by a lawyer or tax consultant. If a managing director’s salary is too high, it may be regarded by the tax office as a hidden distribution of profits. In special cases, this can be regarded as tax evasion and may mean the loss of charitable status. That’s why the support of a lawyer or tax advisor is advisable for the current course of business and with larger foundations, non-profit associations and gGmbHs. Early consultation saves costs in the long term.

The gUG vs. the UG

gUG share capital

As described above, the gUG (haftungsbeschränkt) is the non-profit version of the UG (haftungsbeschränkt). The enormous advantage of the non-profit UG (haftungsbeschränkt) and UG (haftungsbeschränkt) over the more traditional gGmbH and GmbH is that both can be founded for only € 1 in share capital. However, the law stipulates that a gUG (haftungsbeschränkt) must form reserves from 25 per cent of the profit reduced by the loss carried forward each year. This is intended to ensure that gUG (haftungsbeschränkt) has at some point saved a share capital of 25,000 € and can be converted into a gGmbH.

The gUG vs. the GmbH-Gesetz (limited liability companies act)

On the one hand, you would have to follow the principle of immediacy (Grundsatz der Unmittelbarkeit) and transfer all profits to the charitable purpose of your non-profit limited partnership as defined in the articles of association. On the other hand, 25% of the profit must also be allocated to the share capital. So there’s a conflict between the non-profit and company law. In this case, the GmbH-Gesetz takes precedence. 25% of the annual profit of the non-profit company must be used to increase the share capital until this amounts to €25,000. Only then can a gUG (haftungsbeschränkt) be converted into a gGmbH.

You should state in your articles of association that in the event of dissolution, only the originally paid-in share capital will be paid out to the shareholders. If you want to form reserves, this is only possible to a certain extent, under certain conditions and the formation of reserves should be indicated in the balance sheet. Otherwise, you would be in breach of the principle of direct use of funds (known as the Grundsatz der unmittelbaren Mittelverwendung).

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gUG limitation of liability

The GmbH-Gesetz (limited liability companies act) generally limits the liability of the partners for the share capital. Therefore, the same laws apply to gUG (haftungsbeschränkt) as to gGmbH.

What are the advantages and disadvantages of a non-profit UG (haftungsbeschränkt) compared to a non-profit GmbH (gGmbH)?

In principle, the legal forms of non-profit UG (haftungsbeschränkt), gGmbH, non-profit association and foundation are suitable for the implementation of a non-profit purpose. The attractiveness of gUG (haftungsbeschränkt) and gGmbH is due to the entrepreneurial orientation of these legal forms. So anyone planning a charitable mission on a large scale should use the gGmbH.

If you want to start smaller, found a gUG (haftungsbeschränkt). This has the advantage that it is also possible to establish a company without € 25,000 of share capital. However, 25 per cent of the annual profit must be used to build up reserves. As such, this 25 per cent will then not flow into your social projects.

In the end, both the gUG (haftungsbeschränkt) and gGmbH legal forms are bound by the German Limited Liability Companies Act. Therefore, the two legal forms hardly differ from each other.

 

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Andreas Munck

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Want to talk to a human about setting up a business in Germany?

  • Startup expert
  • 10+ years experience

Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.

 

Want to know more about the UG?

What is a UG?

What is a UG (haftungsbeschränkt)?
The UG Corporation
The pros and cons of the UG (haftungsbeschränkt)

How to guides for the UG

How to set up a UG company
How to set up a company in Germany
How to choose the right legal form for your business in Germany

When to form a UG

When to form a UG or GmbH
Should I use the calendar year as my company’s financial year in Germany?

How to name your UG

How to find the perfect company name for your UG or GmbH
Name check by the IHK: Is the company name I want still available?

Articles of association of the UG

Musterprotokoll vs Gesellschaftsvertrag: How are they different?
Should I use the Musterprotokoll or bespoke articles of association when incorporating a UG in Germany?
The UG’s Gesellschaftsvertrag: The articles of association of Germany’s entrepreneurial company

Master list:

The Master list of all Company Formation articles

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