Thinking about starting a Germany’s entrepreneurial limited liability company form, the UG (haftungsbeschränkt)? A pros and cons list can help you make a sensible decision by laying everything out. To help you approach your choice in an objective way we’ve put together the advantages and disadvantages of starting a UG (haftungsbeschränkt) in Germany.
Our UG (haftungsbeschränkt) essential reading:
3. The pros and cons of the UG (haftungsbeschränkt): Weighing up the entrepreneurial company in Germany <<<
The UG is the entrepreneurial limited liability company Germany. UG stands for Unternehmergesellschaft (haftungsbeschränkt) and is colloquially known as a “mini-GmbH” or “1-Euro-GmbH”. It is not a legal form in its own right, but rather a variant of the GmbH. The UG (haftungsbeschränkt) is suitable for all founders who want to limit their liability risk, but want to start with a lower share capital than with the GmbH. Theoretically, the UG (haftungsbeschränkt) can be incorporated for as little as €1 (one euro), in contrast to the GmbH with a minimum share capital of €25,000.
– Liability (Haftung)
Liability is limited to the assets of the UG, the private assets of the partners remain unaffected.
– Starting share capital (Stammkapital)
Theoretically, the UG can be formed (incorporated)with a share capital of only €1 (one euro).
– Formation (incorporation) costs
The formation costs can be made very economical with the help of the statutory model articles of association (Mustersatzung or Musterprotokoll).
The UG is suitable for all types of activities, services and trades.
The UG pays Körperschaftssteuer (corporate income tax). Compared to the income tax for natural persons (e.g. employees, sole traders, GbR partners), the UG’s tax rate is, generally, more advantageous.
– Limited liability for “solopreneurs”
Even a single person can found a UG, also known as a “one-person UG”. Here, the sole shareholder is also the managing director.
– Shareholders can be employees (or not)
The shareholders of a UG can also be employees simultaneously.
– Tax deductible business costs
The personnel costs, including those for yourself, can be tax deductible, i.e. the entrepreneur, can be claimed as business expenses and reduce the taxable profit.
– Shareholder flexibility
Shareholders can easily sell their shares.
– External managing director
Outside directors who are not shareholders can be quickly appointed.
– Ease of exiting
The UG can be easily sold by disposing of the shares.
– Can be part of a holding structure
Shareholders can be natural persons and legal entities, i.e. corporations and partnerships.
– Have to build a reserves obligation
In the UG (haftungsbeschränkt) there is an obligation to save revenue, i.e. the partners cannot fully distribute the profit of the UG until the statutory reserve amount has been saved.
– Converting to a GmbH
After building €25,000 in reserves, the UG does not automatically convert into a GmbH. If you want to convert it into the more PR friendly GmbH, the process is a time consuming bureaucratic hassle.
– No contributions in kind
Contributions in kind cannot be made, i.e. the capital contribution must always be paid in cash and in full.
– Cannot hide the “UG” part
In legal transactions, the designation UG (haftungsbeschränkt) must always appear at the end of the company’s name. You cannot omit this part.
– Reputational problems in Germany
It is obvious to everyone that the UG (haftungsbeschränkt) has a low share capital. Therefore, the reputation and creditworthiness of the UG with creditors and suppliers is rather limited.
– Low capital trap
If the share capital is too low, there is a risk of over-indebtedness and insolvency of the UG.
– Accounting obligations
Like the GmbH, the UG legal form must keep double-entry accounts and balance sheets. Publishing annual accounts (annual financial statement) is also part of the deal.
– Formation process
The formalities for setting up an entrepreneurial company are more time-consuming and expensive than those setting up a non-incorporated business such as a GbR.
– Notarisation requirements
Many transactions must be notarised, such as the assignment of company shares.
– Strict regulations
The managing director faces criminal consequences and civil liability if he violates his duties under the GmbH Act.
Banks and other creditors usually insist on directly enforceable guarantees from the shareholders when granting loans. This usually removes the limitation of liability.
– Additional taxes
The UG must also pay Gewerbesteuer (trade tax) on top of Körperschaftssteuer (corporate income tax).