Since its introduction in 2008, the legal form UG has been an attractive alternative for entrepreneurs wishing to start a company with limited liability without having to come up with €25K in share capital. Sounds good, right? But, before you jump into anything, do your homework. Find out: What differentiates a UG corporation from other legal company forms? How is it different from the GmbH? These questions and more we answer in this article.
The UG corporate form compared to other legal company forms
In German, ‘UG’ stands for Unternehmergesellschaft, which is an entrepreneurial limited liability company. As a corporation, the UG is not just based on its articles of incorporation; it is also considered a legal person, meaning it can acquire assets, receive inheritances and file lawsuits in its own name. It, therefore, shares many of the same rights and obligations as other companies such as GmbHs or AGs that are classified as corporations. The amount of seed capital needed to start a UG, however, is significantly smaller than the amount needed to form a GmbH. Instead of €25,000, only €1 is needed to form a UG. Because of this, UGs are often referred to informally as ‘mini-GmbHs’.
Unlike partnerships like GbRs or oHGs, a UG’s capital is an important feature. Its shareholders are not personally liable; only the UG’s assets are at risk. In a partnership, however, there is no limited liability. Partners are directly liable to the full extent of their personal assets.
A UG can also be a practical legal company form for a so-called shelf company (Vorratsgesellchaft). You can read more about which legal company form is best for establishing a shelf company in this guide.
Characteristics of the UG
The UG is modelled after the British Limited (Ltd.) – a legal company form involving relatively little administrative effort and minimal required capital (£1) – that was popular among German entrepreneurs in the early 2000s. Forming a UG is usually much quicker and not as cost-intensive as forming a GmbH. Because a UG still largely enjoys the same legal advantages as a GmbH despite being less cost-intensive and quicker to form, it is often referred to informally as a ‘mini-GmbH‘ or a ‘one-euro GmbH’.
Characteristics of the UG
Even though UGs are often called ‘one-euro GmbHs’, the costs for forming one are still greater than one euro. In addition to the starting capital, the following fees must be taken into consideration:
- Consulting fees (business experts/Gründerexperte and tax advisers/Steuerberater)
- Notary fees
- Fees for commercial register registration (Handelsregisteranmeldung) and entry (Handelsregistereintrag)
- Fees for trade registration (Gewerbeanmeldung)
- Fees for additional documents (depending on the type of trade)
Additionally, entrepreneurs hoping to form a UG should also plan for the possible costs of finding and registering a company name. Choosing the right name for your company is not always easy. Make sure to keep in mind the options as well as the restrictions for UG company names. Even if you have already found the perfect name for your UG, you still need to make sure the name is available. Doing so will help you avoid future conflicts with companies with the same or similar names.
Other expenses connected to your company name may include:
- Costs for one or more domains
- Trademark registration
Each UG shareholder must deposit an initial contribution of at least €1 into the company’s business bank account. If there’s only one founder/shareholder, the minimum share capital is only €1. The lower a UG’s share capital is, however, the bigger its risk of over-indebtedness becomes. For this reason, most UGs begin with around €500 to €1000 in share capital.
As a protective measure, German lawmakers established the obligation of retention, or the Thesaurierungspflicht, requiring UGs to build reserves that equal at least 25 per cent of their annual net profit. This raises the share capital yearly. As soon as the total share capital amount reaches €25,000, or the minimum amount of capital for a GmbH, the obligation of retention no longer applies.
Unlike a GmbH, a UG’s share capital may only consist of cash deposits; contributions in kind are not permitted.
If at some point you wish to convert your UG into a GmbH, you’ll have to raise the amount of share capital, either through the UG’s reserves or through a deliberate increase in capital.
Forming a UG: Personal liability
A UG’s shareholders are usually not personally liable; only the business’s assets are at risk for the most part, sparing the shareholders’ personal assets.
There are certain situations, however, in which shareholders may be deemed personally liable. This is called ‘piercing the corporate veil’, or Durchgriffshaftung. There is no uniform regulation governing such situations – cases are decided individually. The following three situations can cause the corporate veil to be pierced:
- Too little share capital (undercapitalisation). The corporate veil can be pierced if the UG’s share capital was too low to begin with, making economic existence impossible.
- Private and company assets were not clearly separated in the UG’s bookkeeping.
- One of the UG’s shareholders has influenced the company in such a way that the company is no longer solvent. Such actions are legally considered to be existentially annihilating interference. An example of such interference would be withdrawing funds from the company’s bank account.
The corporate veil is only pierced under exceptional circumstances. It is important to note that the company name must designate its ‘haftungsbeschränkt’ – its limited-liability status. If it doesn’t, the shareholders become personally liable. Their assets are also at risk during the period between the notarisation of the UG’s articles of incorporation and officially naming the company by obtaining the commercial register entry (Handelsregister). Until the commercial register entry is made public, the UG is considered ‘in formation’, or ‘in Gründung’, and this status must be communicated. When specifying the legal company form, the designation ‘UG (haftungsbeschränkt) i. Gr’ must be used.
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Forming a UG: Accounting and taxes
Since UGs are corporations, the laws contained within the German Commercial Code (Handelsgesetzbuch, or HGB) apply. This means that double-entry bookkeeping must be employed. The UG’s bookkeeping, then, will consist of two accounts: a land register (also called a journal) and a general ledger. Additionally, a year-end financial statement must be prepared by the end of the fiscal year. The report is then published in the electronic Federal Gazette (Bundesanzeiger). The data to be published depends on the UG’s size category according to the HGB.
Like any other corporation, UGs are taxed as follows:
- Corporate tax (Körperschaftssteuer): 15% + 5.5% solidarity surcharge (Solidaritätszuschlag)
- Settlement tax (Abgeltungssteuer) and profit distribution to shareholders: 25% + 5.5% Solidaritätszuschlag
- Input tax/VAT (Vor-/Umsatzsteuer): 19%
- If the UG has employees, payroll tax (Lohnsteuer), the solidarity surcharge (Solidaritätszuschlag) and possibly church tax (Kirchensteuer) must be paid for each employee
Forming a UG: Converting a UG into a GmbH
As soon as the company’s share capital reaches €25,000, you have the option of converting your UG into a GmbH. Although it is not legally required (and you will never be forced to do so), it can be advantageous in some cases.
Differences between the UG and the GmbH
Strictly speaking, the UG is not a legal company form in and of itself – it is a subtype of the GmbH. This means that the laws regulating GmbHs (GmbHG) apply to UGs. However, there are certain differences between the UG and the traditional GmbHs both legally and financially. Here’s a quick overview of those differences:
|Minimum share capital||€1 per shareholder||€25,000|
|Contributions in kind allowed||No||Yes|
|Formation costs (notary/Notar, commercial register entry/Handelsregistereintrag, trade registration/Gewerbeanmeldung)||Approximately €240 to €300||Approximately €500 to €1000|
|Building reserves (Rücklagenbildung)||Required: 25% of the annual net profit (Thesaurierung)||Not required|
|Image|| || |
Is the UG the right legal company form for me?
The UG is a particularly suitable legal company form for entrepreneurs wishing to establish companies with a small amount of capital while still benefitting from limited liability. The UG doesn’t enjoy the same image or reputation as the GmbH, but it is possible to convert a UG into a GmbH at a later point.
If the administrative workload (especially the bookkeeping) is too heavy, it might be a better idea to establish a sole proprietorship (Einzelunternehmen) instead. Sole proprietorships don’t have to be entered into the Handelsregister, and bookkeeping can be done with the so-called Einnahmenüberschussrechnung (EÜR), a simplified revenue and expenditure statement. The EÜR can be used as long as certain revenue and profit limits are not exceeded. If for some special reason your sole proprietorship is entered into the Handelsregister, then you must also carry out double-entry bookkeeping, just like with a UG.
Forming a UG in Germany is also possible from abroad. Citizens of EU countries or non-member countries (Drittstaaten) can easily form a company in Germany and manage it from the country they reside in. To do so, entrepreneurs have a few guidelines to follow, such as ensuring their language skills are adequate enough to communicate sufficiently in Germany. Take a look at this guide to find out what you need to know to form and manage a UG from outside of Germany.
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