From the Limited to the UG - Delimitation of the British legal form to the German UG

Before the legal form of the UG (Mini-GmbH) was introduced in Germany in 2008, many small businesses used the Limited legal form. The Limited is a British legal form and becomes active in Germany via a detour. For this purpose, the Limited is founded in England, but a main branch is founded in Germany directly afterwards. The Limited is then also entered in the German commercial register and accounted for in accordance with the German Commercial Code (HGB).

The only difference is that the annual financial statements must also be entered in an English form and submitted to Company House in England. Another important difference to the UG is the obligation to form a Limited company with at least 2 shareholders. A limited company consists of a director (managing director) and a secretary (a person responsible for the accounts). This part can be covered by a mailbox service in England, which then takes over the bookkeeping, submission of documents to Company House and general communication with the English authorities.

Otherwise, there is hardly any difference between the two legal forms of Limited and UG. Their formation is associated with little effort and costs if the model protocol is used. The starting capital for the Limited is also only 1 pound (€1.50) and liability is also limited. One advantage of the Limited over the UG is that there is no obligation to build up reserves. While 25% of the profits of a UG flow into statutory reserves, there is no such obligation with a Limited company. Another advantage of the Limited is that it can be set up quickly, for example within 24 hours. With a UG, incorporation takes around 1-2 weeks. The disadvantage, however, is liability, because even though both legal forms are corporations and liability is therefore limited to the company's assets, the Limited company defines significantly more breaches of duty by the shareholders, for which they are also liable with their private assets.

What will change for limited companies as a result of Brexit?

One of the biggest changes for limited companies as a result of Brexit is that the "domicile theory" of international partnership and company law will apply from now on.

Until now, limited companies that were founded in the UK and were active in Germany and had their administrative headquarters were recognized as a British legal form based on the case law of the European Court of Justice on freedom of establishment. However, with the UK's withdrawal from the EU and the expiry of the transition period on 31.21.2020, this case law will no longer apply. Companies founded in the UK will no longer be declared as companies within the EU, but will be assessed on the basis of the BGH according to the law of a company founded in a third country. The so-called "domicile theory" now applies: the company statute applicable to a company is now based on the law of the country in which the company concerned has its management.

For a limited company that has its management in Germany, this means that it is no longer treated under civil law in Germany in accordance with its statute of incorporation and is therefore no longer recognized as a limited company.

In order to be able to classify the Limited under civil law, it is treated like the German legal form of a general partnership (OHG) or partnership under civil law (GbR) if several persons are involved in it. Otherwise, the Limited becomes a sole proprietorship. In concrete terms, this means that the limitation of liability is dissolved. The shareholders are now jointly and severally liable with their private assets instead of with their company assets as before.

What can shareholders of a limited company do?

To counteract the automatic conversion of the Limited into a GbR, OHG or a sole proprietorship, the shareholders have various options.

1) Merger into a GmbH or UG in accordance with Section 122A UMWG

The first option would be to merge the Limited with a German legal form of GmbH or UG. This must be notarized and entered in both the German and British company registers. However, such a merger is quite expensive and complex.

2) Transfer to a GmbH

Another option is to transfer all assets of the limited company to a GmbH. In this case, every asset and every liability must be transferred. This requires the consent of the individual contractual partners and creditors.

3) Contribution of shares through accrual

With this option, the limited company is initially also converted into a partnership; this happens automatically when Brexit occurs. The partnership is then transferred to the GmbH at book value. The assets of the limited company are then transferred to the GmbH.

4) Liquidation and new formation

It is also possible to liquidate the company in the UK. A new GmbH or UG (haftungsbeschränkt) can then be founded in Germany. However, liquidation may result in liquidation taxation in the United Kingdom.