Entrepreneurial company (UG)

An Unternehmergesellschaft (haftungsbeschränkt), or UG for short, is a smaller version of a GmbH. In contrast to the GmbH, the share capital of the UG is only €1, which is why the UG is often referred to as a 1-euro GmbH or mini-GmbH. This legal form was introduced in Germany in 2008 and is a response to the British legal form Limited.

Legal basis

The legal basis of an entrepreneurial company as a variant of the GmbH can be found in the GmbH Act §5a GmbHG. This states that a company that is founded with a share capital that is less than the minimum share capital of €25,000 for a GmbH must be designated as an "Unternehmergesellschaft (haftungsbeschränkt)" or "UG (haftungsbeschränkt)". In addition, the company may only be registered after the share capital has been paid up in full in the form of cash contributions and statutory reserves must be formed. This applies until the UG reaches share capital contributions of €25,000, at which point it is possible to convert the UG into a GmbH. Furthermore, a shareholders' meeting must be convened immediately in the event of imminent insolvency (in comparison: a GmbH has a three-week grace period).

Share capital

As already mentioned, the share capital of the UG is set at a minimum of 1 euro. This is much lower than the €25,000 required to form a GmbH. However, it should be noted here that the formation costs will exceed the share capital of €1 in practice and it is therefore advisable to set the share capital higher. Furthermore, entrepreneurial companies (limited liability) are obliged to set aside 25% of their profits as a legal reserve in order to achieve the share capital of a GmbH of €25,000 in the long term.

Liability

The liability of an entrepreneurial company is regulated in the same way as that of a GmbH. Because a UG is a special form of GmbH and is therefore a corporation, its liability is limited. Liability is limited to the company assets of the UG. The shareholders involved are therefore only liable with their share capital contribution and not with their private assets.

Formation of the UG (haftungsbeschränkt)

UG formation is similar to that of a GmbH, with a few special features.

1) Draw up articles of association or model minutes

At the beginning of the formation of a UG, a model protocol or articles of association must be drawn up. The model protocol is a ready-made version of the articles of association. However, this also saves some formation costs and is universal and cannot be customized. The statutory model protocol can be used for UGs with a maximum of three shareholders and one managing director. However, you should note that any individual adjustments and regulations in the model protocol are omitted. If you would like to include these, you should draw up articles of association from the outset, ideally in collaboration with a lawyer.

You can find templates for the statutory model protocol here: https://www.musterprotokoll.de/download/

Naming

To draw up your articles of association/model protocol, you will of course need a name for your company. This can be freely chosen as long as it is neither misleading nor misleading. It is only important that the addition "UG (haftungsbeschränkt)" or "Unternehmergesellschaft (haftungsbeschränkt)" is added to your company name. You must use this addition for all business purposes.

2) Notarization

Together with your co-founders, you must now have the articles of association/model protocol notarized by a notary. Important: bring a valid identity card with you. With the notarization, you are now a UG (haftungsbeschränkt) in formation.

3) Opening a business account

The next step is to open a business account in the name of the UG and pay in the share capital.

4) Transfer of the share capital

The share capital must now be paid into the business account and each shareholder must transfer their share of the capital contribution. Particularly important: Keep the transfer receipt!

5) Entry in the commercial register

The transfer receipt must now be presented to the notary so that he can register your UG. To do this, he will need the certificate of incorporation, legitimation of the shareholders, list of shareholders, articles of association and proof of payment of the share capital. The entry in the commercial register is then made at the register court of the district court in whose district the registered office of the UG is located. It now takes approx. 1-3 weeks until the entry in the commercial register is completed and you are officially a UG.

6) Registration with the trade office

The next step is to register with the local trade office.

7) IHK/HWK registration

After your UG has been entered in the commercial register, you will receive a letter from the Chamber of Industry and Commerce or the Chamber of Crafts. You will be asked to provide further information and you are now officially a member with your UG. This membership is compulsory and subject to a fee. The costs depend on the profit, whereby you have to pay a fee of €128 plus a basic amount (regardless of the profit) if your profit is between €50,000 and €100,000.

8) Registration with the tax office

And last but not least, registration with the tax office in the form of a tax registration questionnaire. Here you already have to declare future sales. It therefore makes sense to think in advance about what turnover you expect for the coming financial year. The advance tax payments to the tax office are also calculated on this basis. At the end, you will receive a tax number with which you can write your first invoices and start your business activities as a UG (haftungsbeschränkt).

Formation costs

A UG is also similar to a GmbH in terms of formation costs. The same costs are incurred, with one significant difference. The minimum share capital for a GmbH is €25,000, of which €12,500 must be paid in directly at the time of formation, whereas for a UG it is only €1. In addition, the formation costs of a UG are made up of the notary fees, which can vary between €60-500 depending on the articles of association or model protocol. Further notary costs arise from the commercial register application (€30-60) and the commercial register entry (€150) by the notary. It should also be borne in mind that the notary fees depend on the amount of share capital, the higher this is, the higher the notary's fee bill. Overall, you should therefore expect costs of at least €400 when founding a UG if you use a model protocol. If you draw up your own articles of association, the formation costs amount to at least €1000.

The organs of a UG

The same applies to the executive bodies of an entrepreneurial company as for a GmbH. The UG consists of at least one shareholder and managing director, whereby this can also be the same person (1-person UG).

Shareholder

The shareholder(s) of a UG jointly conclude a partnership agreement and make a contribution to the share capital of the UG. They receive shares in the UG based on the amount of their capital contribution, which are also defined in the articles of association.

Managing director

The UG requires at least one managing director who represents the interests of the UG externally. However, there can also be several managing directors. The position of managing director can be filled either by a shareholder or by a third party.

Supervisory board

The same applies to the supervisory board of a UG as for a GmbH. This is optional up to a number of 500 employees, but in practice this hardly ever occurs with UGs due to the low share capital.

Taxes

The taxes payable by an Unternehmergesellschaft (haftungsbeschränkt) are initially made up of corporation tax and trade tax. On average, this results in a tax rate of approx. 30% on the company's profits. In addition, sales tax and capital gains tax may be incurred when profits are distributed.

Corporation tax

The income of the UG is subject to corporation tax at a rate of 15% plus a 5.5% solidarity surcharge on the corporation tax, so that the total tax share amounts to 15.825% of the taxable income.

Trade tax

The UG is considered a trading company within the meaning of the German Commercial Code (HGB) (Section 13 (3) GmbHG) and is therefore also subject to trade tax. In contrast to a GbR, OHG or KG, there is no tax allowance for trade tax for the UG. The trade tax to be paid is calculated from the profit (trade income) of the company multiplied by the flat rate of 3.5% and the trade tax multiplier, which differs depending on the municipality. On average, 400% can be calculated here. This results in an average trade tax rate of 14%.

Turnover tax

In addition, sales tax of 19% or 7% must be paid on sales that are made. However, this is borne by the end customer in the form of VAT. If the UG itself purchases services or products, it must also pay VAT as the end consumer, but can reclaim this from the tax office as it is an entrepreneur. In this case, this is referred to as input tax deduction.

Capital gains tax

When profits are distributed to the shareholders of a UG, they must be taxed at a rate of 25% in accordance with the capital gains tax plus the solidarity surcharge.

Special features of the Unternehmergesellschaft: Creation of reserves

One of the biggest special features of the UG is the obligation to form statutory reserves. In contrast to a GmbH, it is possible to set up a UG with a share capital contribution of just 1 euro. As a result, 25% of the profits must flow into the legal reserve. This continues until the minimum share capital for a GmbH of €25,000 has been raised. Once this has been reached, the obligation to form statutory reserves no longer applies. The UG (haftungsbeschränkt) can now be converted into a GmbH, but this is not mandatory. If you want to convert your UG into a GmbH, please note that the UG's balance sheet must be audited by an auditor and any amendments to the articles of association must be made. You will incur costs for this.

Bookkeeping

The same rules apply to a UG as a corporation as to a GmbH. It is obliged to keep double-entry accounts in accordance with HGB §238 and from a tax law perspective §140 of the German Fiscal Code.

UGs in Germany

The legal form of the UG, like the British legal form Limited, is very popular. Around 250,000 UGs have been founded in the first 10 years since the introduction of the UG (2009-2019).

From the Limited to the UG-Distinction between the British legal form and 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 is active in Germany via a detour. For this purpose, the Limited is founded in England, but a main branch is established 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). You can find out more about the two legal forms here:

Advantages and disadvantages of the UG

One of the biggest advantages of a UG (haftungsbeschränkt) is definitely the low share capital contribution, only 1 euro is required. As a variant of the GmbH, the UG also offers the advantage of limited liability. Liability is limited to the company assets of the UG. The shareholders are therefore only liable with their share capital contribution, not with their private assets. Furthermore, there are also lower formation costs compared to a GmbH, as the statutory model articles of association can often be used for a UG.

One of the main disadvantages of a UG is the obligation to set aside statutory reserves amounting to 25% of the profits made. This applies until reserves of € 25,000 are reached, at which point the UG can be converted into a GmbH. Due to the low share capital of a UG, it often has a lower reputation than a GmbH, as investors and lenders are aware of the lower liquidity. Another special feature of the UG is the immediate obligation to convene a shareholders' meeting in the event of a crisis (in comparison: a GmbH has a three-week grace period for this). If you are still wavering between the two company forms and need help deciding, you can find a comparison in our article GmbH vs. UG.

To summarize, the UG is a great way to found a company, especially for young founders and start-ups. Due to the low starting capital, founding a UG is cheaper and easier than founding a GmbH, but founders also benefit from the limited liability of the company. However, if you already have sufficient start-up capital at the beginning, you should also consider founding a GmbH.

Advantages

• can be founded with share capital of 1 euro
• Limited liability to company assets
• Low formation costs with the help of the statutory model articles of association
• As a corporation, the UG is subject to trade tax and corporation tax, which can be lower than income tax for natural persons
• uncomplicated transfer of the shares

Disadvantages

• Lower reputation due to the low share capital
• Obligation to retain 25% of annual profits as a statutory reserve until € 25,000 is reached
• Share capital must be made as a cash contribution
• In the event of a crisis, a shareholders' meeting must be convened immediately
• Once the sum of € 25,000 has been reached, a UG is not automatically a GmbH (limited liability company); this requires a change of name, which is often time-consuming and expensive
• Obligation for bookkeeping and accounting as with a GmbH

UG (haftungsbeschränkt) and other legal forms in comparison

❓FAQ-UG's

What is a UG?

The abbreviation UG (haftungsbeschränkt) stands for Unternehmergesellschaft. An entrepreneurial company is a corporation and its liability is limited to the company's assets. The UG is also known as a mini-GmbH, as it is similar to a GmbH in its basic features, but can be founded with a share capital of just €1.

Who is liable for the UG?

The liability of a UG is limited to the company's assets. This means that only the company is liable, the shareholders are only liable with their share capital contribution but not with their private assets. However, there are a few exceptions to this. For example, the shareholders of a UG are also liable with their private assets if they take out personal loans or breach their obligations to the company. In this case, the so-called "pass-through liability" comes into play. The limitation of liability of the UG no longer applies and the liability claims are passed on to the private assets of the shareholders.

What is the difference between a GmbH and a UG?

As the UG is a special form of GmbH, the two legal forms are very similar. However, one of the biggest differences is the share capital. While a GmbH requires €25,000 in share capital, a UG only requires €1. On the one hand, this is advantageous as less share capital is required when the company is founded. On the other hand, however, potential investors are also aware of the low share capital and may be less willing to invest in a UG than in a GmbH. In addition, a UG is obliged to set aside statutory reserves amounting to 25% of annual profits until the share capital of a GmbH has been reached. The UG can now be converted into a GmbH. However, this does not happen automatically, but is associated with costs for a tax consultant and auditor who audits the annual financial statements of the UG

What are the advantages of a UG?

The advantages of a UG are, on the one hand, the low share capital of €1 and, on the other, the low formation costs if the UG is formed with the help of the statutory model articles of association. In addition, a UG as a corporation also has the advantage of limited liability to the company's assets and thus offers a lower risk for the shareholders.

How do I set up a UG?

The formation of a UG is similar to that of a GmbH. You can read about this in detail here.

In general, when founding a UG, you first need a model protocol or articles of association. This is then notarized. This is followed by the opening of a business account and the payment of the share capital. In the next step, the notary then enters the UG in the commercial register. This is followed by registration with the trade office, IHK/HWK registration and registration with the tax office. In total, the formation of the UG then takes 1-3 weeks.

What are the advantages of founding a UG for start-ups?

One of the biggest advantages of forming a UG is definitely the low share capital. This legal form is particularly suitable for start-ups that do not yet have sufficient capital for a GmbH. In addition, a UG also has the advantage of limited liability, which can be an enormous advantage, especially for start-ups with riskier business models.

How do I build up reserves with a UG?

The formation of reserves in a UG means saving profits for self-financing and increasing the share capital. It is a legal obligation of the GmbH Act (§ 5a GmbHG) that a UG must set aside 25% of the annual surplus. This applies until reserves of € 25,000 are reached. These must then be converted into share capital. The formation of statutory reserves offers the advantage for UG founders in particular that they can protect themselves from over-indebtedness or insolvency by accumulating retained earnings. This also protects the UG's potential creditors.

What does the retention obligation mean for a UG (haftungsbeschränkt)?

The retention obligation means nothing other than the obligation to form statutory reserves of a UG in the amount of 25% of the annual surplus.

How do I convert a UG into a GmbH?

First of all, changing the legal form from a UG to a GmbH is a change of name. A conversion refers to the change from one legal form, e.g. GbR, to another, e.g. GmbH, but since the UG is a sub-form of the GmbH, this is a change of name. The process of changing the company name begins with an increase in the share capital to €25,000. On the one hand, this can come from the saved reserves, on the other hand, the shareholders can also pay additional capital into the company. It is important to note that when increasing capital from company funds (i.e. from retained earnings), an audited balance sheet must first be prepared. This incurs high costs for an auditor for the founders. This audit is not required if the shareholders increase the capital through cash contributions.

In the second step, all shareholders must then agree on the change of name and their shareholder resolution must be submitted to the notary. The amendment to the articles of association, which includes the increase in share capital and the change of name, must be notarized. In the final step, the GmbH must then be entered in the commercial register.

When can I use a sample protocol when founding a UG?

The use of a model protocol for the formation of a UG is particularly useful if you are a single founder or if no special regulations are made within the UG (e.g. for the transfer or inheritance of shares).

Why should I set up a GmbH instead of a UG?

The advantages and disadvantages of founding a GmbH or UG are summarized for you here:

UG vs. GmbH

Is there a UG law?

All legal regulations concerning UGs are regulated in §5a of the GmbH Act.

Can a UG take advantage of the small business regulation?

In principle, the small business regulation only applies to the turnover of a company. Who can and who cannot make use of the small business regulation is determined by the annual turnover. Accordingly, a UG can also make use of the small business regulation in accordance with § 19 Para. 1 if its turnover plus the tax due on it does not exceed EUR 22,000 in the previous calendar year.