Dirk Janzen, MBA

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In 2008 the German Limited Liability Companies Act was reformed and a new option to enter a GmbH by way of founding an Unternehmergesellschaft (haftungsbeschränkt), abbreviated to UG (haftungsbeschränkt) was introduced (hereinafter „UG“). However the UG is not a new legal form but rather a GmbH to which only certain special provisions in the German Act on Limited Liability Companies apply. The most important difference compared to a GmbH is that the UG can be founded with a theoretical minimum share capital of one Euro, which is why it is sometimes called „Mini-GmbH“. In the following we explain the legal structure of an UG and the process of forming that legal company form.


UG (haftungsbeschränkt)


Basic legal structure of an UG


Taxation of a GmbH


Formation Procedure

The UG is - apart from a few exceptions - subject to the same provisions as a GmbH. Respectively the UG is a very flexible legal form, meaning that the structure of the company as stipulated by law can be extensively adapted to the business’ and shareholder(s) needs. Hereinafter the basic corporate structure of an UG shall be described, additionally alternative regulation possibilities shall be explained that are commonly stipulated when forming an UG.


Separate Legal Entity


An UG is an independent legal entity, meaning that the holder of rights and obligations is not the individual shareholder, but the UG itself. The company itself concludes contracts, holds assets and is liable for taxation.


Share Capital and Shareholder(s)


The share capital of the UG (haftungsbeschränkt) may, theoretically, amount to anything from EUR 1 to EUR 24,999. However, the amount of the share capital must in all cases reflect the capital required by the company for the intended business activity. If for instance an UG is founded with a share capital of just EUR 1,000, insolvency is almost bound to occur: fixed costs such as rent, electricity, insurance, etc. could soon result in the company being unable to meet its obligations, in which case the managing director of the company would have to file for insolvency. This reality is the reason why many limited company start-ups have failed.

The capital contribution can can only be made up of cash. Contributions in kind such as property, patents or other assets are not legitimate. At the time of registration, all of the company’s capital must be actually and verifiably contributed to the company for which the managing director(s) must guarantee. For the capital contribution in cash the company generally requires a German bank account to which the money is to be contributed. Thanks to the Internet the founder(s) and managing director(s) of an UG don’t have to be personally present for opening a German bank account, since some German banks offer the account opening online from abroad.


An UG can be established by any number of different shareholders - one minimum. Shareholders can be natural persons as well as other corporations or partnerships. Irrespective of nationality or place of residence, anyone can establish an UG in Germany. The same legal conditions apply for foreign and local entrepreneurs. There is no specific investment legislation in Germany, nor is there a minimum percentage of German shareholdings required for foreign entrepreneurs.


Limitation of Liability


After the registration of the UG with the commercial register (more about the registration procedure hereafter) the liability of the UG is limited to the company’s business assets, including share capital. Whereas the liability of the shareholder(s) is limited to the share capital invested. The latter is one of the main reasons founders choose the legal form of an UG, since this way the risk of an investment in Germany can be reduced to the amount of the share capital (plus the formation- and setup-costs).


Management of the UG


The UG is managed and legally represented by its managing director(s). There must be at least one managing director. Other then with partnership entities the managing director(s) do not have to be shareholders of the company but can be external managers. Further managing director(s) do not have to be German residents.


If the company has only one managing director he or she has sole power of representation. In case the UG has two or more managing directors the company is generally represented by two of them. This default regulation can be amended so that one or all managing directors can represent the company alone or the UG is represented by a managing director together with a authorized signatory.


By issuing binding instructions or directions to the managing directors, the shareholders may exercise direct influence on the management of the UG. To achieve this, corresponding regulations regarding a shareholder approval for specific management measures can be implemented e.g. in the Articles of Association as well as in the managing director’s employment contracts. Further the shareholders have a general right to instruct the managing directors through shareholder resolution.


Articles of Association


The legal regulations of the Act on Limited Liability Companies outlines a minimum content of the Articles of Association of an UG. According to this the Articles must include the name and registered office of the company, the object of the company, the amount of the share capital and the number and nominal amounts of the shares, which each shareholder undertakes to contribute to the share capital (capital contribution).


However it is quite common to have a wide range of additional regulations in the Articles to amend the company structure to the founders and the company’s business requirements. Such amendments for example include regulations concerning the transferability of the shares which can for example be restricted to the approval of the majority or all of the shareholders. Non-competition clauses are popular as well. In case you would like to learn more about different regulation possibilities please see our article on this topic here.


Special purpose capital reserves


The Legislators aim when developing the idea for the legal form UG was to facilitate the entry to a GmbH for founding entrepreneurs with low capital requirements. The applicable Act on Limited Liability Companies states that the UG must create statutory provisions in its balance sheet which must include one fourth of the net profit for the year from which the loss carry-forward was deducted. This way, the company should gradually save money until it has built up the minimum share capital required for a GmbH and then be able to become a ”real“ GmbH by way of a resolution to increase capital. After a relevant application has been filed with the Commercial Register, it could also add the supplement ”GmbH“ to its name instead of „UG“ to identify the legal form of the company. However, no period of time or obligation to transform the company– has been specified for this purpose. It is therefore conceivable that a UG remains in this legal form forever.


The capital reserve may only be used for

Capital increases from company funds;

The compensation of a net loss for the year, unless it is covered by profits carried forward from the previous year;

The compensation of losses carried forward from the previous year, unless they are covered by the net profit for the year.


Note that if the shareholders breach their obligation to create such provisions, this will result in claims of recourse under civil law. It is also conceivable that rights of recourse be triggered by excessively high remuneration of the shareholder / managing director according to the principles of undisclosed profit distribution.

As with all Corporations right after the formation and registration of the UG it has to be registered with the Financial Authorities. The UG is liable to corporate income tax, trade tax and solidarity surcharge. In most cases VAT has to be paid as well. The average tax burden of a GmbH is less than 30 percent. In some regions, due to a locally variable rate of trade tax, it is under 24 percent (Source: German Federal Ministry of Finance, 2014).


Further an UG has to fulfill certain advanced accounting and publication obligations. The extent of these obligations mainly depend on the size of the corporation.


In case you would like to learn more about the taxation of an UG and it’s accounting obligations please see our article on this topic here.

Setting up an UG and registering it with the commercial register is is a straight forward process.


For the formation of an UG the founder(s) must generally visit a German notary, since the formation deed and Articles of Association have to be signed in the presence of a notary. However at the notarial formation process the shareholder(s) do not have to be personally present but can give power of attorney to a third person such as a lawyer. However that power of Attorney has to be signed before a foreign notary at the shareholder’s place of residence (depending on the country of residence an Apostle or Legalization might be required as well; check out our article on this subject here).


In order to be valid, the UG must be registered with the commercial register. Once registered in the commercial register, the UG becomes a legal entity. The commercial register application for the registration of the new UG has to be signed by all new managing director(s) before a notary in person. However the signature of that application can as well be made before a foreign notary at the managing director’s place of residence (depending on the country of residence an Apostle or Legalization might be required as well; check out our article on this subject here).


The commercial register provides information about the UG including Company name, object of company, managing directors and authorized signatories. Further the Articles of Association as well as a list of shareholders are registered and can be inspected as well. The named information is public and can be viewed by other interested parties and companies. Since founders of a UG in some cases do not want the public to have to much insight into company matters such as Articles of Association and list of shareholders, structuring measures can be taken in order to prevent certain information from public notice.


As for the GmbH the time period required for the formation of an UG is two to three weeks. The estimated total costs for the notarization of the formation and the registration with the commercial register are as well approximately EUR 600 to EUR 800. After the registration with the commercial register the new UG must be registered at the local trade office as well. The costs for that registration are approximately EUR 50.



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