Anyone who wants to start a venture in Germany can choose from a variety of business structures. One special case is the so-called mini-GmbH. In this article, you will learn what a mini-GmbH is, the advantages and disadvantages, and how to set one up. We also explain the legal and tax obligations of a mini-GmbH and how it can be converted into a conventional limited liability company (GmbH).

What’s in this article?

• What is a mini-GmbH, and how does it differ from a normal GmbH?
  
• What are the advantages of a mini-GmbH?
  
• What are the disadvantages of a mini-GmbH?
  
• How do you form a mini-GmbH?
  
• Legal and tax obligations of a mini-GmbH in Germany
  
• How can you convert a mini-GmbH into a GmbH?
  

What is a mini-GmbH, and how does it differ from a normal GmbH?

“Mini-GmbH,” like “1-euro-GmbH” or “small GmbH,” is not an official designation. These colloquial terms typically refer to an entrepreneurial company or UG—which stands for “Unternehmergesellschaft”—and as a legal entity, it has its distinct status. It was introduced in 2008 to enable companies to establish themselves within the law with manageable financial risk.

As a special form of the GmbH, the UG is subject to unique regulations under Section 5a of the German Act on Limited Liability Companies. For example, in business transactions, it must always include the word “haftungsbeschränkt” (limited liability) in its name. This clearly distinguishes it from a GmbH.

Furthermore, a mini-GmbH needs only a minimal amount of equity to get started. Whereas a traditional GmbH demands a minimum capital contribution of €25,000, a UG requires only €1 per shareholder. The business must deposit the equity in cash into its account; contributions in kind are not allowed.

Due to the special regulation on share capital, the mini-GmbH reserves one-quarter of its annual profit until the equity base reaches €25,000. Once the UG forms the full reserve, it can convert into a GmbH.

What are the advantages of a mini-GmbH?

Founding a mini-GmbH offers numerous advantages. The following is an overview of the most important ones:

Low share capital

You can establish a mini-GmbH with a share capital of just €1. This makes the business structure ideal for startups with manageable financial resources.

Simple creation

Setting one up is quick and straightforward, especially when using a template for the relevant documents. This also reduces the founding costs compared to a classic GmbH.

Limited liability

The mini-GmbH is liable exclusively for its corporate holdings. The private assets of the shareholders are generally not taken into account. This typically rules out personal liability as a result.

Managing director’s salary as a business expense

The salary for managing one can be claimed as a business expense. Doing so can reduce taxable profit.

What are the disadvantages of a mini-GmbH?

Some disadvantages offset the above-mentioned benefits of a mini-GmbH. The most significant ones are summarized below:

Name suffix

As noted above, every mini-GmbH must include the suffix haftungsbeschränkt in legal transactions. This suffix can raise doubts about the creditworthiness or size of the business among potential customers or investors.

No capital increase through contributions in kind

When founding a UG, only cash contributions are permitted. Anyone who wants to provide equipment or intangible assets, such as software or trademark rights, has to establish a GmbH directly.

No full profit distribution

Because the UG retains a quarter of its annual profit until the share capital reaches €25,000, it initially limits the distribution of earnings to shareholders.

Accounting obligation

Like the classic GmbH, the mini-GmbH must use double-entry bookkeeping. This includes, among other things, recordkeeping, disclosure in the Federal Gazette, and the preparation of annual financial statements. Simple cash-basis accounting (EÜR) is not sufficient, leading to increased administrative effort and higher costs.

How do you form a mini-GmbH?

Establishing a mini-GmbH takes the following steps:

Determining the shareholder structure

One or more shareholders can find a mini-GmbH in Germany. In addition to developing a viable concept, you first determine the ownership structure. Are you starting a business alone or as part of a team?

Determining the share capital

The amount of share capital to be paid is a key factor. Although you only need to contribute €1 per owner, higher amounts will make things easier. This equity serves as a financial basis for ongoing costs and, as a result, shouldn’t be too small to be depleted quickly. It can also provide third parties with an indication of a certain degree of economic stability.

Creating a partnership agreement

There are two options for establishing a UG: an individually drawn-up partnership agreement or a standardized template. The latter is easier and cheaper but is only suitable for a maximum of three shareholders and one managing director. Additionally, it offers no flexibility for future changes. Anyone who wants more flexibility—for instance, regarding profit distribution, succession, or multiple managing directors—must choose an individual partnership agreement.

Notarial certification

For the establishment of the mini-GmbH to be legally effective, the articles of association are notarized as part of the formation process. The notary examines the documents and confirms their contents.

Opening a business account

You are required to open a business account for your UG to separate assets from personal ones. You pay the specified equity into the corporate account.

Registering in the commercial register

To enter your business in the commercial register, you have to show proof of payment of the share capital. Only after this does the UG become a separate legal entity and start officially participating in market life. As a rule, registration is carried out by the business’s notary.

Registering the business

The UG must then register with the relevant trade office if it is pursuing a commercial activity. Freelance activities do not require business registration. The process is typically conducted in person or online through the business portal of the respective city or municipality.

Getting a tax number

After enrollment, the responsible tax office automatically contacts the UG. It sends out a tax registration questionnaire, which must be completed and returned. The office then assigns the tax number under which the UG is recorded. If the business provides or receives services to or from other European Union countries, then it can also apply for a value-added tax identification number (VAT ID). The mini-GmbH can only officially issue invoices once it has obtained this identifier (and, if necessary, a VAT ID). Freelancers are expected to proactively contact the tax office to apply for a tax number.

Chamber of Commerce and Industry (IHK)/Chamber of Crafts (HWK) membership

The establishment of a UG entails compulsory membership in the relevant Chamber of Commerce and Industry (IHK) or, in the case of skilled trades, in the Chamber of Crafts (HWK). The respective chamber automatically registers the entity. Membership usually involves annual dues, which are based on the business’s profits and legal structure.

Setting up accounting

Before operations begin, you need to establish the mini-GmbH’s accounting system. Since the business must keep accounts, it has to ensure proper recordkeeping from the outset. Stripe Tax can help with this. With Tax, you can calculate, collect, and report levies for international payments. The correct tax amount is determined automatically. You also have access to all relevant documents, allowing you to apply for refunds quickly and easily.

Legal and tax obligations of a mini-GmbH in Germany

The mini-GmbH is subject to various legal and tax obligations in Germany. From a regulatory perspective, it is obliged to maintain proper, double-entry bookkeeping and prepare annual financial statements. These go to the Federal Gazette for publication. The UG also reports all operational changes to the commercial register—such as updates to management or the company’s headquarters. In terms of assets, it remains legally separate from its shareholders, limiting liability to the company’s holdings.

The mini-GmbH is a corporation and is subject to corporate income tax. If it operates as a trade enterprise, it must also pay trade levies as well. VAT applies to income from deliveries and services unless the small-scale entrepreneur rule applies. Small business owners are exempt from paying VAT; however, they cannot claim input tax as a deduction. When employees are hired, the business pays income tax. Profit distributions to shareholders are also subject to capital gains levy and the solidarity surcharge. While working with an advisor is not required, it is strongly recommended—especially during the early years.

How can you convert a mini-GmbH into a GmbH?

You can convert a mini-GmbH into a conventional one as soon as at least €25,000 in equity is available. If the business reaches this statutory minimum capital for a GmbH, the owners must formally decide to change the legally mandated structure. The existing articles of association are then adjusted or revised accordingly; the changes call for notarization and filing with the commercial register. After an audit, the registry records the business as a GmbH. From this point on, it is officially no longer a UG.