In Germany, the Unternehmergesellschaft (UG) is commonly referred to as the “little sister” of the Gesellschaft mit beschränkter Haftung (GmbH). But while these two business structures share some similarities, there are also some key differences.

In this article, we’ll go over what a UG is, including its advantages and disadvantages, its associated tax requirements, and how it differs from a GmbH. We also explain step-by-step how to set up a UG.

What’s in this article?

• What is a UG?
  
• What is the difference between a UG and a GmbH?
  
• What are the advantages and disadvantages of a UG?
  
• What are the legal requirements for establishing a UG in Germany?
  
• What are the consequences of the low capital requirement for a UG?
  
• Starting a UG: Step-by-step instructions
  
• Tax obligations of a UG in Germany
  

What is a UG?

“UG” is short for “Unternehmergesellschaft” in German, which means “entrepreneurial company” in English. It was introduced in 2008 as a special form of the GmbH, or limited liability company. Colloquially, the UG is also referred to as a “mini-GmbH” or “1-euro GmbH.” However, it is not legally a GmbH.

The UG is modeled on the British “limited company” business structure, which can be founded with just one British pound. In Germany, the UG is used especially by entrepreneurs who have little equity but still want limited liability.

What is the difference between a UG and a GmbH?

Whereas a minimum capital of €25,000 is needed to establish a GmbH, a UG requires only one euro per shareholder. That said, UGs have a required retention ratio of 25%; that is, until a UG reaches a share capital of €25,000, it must retain a quarter of its annual profits as a reserve. Once this amount of share capital has been reached, the UG can be converted into a GmbH.

Despite that difference, both business structures offer limited liability for their shareholders; just as with a GmbH, the business assets of a UG are considered separate from the shareholders. As a rule, this means that only the business’s assets are liable to claims. With few exceptions, the private assets of the shareholders remain unaffected by liability claims from third parties. For this reason, the name of the company must include “Unternehmergesellschaft (haftungsbeschränkt)” or “UG (haftungsbeschränkt)” in its business transactions (see Section 5a of the Limited Liability Companies Act).

What are the advantages and disadvantages of a UG?

Setting up a UG has both advantages and disadvantages, and it is important to consider these before deciding on a business structure. Below you will find an overview of the most important points.

Advantages

• Simple founding process: A UG can be founded quickly and with little administrative effort, especially when using the legally prescribed template.

• Low minimum share capital: The minimum financial outlay for starting a UG is very low compared to a GmbH. It requires a share capital of only €1.

• Liability at the company level: The UG is liable exclusively with its own assets. The private assets of its shareholders generally remain untouched.

• Managing director’s salary is tax deductible: The managing director’s salary can be recorded as a business expense. This reduces the business’s profits—as well as its tax burden.

Disadvantages

• No founding with tangible assets: UGs can only be established with cash contributions. Unlike with GmbHs, neither tangible nor intangible assets can be used as contributions.

• Mandatory information in the business name: The business must include either “Unternehmergesellschaft (haftungsbeschränkt)” or “UG (haftungsbeschränkt)”— “haftungsbeschränkt” meaning “limited liability”—in its name. This can give potential customers and investors the impression that the business is small or less financially stable.

• Limited distribution options: As long as the share capital remains below €25,000, a quarter of the annual profits must be retained in the business. This initially limits distribution to shareholders.

• Increased accounting effort: In contrast to small-scale entrepreneurs and freelancers, a cash-basis accounting method (EUR) is insufficient for UGs. Instead, UGs are obliged to use double-entry bookkeeping like GmbHs do, regardless of their size or revenue.

What are the legal requirements for establishing a UG in Germany?

There are various legal requirements for starting a UG in Germany.

Obligations for starting a UG

The foundation of every company is its articles of association. These can be created using a template or created specifically for an individual UG. The articles of association must be notarized (see Section 2 of the Limited Liability Companies Act). In addition, the business must be entered in the commercial register. The UG only becomes legally functional after registration. In addition, any changes to the business must be reported to the commercial register. This can, for example, include changes in management or a relocation of the business’s headquarters.

Bodies of the UG

To found a UG, you need at least one shareholder. However, several people can also join together to set one up. Furthermore, at least one natural person must be appointed as managing director; this person can also be a shareholder. The management represents the UG in and out of court.

Another key governing body of a UG is the general meeting of shareholders. In this body, the shareholders come together to make important decisions for the business by means of shareholder resolutions—for example, appointing or dismissing management, changing the articles of association, or dissolving the UG.

Business structure and liability of the UG

As corporations, UGs are legal entities. They act independently in business transactions and can acquire rights, conclude contracts, and be sued. Typically, the business, not its shareholders, is solely liable for liabilities (i.e., debts). Therefore, the business name of the UG must include either “Unternehmergesellschaft (haftungsbeschränkt)” or “UG (haftungsbeschränkt),” as mentioned previously, to indicate its limited liability. The business name must also be unique and distinguishable (see Section 18 of the German Commercial Code).

Share capital of the UG

A share capital of only €1 is required to start a UG. However, larger amounts can also be paid into the business account as reserves. Contributions in kind—such as machinery or trademark rights—are not permitted in UGs. UGs are obliged to create reserves: 25% of their profit surplus must be allocated to reserves until the share capital reaches €25,000.

Accounting obligations of UGs

Another legal requirement when establishing a UG is compliance with accounting obligations. Double-entry bookkeeping is mandatory, as is the preparation of annual financial statements, which must be published in the Federal Gazette.

What are the consequences of the low capital requirement for a UG?

The minimum capital requirement of €1 for a UG lets the business become autonomous quickly and easily. Since the costs of establishing a UG are manageable, this business structure is particularly attractive for startups and self-employed individuals. Using a template for the articles of association further simplifies the incorporation process and reduces notary costs. This allows the UG to be registered in the commercial register quickly and with minimal bureaucratic effort.

However, the low share capital also brings with it some practical and economic challenges. Starting with €1 is not enough to cover ongoing costs, such as rent, insurance, or goods. In practice, then, more capital is needed—be it through larger deposits or external financing. In addition, business partners and banks might see low share capital in a negative light. It can give the impression of a lack of financial stability and make it difficult to obtain credit. Since the UG is only liable with its corporate assets, a low reserve also means increased risk for creditors.

Starting a UG: Step-by-step instructions

The following steps are necessary when establishing a UG:

• Determine the shareholders: Determine the shareholder structure by deciding how many shareholders will be involved in the establishment of the UG.

• Determine the share capital: A minimum of €1 per shareholder is required by law—however, more makes sense to cover running costs and build trust among third parties.

• Create a partnership agreement: Draw up an individual partnership agreement or use the simple template. The latter is only suitable for up to three shareholders and one managing director.

• Obtain a notarial certification: The partnership agreement must be notarized. The notary is usually also responsible for registering the business with the commercial register.

• Open a business account: Pay the share capital into a separate business account to keep personal and business assets separate.

• Enter the business in the commercial register: With proof of payment of the share capital, the UG can (and must) be entered in the commercial register.

• Register the business: If you plan to conduct commercial activities, you must register the UG with the trade office.

• Apply for a tax number: After you register your business, the tax office will contact you automatically. To obtain a tax number, you must complete a tax registration questionnaire. For EU transactions, a value-added tax (VAT) ID might also be required.

• Get IHK or HWK membership: Upon registration in the commercial register, the UG automatically becomes a member of the relevant Chamber of Industry (IHK) or Chamber of Crafts (HWK).

• Set up accounting: Before starting your business, you need to set up proper accounting. Solutions like Stripe Tax can make tax calculation and processing much easier. With Tax you can, among other things, calculate, collect, and report taxes for worldwide payments. Tax automatically calculates the correct tax amount. In addition, you have access to all relevant tax documents, so that you can, for example, apply for tax refunds.

Tax obligations of a UG in Germany

When founding a UG, you should also consider the tax costs involved. A UG must pay the following taxes:

• Corporate tax: As a legal entity, the UG is subject to corporate tax. The current tax rate is 15% on taxable income. In addition, there is a solidarity surcharge of 5.5% of the corporate income tax.

• Municipal trade tax: If the UG operates a commercial business, trade tax is also owed. This is levied by the respective municipality and varies depending on the tax rate at the business’s location. There is no tax allowance for corporations.

• Value-added tax (VAT): As a rule, the UG levies sales tax on its sales of goods and services. However, it might adopt the status of a small-scale entrepreneur if its annual revenue in the previous calendar year is less than €25,000 and less than €100,000 in the current year. In this case, VAT is not charged, but input tax deduction is also not possible.

• Income tax: If the UG has employees, it is obliged to pay income tax and social security contributions on their behalf to the tax authorities and health insurance funds.

• Capital gains tax: As soon as profits are distributed to shareholders, the capital gains tax applies. This amounts to 25% plus a solidarity surcharge of 5.5% and, if applicable, a church tax. The UG is obliged to withhold this tax directly and pay it to the tax office.