What you need to know about gUGs (limited liability) in Germany


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  1. Introduction
  2. What is a gUG (limited liability)?
    1. What is the difference between gUG and UG?
    2. What is the difference between a gUG and a gGmbH?
    3. What is the difference between a gUG and a nonprofit association?
  3. What is a nonprofit business purpose?
  4. How do you found a gUG?
  5. What tax benefits does a gUG have?

By setting up a gUG, the founders are able to realize their vision of a nonprofit business and benefit from tax relief in the process. In this article, you will learn what a gUG is and how it differs from a UG, gGmbH, and a nonprofit association. We explain what a nonprofit business purpose is and how you can found a gUG on this basis. We also outline what tax benefits a gUG can offer.

What’s in this article?

  • What is a gUG (limited liability)?
  • What is a nonprofit business purpose?
  • How do you found a gUG?
  • What tax benefits does a gUG have?

What is a gUG (limited liability)?

gUG stands for “gemeinnützige Unternehmergesellschaft” in German, which means “nonprofit entrepreneurial company” in English. It refers to a limited liability corporation for nonprofit purposes. It can be understood as a special type of UG (limited liability) and an alternative to the gGmbH. Its features make the gUG particularly suitable for founders who are involved in social or cultural work and who also want to limit their financial risk. The liability of shareholders and managing directors in a gUG only extends to the business’s assets and not to their private assets.

What is the difference between gUG and UG?

Whether a company is founded as a gUG or UG depends on the business purpose. A UG primarily serves economic interests and aims to generate profit. In contrast, a gUG serves a nonprofit, charitable, or religious business purpose. Among other things, this includes promoting science and research, art and culture, the welfare of the young and the elderly, as well as protecting the environment, animals, and customers. Three-quarters of the corporate profit of a gUG must benefit the stated nonprofit purpose.

What is the difference between a gUG and a gGmbH?

Both the gUG and the gGmbH serve a nonprofit business purpose. The major difference between the two types of company is the share capital required: when founding a gGmbH, as for a GmbH, a minimum share capital of €25,000 must be contributed to the business. At least half of this must be deposited into the company’s bank account. A gUG, as for a UG, only requires €1 per shareholder as share capital.

Because of this special regulation, a gUG is obliged to retain 25% of the annual profit as a reserve. The initial contributions are topped up in this way until the €25,000 required for a gGmbH is reached. Once the required level of reserves has been achieved, the gUG can be converted into a gGmbH.

What is the difference between a gUG and a nonprofit association?

A registered association (e.V.) is also a commonly used legal formation in Germany for nonprofit projects. However, there are some major differences compared to a gUG.

A gUG can be founded by one or more persons whereas an association requires a minimum of seven founding members. An association can also gain an unlimited number of additional members, while a gUG is not designed necessarily to take on new members or shareholders. Although there is no legal limit to the number of shareholders, in practice the number is naturally limited to just a few people.

Associations can be financed by membership fees and are not obliged to build up assets, unlike a gUG. A gUG offers greater security in corporate planning and clear regulations on liability. Moreover, the shareholders and managing directors are remunerated as full-time employees and benefit from simplified decision-making. In contrast, in an association, decisions are often made in general meetings where all members can exercise influence.

What is a nonprofit business purpose?

In principle, the business purpose of a gGmbH must be nonprofit, charitable, and/or religious. An activity is considered nonprofit according to the German Fiscal Code (AO) if it is dedicated “to the altruistic advancement of the general public in material, spiritual or moral respects” (see Section 52 AO). The beneficiaries cannot be small or closed groups of people, such as individual families or businesses.

An activity is considered charitable if it is dedicated “to altruistic support for persons” (see Section 53 AO). This includes people affected by poverty or who are dependent on assistance on account of their physical, mental, or emotional state.

Religious purposes include activities that are dedicated “to the altruistic advancement of a religious community which is a public-law entity” (see Section 54 AO). Among other things, this includes building and maintaining places of worship, conducting worship services, or training clergy.

A deciding factor, regardless of whether it is serving a nonprofit, charitable, or religious purpose, is the altruism of the business. A gUG may not primarily serve its own economic purposes. This means that the profit made does not benefit the business or the shareholders, but rather the specified nonprofit business purpose (see Section 55 AO). The company’s beneficiaries must therefore be recorded in the gUG’s articles of incorporation. Among others, beneficiaries can include nonprofit associations, foundations, gGmbHs, or other gUGs.

In Section 56 AO, exclusivity is mentioned as another condition for a nonprofit activity: “Exclusivity is deemed to exist if the sole pursuit of a corporation is the tax-privileged purposes set out in the statutes.” Therefore, the gUG may only exercise activities or support projects that have a clear connection to the stated business purpose.

The business purpose of a gUG is also only deemed nonprofit if the UG achieves this purpose itself. The activity may not be relinquished to third parties. However, under the law, the gUG is permitted to be supported by aides (see Section 57 AO).

The tax office determines whether the nonprofit principles are fulfilled in the articles of incorporation when the gUG is founded. In any case, nonprofit status is only provisional and is awarded retroactively for a calendar year. This ensures that the gUG complies with the requirements. If the tax office discovers an infringement, it can deprive the business of nonprofit status. In the worst-case scenario, a payment for tax arrears may be due. Among others, this can affect social entrepreneurs. Since they often work not only for a good cause but also for economic success, they are particularly at risk of losing their nonprofit status.

How do you found a gUG?

Founding a gUG can be quick and straightforward compared with other types of business:

  • Define business purpose: At its core, a gUG serves a nonprofit purpose. The first step is to clearly define this. What are the objectives? What measures will be taken? What specific projects will be supported?
  • Create a memorandum of association and articles of incorporation: The memorandum of association defines the internal arrangements of the gUG. Among other things, it regulates relationships between the shareholders, management, distribution of profits and losses, as well as provisions on liability. The articles of incorporation contain information regarding the business purpose and objectives, among other things. Both documents are important for official purposes, and also for familiarizing the agents with the subject matter. The memorandum of association and articles of incorporation should therefore be created with care, and legal advice sought in case of doubt.
  • Open a business bank account: To separate business from private transactions, a gUG is obliged to open a business bank account.
  • Deposit share capital: After opening the account, the share capital should be deposited directly. This must amount to at least €1 per shareholder.
  • Verify nonprofit status: The documents created by the company should be submitted to the competent tax office before certification by a notary. The authorities check whether the gUG’s articles of incorporation and the intended activity meet the requirements, both formally and in regard to the nonprofit purpose.
  • Have the documents notarized: A notary checks the lawfulness of the documents created by the gUG and certifies them.
  • Enter the gUG in the commercial register: After confirmation by the tax office, the company can be entered in the commercial register.
  • Arrange tax and trade registration: The last step is to register the gUG with the tax office and, if applicable, the trade office.

What tax benefits does a gUG have?

A gUG benefits from certain tax privileges. Corporate tax (i.e., 15% of the profit), does not have to be paid, for example. Trade tax is also not payable. A gUG is also exempt from property tax if the properties are used for the company’s nonprofit purposes. Gift tax and inheritance tax are likewise not payable. gUGs can also be exempted from value-added tax (VAT), again subject to the condition that their revenue is generated from nonprofit or tax-exempt activities.

However, other provisions apply for revenue generated from a commercial side of the business: corporate and trade tax must be paid in full and a reduced rate of 7% is estimated for VAT. It is therefore important to clearly differentiate the company’s nonprofit and commercial revenue and expenses from each other.

gUGs can also accept donations and issue tax-deductible donation receipts.

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