Key information about UGs (limited liability) in Germany

  1. Inleiding
  2. What is a UG (limited liability)?
  3. What is the difference between a UG and a GmbH?
  4. How do you found a UG?
  5. What requirements does a UG’s name need to meet?
  6. Who is liable for the UG?
  7. What taxes does a UG have to pay?
    1. Corporation tax and solidarity surcharge
    2. Trade tax
    3. VAT
    4. Capital gains tax
    5. Optional taxes

When setting up a business, your choice of legal formation lays the foundation for all future steps. One of the most popular options in Germany is the entrepreneurial company (UG), since it comes with many advantages for founders. Some specific points are worth noting, however. In this article, you will discover what a UG is and how it differs from a GmbH. You will also learn how to found a UG, what requirements you will need to meet when naming a UG, and what regulations you will need to follow when it comes to liabilities and taxes.

What’s in this article?

  • What is a UG (limited liability)?
  • What is the difference between a UG and a GmbH?
  • How do you found a UG?
  • What requirements does a UG’s name need to meet?
  • Who is liable for the UG?
  • What taxes does a UG have to pay?

What is a UG (limited liability)?

UG stands for “Unternehmergesellschaft” in German, which means “entrepreneurial company” in English. It refers to a limited liability corporation. As a special form of GmbH, it is unofficially known as a “mini-GmbH,” “small GmbH,” or “1-euro-GmbH.” Therefore, it is not viewed as a separate legal formation, but rather as a GmbH to which special regulations apply according to Section 5a of the GmbHG. For example, the business must include the phrase “limited liability” when conducting business transactions. This enables it to be clearly distinguished from a classic GmbH.

The UG was launched in 2008 to offer founders and young entrepreneurs an attractive way of benefitting from the legal security and professionalism a corporation provides at a manageable level of financial risk. Since then, the limited liability UG has enjoyed great popularity in Germany. Its success could be compared with the “Limited” company in the UK.

What is the difference between a UG and a GmbH?

The key difference between a UG (limited liability) and a GmbH is the amount of share capital required: when founding a GmbH, a minimum share capital of €25,000 must be contributed to the business. For a UG, this requirement is set at just €1 per shareholder. Thanks to its low shareholder equity, the UG is particularly suitable for founders with limited financial resources.

Due to this special regulation, a UG is required to retain a quarter of its annual profits as reserves until the share capital of a GmbH—€25,000—is reached. Once the required level of reserves has been achieved, the UG can be converted into a GmbH.

A further difference between a UG and a GmbH lies in the startup costs: on average, it takes between €500 and €1,000 to set up a GmbH. This includes consulting and notary fees, business registration, and entry in the Commercial Register. By contrast, a UG can be founded with around €300, provided you use a standard record (see below).

Here is a summary of the main differences between a UG and a GmbH:

UG
GmbH
Aandelenkapitaal
Vanaf € 1 Minimaal € 25.000
Reserves vaststellen
25% van jaarlijkse winst, tot € 25.000 Geen juridische vereisten
Opstartkosten
€ 250–€ 300 € 500–€ 1000
Bedrijfsnaam
Moet 'UG (haftungsbeschränkt)' of 'Unternehmergesellschaft (haftungsbeschränkt)' bevatten Moet 'GmbH' bevatten

How do you found a UG?

There are two options for founding a UG. First, there is the standard record. Secondly, there is the customized memorandum of association. Both documents serve the same purpose: they determine the rights and obligations of the shareholders.

A standard record is a standardized template with contents that are stipulated by law. It is a combination of the memorandum of association, list of shareholders, and the appointment of management. In principle, a UG can be founded by one or more people. However, if the standard record is used, the maximum number of shareholders is limited to three people. Furthermore, only one managing director can be appointed. The advantage of using the standard record is the manageable effort and the lower costs. This includes, among others, lower notary fees.

Founding a UG via a memorandum of association requires more effort, but it also offers more flexibility. This process allows individual provisions to be made regarding profit distribution, inheritance, or the right to sell. Furthermore, the number of shareholders or managing directors is flexible. You also have flexibility regarding the financial year, which does not necessarily need to correspond to the calendar year. From the outset, the UG’s founders should consider whether there may be future changes within the business. For example, if there are plans to add a second person to the management team at a later stage, a standard record is likely to be unsuitable. Since no changes are permitted via the standard record process, a memorandum of association would need to be used in this specific scenario. This would mean additional costs. Anyone who initially founds a UG with a memorandum of association is able to make updates to it at any time. In this scenario, only minor notarial costs are incurred.

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What requirements does a UG’s name need to meet?

A UG’s name should enable the business to be easily identified. The name should also distinguish it from other businesses (see Section 18 Paragraph 1 of the HGB). Plain industry or generic names are, therefore, not sufficient. The name must be unique. Furthermore, it must not contain any misleading elements that may lead to false conclusions being drawn about the activity, size and importance, location, or people involved in the business. It is also not permitted to exclusively use letter or number sequences.

Providing these requirements are met, the UG’s shareholders are free to choose their business name. Almost any name, including a fictitious name, is possible. However, it is important that the name always includes the addition “UG (haftungsbeschränkt)” or “Unternehmergesellschaft (haftungsbeschränkt).” This must be used for all official business transactions, including on invoices, in correspondence, and on the business’s website. For advertising material or social media posts, you are not required to include the legal formation.

Examples of UG names include:

  • Computerservice UG (haftungsbeschränkt) Mainz
  • Schmidt & Müller Elektronik Unternehmergesellschaft (haftungsbeschränkt)
  • Portraitfotografie Sunlight UG (haftungsbeschränkt)

The decision on whether a UG’s name is permissible is made by the district judges of the relevant registry court. If the judges give their permission, the UG can be included in the Commercial Register. It is also possible to have a preliminary screening carried out by the Chamber of Industry and Commerce. The IHK name check predicts whether the business name is likely to be rejected or accepted by the registry court.

Who is liable for the UG?

As a special form of GmbH, the UG is also a legal entity and has an autonomous legal personality. The UG has limited liability, as its name suggests. As with a GmbH, the liability of shareholders and managing directors only extends to the business’s assets. It does not extend to private assets. This presents a major advantage when compared to partnerships such as a GbR, since the financial risk is limited and there is no threat of personal insolvency. A UG’s shareholders can only be held personally liable in the event of intentional or grossly negligent misconduct.

What taxes does a UG have to pay?

The UG is subject to various forms of taxes. The nature of these taxes depends on the business’s profit and size, as well as some other factors. These taxes include:

  • Corporation tax
  • Solidarity surcharge
  • Trade tax
  • Value-added tax (VAT)
  • Capital gains tax
  • Employment tax (optional)
  • Property tax (optional)
  • Land transfer tax (optional)

Corporation tax and solidarity surcharge

As a corporation, the UG is subject to the regulations of the Corporate Tax Act (KStG). Profits are taxed at a rate of 15%. To determine the amount of tax payable, the UG submits its annual corporation tax declaration and its annual financial statements to the tax office.

In addition, the UG must pay a solidarity surcharge of 5.5% on the amount of corporation tax.

Trade tax

Businesses in Germany are legally required to pay trade tax. This also applies to UGs if they are registered with the trade office. The amount depends on the UG’s profits and the trade tax assessment rate applied by the relevant local authority.

VAT

The UG must pay VAT of 19% or 7% for paid goods and services in Germany. However, if turnover is low, the UG may be exempt from VAT under the rules for small scale entrepreneurs. This rule applies when a business’s annual turnover for the previous year does not exceed €22,000 and is not expected to exceed €50,000 in the current year. These prerequisites are laid out in Section 19 of the VAT Act (UStG).

Capital gains tax

If the business distributes dividends, capital gains tax of 25% and a solidarity surcharge of 5.5% must be paid on them. Tax is withheld by the business and transferred to the tax office on a monthly basis.

Optional taxes

Employment, property, and land transfer taxes do not have to be paid by every UG. These taxes only apply in certain circumstances.

If a UG employs staff, it must pay employment tax on their salaries every month. The amount of employment tax varies depending on the respective salary and personal circumstances of the employees.

Property tax only needs to be paid if the business owns developed or undeveloped land. The unit value of the property forms the assessment basis, which is multiplied by the property tax rate of 3.5 per thousand. The property tax measurement amount is then multiplied by the municipality’s individual property tax assessment rate.

If a UG uses its assets to purchase a property, a one-off land transfer tax is due. This is based on the purchase price, which is multiplied by the tax rate of the respective state. The tax rates vary between 3.5% and 6.5%.

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