The limited liability entrepreneurial company (Unternehmergesellschaft, or UG) is a special legal formation in Germany. This business type is best suited to founders of commercial enterprises with low seed capital. It was introduced in 2008 as a flexible variation of the limited liability company (GmbH)—which is roughly equivalent to a limited liability company (LLC)—and offers a comparable limitation of liability. You might wonder: what are the UG requirements for annual financial statements?

This article explains why UGs have to prepare and publish annual financial statements and their importance. We also explain what an annual financial statement must contain and how to prepare one.

What’s in this article?

• Does a UG have to prepare an annual financial statement?
  
• Does a UG have to publish an annual financial statement?
  
• Why are annual financial statements important for UGs?
  
• What goes into an annual financial statement for a UG?
  
• How do you prepare an annual financial statement for a UG in Germany?
  
• Example annual financial statement for a UG
  

Does a UG have to prepare an annual financial statement?

Similar to a GmbH, a UG is obligated by law to prepare an annual financial statement every year. This obligation is set out in Section 242 of the German Commercial Code (HGB) in conjunction with Section 264. A UG can prepare the annual financial statement in-house or hire a tax advisor.

A UG is sometimes referred to as a “1-euro-GmbH” or “mini-GmbH.” This is because UGs are a special type of GmbH. While founders of a GmbH are required to pay at least €25,000 in share capital, a UG can be set up for just €1. However, after it has been set up, it must retain one quarter of annual profits until its share capital reaches €25,000. As soon as it reaches this threshold, the UG can be converted into a GmbH.

The UG is the GmbH’s “smaller sister” and is not considered a separate legal formation. Instead, a UG is a GmbH that is subject to special regulations, according to Section 5a of the German Act on Limited Liability Companies (GmbHG). For example, it is required to include the phrase “haftungsbeschränkt” (“limited liability”) in its name to clearly distinguish it from a GmbH. In addition, there is no difference between a GmbH and a UG when preparing an annual financial statement.

Does a UG have to publish an annual financial statement?

The UG is required to prepare an annual financial statement and make it publicly available. This disclosure obligation is enshrined in law in Section 325 of the HGB and applies regardless of the company’s size or revenue. However, small capital companies (Section 267 of the HGB) and microcapital companies (Section 267a of the HGB) can apply exemptions regarding the content and scope of publication.

The fundamental obligation to publish applies to all entrepreneurial companies without limitation. A UG must file its annual financial statement within 12 months of the end of the financial year, even if the company has not earned revenue during this period. Statements are published electronically in the Federal Gazette and the Commercial Register. Failure to observe this deadline could result in the Federal Office of Justice (BFJ) imposing a fine of no less than €2,500. If the UG fails to comply with its disclosure obligation despite being requested to do so, an administrative fine could be imposed multiple times or increased.

In terms of managing a business, on-time disclosure also sends a positive message to business partners, banks, and investors. It shows that the company is being properly managed. Consistently failing to observe this obligation risks financial penalties and reputational damages.

Why are annual financial statements important for UGs?

A UG’s annual financial statement is a legal obligation, but it is also important for other reasons. For example, it’s a key tool for monitoring and assessing the financial standing of the business. For management, it provides a solid foundation for making business decisions backed up by data. It can show how earnings compare year-over-year, which costs are bringing down net profit, or where the company has reserves or scope for investment. The annual financial statement creates transparency regarding the status quo and the financial growth of a UG.

It also gives third parties a reliable basis for assessing the financial standing of the business. The annual financial statement is frequently the first place banks look when negotiating a loan or where potential new clients look when awarding a major contract. A neatly presented annual financial statement can give a UG a competitive edge.

Finally, the annual financial statement is also important for the Federal Central Tax Office (BZSt). It is used as the basis for calculating taxable profit, thus directly impacting the amount of a UG’s liability in corporate income tax and trade tax. A carefully prepared annual financial statement can help a UG prevent ambiguity over taxation or unnecessary arrears.

What goes into an annual financial statement for a UG?

The annual financial statement for a UG consists of at least two parts: the profit and loss statement (P&L statement) and the balance sheet.

The P&L statement provides an overview of how successful a UG has been during a specific period, usually a financial year. It is mandatory for every company, according to Section 242.2 of the HGB. The P&L statement compares earnings achieved against expenditure incurred to show whether a business has made a loss or gain. Unlike freelancers, small business owners, and business owners with low revenue, UGs are not permitted to use cash-basis accounting. Cash-basis accounting is a simplified method for calculating profit.

The balance sheet of a UG illustrates the business’s assets and financial position as of a certain date. Pursuant to the regulations of the HGB, it is divided into assets and liabilities (Sections  242, 243, 264, and 266). The assets side records current and noncurrent assets (e.g., real estate, equipment, receivables, or bank balances). The liabilities side reports equity, liabilities, and the gain or loss for the year from the P&L statement. Figures are usually compared to the opening balance at the start of the financial year or when the UG was founded.

Other documents

Depending on the size of the company, the annual financial statement must include notes and a management report in addition to the balance sheet and the P&L statement.

The management report explains the annual financial statement. It provides additional information about the financial year’s status, the results achieved, and the company’s current financial situation. It should offer a complete and balanced analysis appropriate for the scope and complexity of the business. The notes provide additional information and explanations of certain line items on the balance sheet and the P&L statement.

Medium and large capital companies (Section 267 of the HGB) are obligated to prepare both notes and management reports. Small capital companies must also compile notes but can apply certain exemptions to scope and content. They are not required to prepare management reports (Section 326.1 of the HGB).

Furthermore, microcapital companies (Section 267a of the HGB) are not required to prepare notes, if the necessary information is provided directly on the balance sheet. In this case, they are not required to prepare a management report either (Section 326.2 of the HGB).

How do you prepare an annual financial statement for a UG in Germany?

Whether a company prepares the annual financial statement in-house or hires a tax advisor to prepare it, a structured approach is key. The process starts with proper bookkeeping. All transactions in a given year must be recorded correctly, in full, and in chronological order. At the end of the year, businesses can use these records to do a stock-take and determine assets for the year.

For companies with recurring revenue, in particular, it can make sense to employ specialized tools such as Stripe Revenue Recognition. Revenue Recognition guarantees all earnings are allocated to the correct reporting period to give you reliable, periodic revenue data for calculating profit. Revenue Recognition also reduces the risk of accounting errors or failed transactions. Recurring payments, credit notes, or partial payments are recorded correctly.

As soon as all data has been fully collected and structured, businesses should generate a balance sheet and P&L statement. Make sure to indicate separate items as stipulated by the HGB, especially Sections 266 and 275. Smaller UGs can apply a simplified breakdown of items.

If the business is required to prepare notes, it should add the necessary explanations, such as amortizations, reserves, or contingent liabilities. Larger UGs are additionally required to compile a management report that describes the course of business and the company’s current situation in more detail.

Once all of the parts of the annual financial statement have been prepared, management must adopt the statement and have it audited as necessary. Medium and large UGs are obligated to undergo auditing, and a neutral auditor must oversee the preparation of the annual financial statement. Once the annual general meeting (AGM) has approved the annual financial statement, the last step is to publish it in the Federal Gazette or Commercial Register.

Example annual financial statement for a UG

Below, we’ve provided an example of an annual financial statement for a UG, including the two main components: a P&L statement and a balance sheet.

Example P&L statement

Example balance sheet

These examples illustrate what a simple annual financial statement for a UG can look like. With the right preparation—and support from digital tools such as Stripe Revenue Recognition where necessary—preparing the annual financial statement for a UG can be easy. Doing so can allow a UG to comply with legal regulations and gain valuable insights into the business’s financial standing.