In the first part of our series, we have provided you with an overview of the various legal forms under which entrepreneurs and start-ups can operate their businesses in Germany. The second part of the series dealt with the legal form of the GmbH. This part focuses on the entrepreneurial company with limited liability UG (haftungsbeschränkt)).
The UG (haftungsbeschränkt) is not a legal form of its own, but a special form of the GmbH. Therefore, the Limited Liability Companies Act (GmbHG) provides the legal framework.
As a legal entity (corporation), the UG (haftungsbeschränkt) has its own legal personality and is represented by its governing bodies. As a corporation, the liability of the shareholders is limited to the company’s assets. However, there is a significant difference to the GmbH and the AG since the UG (haftungsbeschränkt) can be founded with lower share capital (of only EUR 1). This is why the UG (haftungsbeschränkt) is often referred to as a “Mini-GmbH” or “1-Euro-GmbH”.
This article provides an overview of the founding process of a UG (haftungsbeschränkt) and the liability of the shareholders. Our on-demand legal experts offer you comprehensive legal advice and support for the formation of your company in Germany.
I. Formation of the UG (haftungsbeschränkt)
1. Who can found the UG (haftungsbeschränkt)?
Formation by one or more shareholders
Such as the GmbH, the UG (haftungsbeschränkt) can be founded by a single person as well as jointly by several founders. Founders can be both natural persons and companies.
Purpose of the company
In general, the UG (haftungsbeschränkt) can be a suitable legal form for the vast majority of business purposes. The object of the company can be a trade that requires a license.
The UG (haftungsbeschränkt) is particularly interesting for entrepreneurs since the share capital can be less than EUR 25,000 (which is the minimum required for the GmbH). Even if a share capital of EUR 1 is theoretically sufficient for the formation of the company, one must note that the administrative costs of the UG (haftungsbeschränkt) are already significantly higher and an undercapitalized company is threatened with insolvency from the very beginning. It has thus become the practice that the capital contribution at least covers the costs of the notary and the entry in the commercial register at the competent local court.
The notary costs in turn depend on the amount of the share capital. The amount of the share capital must be chosen carefully for each case and should be based on the company’s financial requirements.
2. Differences between the UG and the GmbH
The most significant difference between the GmbH and the UG (haftungsbeschränkt) is the required share capital to set up the company as just mentioned above. Entrepreneurs should, however, also bear the following differences in mind.
Designation as UG (haftungsbeschränkt) – “limited liability”
Although the UG (haftungsbeschränkt) is legally a GmbH, it may not be designated as such in business transactions. The designation “Unternehmergesellschaft (haftungsbeschränkt)” (entrepreneurial company (limited liability)) or “UG (haftungsbeschränkt)” is mandatory and may not be altered or abbreviated. This regulation serves to protect the business partners and ensures that it is readily recognized that the company is a limited liability company, which, however, was founded with less than EUR 25,000 share capital.
The purpose of the introduction of the UG (haftungsbeschränkt) by the legislator was to enable the formation of a limited liability company with lower capital investment. Nevertheless, the intended goal of every UG (haftungsbeschränkt) is to eventually become a GmbH by saving up to the required capital of EUR 25,000.
To facilitate that, the UG (haftungsbeschränkt) is obliged to build a statutory reserve with at least 25 % of its annual surplus. These reserves may only be used to offset losses from previous years or to increase the share capital. The obligation to retain reserves in the amount of 25% of the annual surplus ceases to apply as soon as the sum of the reserves reaches EUR 25,000. From this point on, the UG (haftungsbeschränkt) can be converted into a GmbH. However, this does not happen automatically, but by increasing the capital accordingly and applying for entry in the commercial register through a notary public.
No contributions in kind or partial payments
In contrast to the formation of a GmbH, no contributions in kind are permitted with a UG (haftungsbeschränkt). In addition, the share capital must be paid in full immediately.
3. Formation process of a UG
The formation process is similar to the formation of a GmbH.
Articles of Association for a UG
The UG (haftungsbeschränkt) is founded by articles of association. The legislator provides model protocols for the company with a sole shareholder as well as for companies with up to three shareholders by which the company may be formed under a simplified procedure. There are certain minimum requirements that the articles of association must contain. Additionally to the statutory minimum requirements, further individual regulations can be made in the articles of association specifically tailored to the respective company and shareholders.
Furthermore, a list of shareholders must be provided showing the shares of the capital contribution to be made by each shareholder.
The articles of association must be notarized, regardless of whether they are individually drafted or whether the model protocol was used. By using the model protocol the entrepreneur can save on the notary costs. In general, the notary costs depend on the amount of the share capital.
II. Liability of the UG
As a special form of the GmbH, the liability of the UG (haftungsbeschränkt) is also limited to the company’s assets. The company is liable to creditors for its obligations with the company’s assets. There is no further liability of the shareholders with their private assets.
However, the limitation of liability does only apply once the company has been entered into the commercial register. Until the company is entered into the commercial register, the shareholders are also liable with their private assets.
III. Representation and management of the UG
As a legal entity, the UG (haftungsbeschränkt) is not capable of acting itself but is represented by its governing bodies (director and the shareholder’s meeting). The appointment of a director is mandatory by law. The director acts for the GmbH and has the power to conclude contracts on behalf of the company. It is also possible to appoint several directors that act in joint representation, insofar as no deviating regulations are made in the articles of association.
IV. Pros and cons of the UG:
|Pros of the UG:||Cons of the UG:|
|– Liability limited to the company’s assets|
– Foundation by one person possible
– Low share capital required
– Low formation costs (particularly when using the model protocol)
|– No free disposal of company assets due to mandatory reserves|
– No possibility for contributions in kind (share capital must be paid immediately in cash)
– The designation “haftungsbeschränkt” (limited liability) is mandatory
– Accounting and bookkeeping obligation
– Obligation to publish the annual financial statements
The UG (haftungsbeschränkt) enjoys great popularity among start-ups, which is mainly due to the fact that a small amount of start-up capital is sufficient to establish a UG (limited liability) and the partners are not liable with their private assets. The formation is usually uncomplicated and quick.
Are you an entrepreneur considering to found an entrepreneurial company with limited liability UG (haftungsbeschränkt) in Germany?
Our on-demand legal experts offer you comprehensive legal advice and support for the formation of your company in Germany.
Contact us today for an initial consultation.