If you live in Germany, you may have seen the GmbH and the UG abbreviations used to distinguish two common business types. Have you ever wondered what they stood for?
GmbH stands for Gesellschaft mit beschränkter Haftung, and UG stands for Unternehmergesellschaft. Although they seem to be similar, there are differences between the two. If you’re planning to start a company in Germany, it’s essential to learn these differences.

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What Is GmbH?

GmbH is a form of limited liability company in Germany. As understood from the definition, the main characteristic of this form is its limited liability. That is, in case of damages with private assets, shareholders can’t be held responsible. So, what does it mean?

The financial accountability of a person is restricted to a fixed amount at limited liability companies. Thus, for a GmbH, it means that the company is responsible for damages only with its assets. The private assets of shareholders aren’t involved. Obviously, the financial risk is much lower for the shareholders since they’re only accountable with share capital.

What Are the Requirements to Start a GmbH?

The minimum amount to start a GmbH is €25,000. Before registering the company, half the money must be ready to use. It’s to ensure that you are a solvent entrepreneur, and you can pay your debt when necessary.

Before applying to register your company, make sure that you appoint the first director and include a list of shareholders. This is a must under the German law. There can be only one owner as well as other shareholders. This article written by a lawyer explains the requirements for a GmbH.

If the company has more than 500 employees, then you need a supervisor board. Otherwise, it means that your company is run by only managing directors. Managing directors have unlimited proxy at a company. Thus, the regulations say that a supervisory board must approve all financial expenses at the company. 

Since there isn’t a central corporate registry in Germany, you need to register your company in a local court. Where you register must be in the same location as where your company’s registered office is.

During the time between establishing and registering your company, you can start business activities. However, becoming effective is only possible after registration. This usually takes up to three weeks.

As a GmbH owner, you have to pay the corporate income tax of 15%. This rate doesn’t include a solidarity surcharge of 5.5% of the corporate tax. There are also the municipal trade tax and the value-added tax that you are subjected to. Thus, an effective corporate income tax rate varies between 30 to and 33%. 

A GmbH is controlled by the German Generally Accepted Accounting Principles and the International Financial Reporting Standards. If your company is medium size or large size with more than 500 employees, a statutory auditor has to audit your annual financial statements. 

What Is UG?

UG is a form of GmbH, and it’s also known as Mini-GmbH. Under the German law passed in 2008, founders have the opportunity to establish a business at a very low cost. Starting a UG requires €1, and there is no limit to the number of shareholders.

According to the UG rules, the rights and obligations of the shareholders are based on individual participation. That is, their individual percentage as a shareholder plays a role in determining their rights and obligations. However, it’s also possible to determine them regardless of percentages. If you want to start a business with low capital or zero money, here is another article to learn more.

What Are the Requirements?

Establishing a UG doesn’t require special features. The only thing matters is the amount of share capital. In fact, each shareholder can only pay €1 into the business account. This, of course, is very appealing and a good option for young entrepreneurs as they don’t have to pay the €25,000 required to start a GmbH.

Although this feature sounds amazing, don’t forget that there are still many costs you have to pay such as notary fees, or registration fees. To start a UG, you can either use the Musterprotokoll, or custom-made articles of association. The Musterprotokoll is a standard template, and it’s easier to complete the process of starting a UG with it. The custom-made articles of association are called “Gesellschaftsvertrag” in German. The articleMusterprotokoll vs Gesellschaftsvertrag” by firma.de provides detailed information about both associations. 

If you choose Musterprotokoll, be aware that there are some restrictions. For instance, there can be only one CEO and a maximum of three shareholders. Plus, the financial year of the company must align with the calendar year. Furthermore, the shareholders are exempted from § 181 BGB, German Civil Code. § 181 BGB is related to self-dealing, and it concerns the elements on having a contract with oneself.

You can’t change the Musterprotokoll, but you can play around a few regulations in the custom-made articles of association. It’s possible to change profit distribution, succession, or right of sale. You can tailor them according to your company circumstances.

As for the accounting and taxation of a UG, the German Commercial Code applies to your company. That is, you have to keep double-entry accounts and an annual balance sheet.

The taxation system is the same as a GmbH—a corporate income tax of 15%, and a solidarity surcharge of 5.5%. When you distribute the profits among the shareholders, you have to pay a withholding tax of 25% and a solidarity surcharge to the tax office.

What Are the Differences Between a GmbH and a UG?

GmbH is the most preferred limited liability company in Germany. UG is a new form of business entity, and it’s more founder-friendly. It’s sometimes referred to as mini-GmbH. However, the main difference between the two business entity types is the required capital stock. You can start a UG with €1, whereas you need at least €25,000 for a GmbH.

It’s not only the amount of capital stock you need. In addition to that, there’s a difference in the formation costs of these two. The approximate costs to establish a GmbH, such as notary fee, and registration fee, generally go up to €3,000. However, the costs are lower with a UG, varying between €240 and €300.

Because a GmbH requires more investment than a UG does, it’s seen more prestigious in the business world. Thus, a UG has a lower rating of credit.

As the obligations say, UG owners must reserve at least 25% of the annual profit in the company. This is to save up additional capital resource faster. This rule doesn’t apply to GmbH owners, where you can take all the profits if you want. You can read other requirements for establishing a UG in this article

On the other hand, there is a possibility to convert your UG into a GmbH if you save up €25,000. It takes only a few hundred euros, and you are excluded from leaving the 25% of your profit.

The Bottom Line

When it comes to choosing a business entity type, you might need help. This article discussed the two concepts and their differences. Although they seem similar, there are still diverse points. If your capital is lower than €25,000, head towards a UG. Personal responsibility is at minimum in both entities. Your personal assets are safe. All you need is to consider the pros and cons, and pick the one that suits your business idea the best.

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