Since 1 November 2008, when the law on company formation in Germany changed, it has been possible for a new business to set up as an Unternehmergesellschaft (UG). That’s a bit of a mouthful. Think of it simply as a regular limited liability company (GmbH) but with a lower barrier to entry.
In a nutshell a UG – commonly referred to as a mini-GmbH – is far cheaper and less complicated to set up than a GmbH, bringing it within the reach of any founder. Whether you need to form a holding company for investments, or simply create a legal foundation for a fully-fledged startup, the UG ticks the boxes. So what are the pros and cons of setting one up?
UG versus GmbH
A UG is basically the same as a GmbH, but you only require equity of €1 to set one up, rather than €25,000 for a GmbH. But a full 25% of annual profit must be set aside as reserve assets, until such a time as the equity capital equals the requirement for forming a classic GmbH, i.e. €25,000. Thereafter, the company can convert to a GmbH, although it is under no obligation to do so.
In the practical terms of everyday business, however, the difference between the two is more pronounced. For one, many business partners/ suppliers in Germany are likely to be unfamiliar with the still-fledgling UG suffix, so that you have to actually tell them it is a legitimate form of German company. One disadvantage of this lack of an established track record for the UG suffix is that suppliers are less likely to extend you a line of credit, so expect to pay in advance, even on low volume/ low value orders. A UG suffix is however preferable to a UK Ltd. suffix in the eyes of German partners/ banks. Remember that as a matter of law, the company name must include not only the suffix, but also the words ‚limited liability‘ in brackets, as follows: Your Company UG (haftungsbeschränkt).
How do I set up a UG?
As with its big brother the GmbH, a UG must be set up with the help of a notary. But the procedure is far simpler once all the relevant documents are in order: ID card/passport, certificate of incorporation and proof of equity. A template contract exists that is sufficient when there is just the one shareholder. If, however, several shareholders are involved in the UG, you should consider a tailored contract, which clarifies important issues such as „vesting“ from the outset. The notary’s fee will be higher in this case, although still a lot more affordable than with a GmbH.
Once the formalities are completed, the notary sends the registration to the Handelregister (the equivalent of Companies House in the UK) on your behalf. All company information, such as the name of the CEO, registered business address and the amount of startup equity, is officially registered. Don’t forget to set up a legitimate PO Box or mail forwarding service to ensure you receive your certifcates of incorporation from the district court.
How much does it cost to set up a UG?
The biggest cost items are registration with the Handelsregister (approx. €120), notary fees (approx. €50 if using the template contract and registration form), a business bank account (between five and ten euros per month) and registering with the local IHK (the equivalent of the Chamber of Commerce in the UK). The cost of the IHK is between €120 and €240 a year, depending on where in Germany you are located. Some IHKs offer reduced rates for UGs that are purely holding companies, so be sure to check.
Spam ahoy! Watch out for fake Handelsregisters
Some things in Germany are just as certain as death and taxes, namely: spam for newly formed companies. Besides the usual suspects such as office equipment suppliers, stationery suppliers and wholesalers, watch out for official-looking demands for payment from companies claiming to be the Handelsregister. The amount is typically in the order of €400 or €600. The real Handelsregister is aware of the problem and recently issued warnings about these fakers. Be on your guard.
Other articles of use to startup entrepreneurs:
- How do you give a startup a solid foundation? Simple: master your business processes
- The art of bootstrapping – part 1
- Financing a startup in Germany – finding state funding and support
- Business angel or VC funding?
This article does not constitute legal advice or replace the advice of a lawyer, in which the particulars of each case would be considered. Although every effort has been made to give an accurate interpretation of the law on company formation, it is possible that some passages may become obsolete or inaccurate in the light of an unknown or unpublished ruling. If in doubt, consult an expert.