Tax Aspects of Entrepreneurial Companies (UGs)

UG (limited liability): Smartly leveraging tax advantages for founders

Since its introduction in 2008, the Unternehmergesellschaft (UG), or entrepreneurial company, has become a popular legal form for founders and startups. It’s no surprise, as it allows the establishment of a limited liability company with a minimum share capital of just one euro. But what specific tax considerations apply to the UG? And how can founders optimally leverage these advantages?

In this article, we take a detailed look at the tax aspects of the UG. From simplified accounting and tax filing to the taxation of distributions and the challenges involved in transitioning to a “regular” GmbH, we cover all relevant topics. Our goal is to provide you with a concise overview and practical tips to support your business decisions.

Simplified accounting and tax filing

One major advantage of the UG lies in its reduced accounting requirements. Unlike the “larger” GmbH, the UG’s financial reporting can follow the rules applicable to sole proprietors, provided certain thresholds are not exceeded. Concretely, this means that instead of double-entry bookkeeping, a simple income-expenditure statement (Einnahmen-Überschuss-Rechnung) is initially sufficient.

Tax filing for the UG is generally simpler than for other corporations. However, it is important to note that the UG remains subject to corporate income tax and must submit the corresponding advance notifications and annual tax returns. Trade tax also applies as with the GmbH, although its calculation can likewise be simplified.

Taxation of profit distributions

Like the GmbH, the UG is subject to corporate income tax at a rate of 15%, plus the solidarity surcharge on its profits. When these profits are distributed to shareholders, a double taxation occurs as with the GmbH: distributions are subject to a withholding tax of 25%, plus solidarity surcharge and, if applicable, church tax at the shareholder level.

To avoid this double taxation, UG shareholders should carefully consider if and to what extent they withdraw profits. In many cases, it may be advantageous to retain profits within the company initially and reinvest them in growth. Additionally, agreeing on a managing director’s salary can, depending on the situation, be more tax-efficient than profit distributions.

Challenges when transitioning to a GmbH

Many founders use the UG as an entry point into the world of corporations, with the goal of later converting to a “regular” GmbH. While this transition is possible at any time, it involves several tax-related challenges. For example, regulations regarding the disclosure and audit of the annual financial statements must be observed.

Valuation of company assets can also pose difficulties: if hidden reserves are uncovered, additional tax burdens may arise. It is therefore important to set the course early for a smooth transition and carefully weigh the pros and cons. Professional support from a specialized tax advisor can help avoid costly mistakes.

Conclusion: Use the UG smartly, but watch out for pitfalls

The UG offers an attractive opportunity for founders and young companies to benefit from the advantages of a corporation while keeping costs and administrative burdens low during the startup phase. However tempting the tax advantages may be, it is crucial to look closely and keep potential pitfalls in mind.

Those who understand the specific features of the UG and adjust the right levers can effectively optimize their tax burden and preserve valuable liquidity within the company. Careful planning of profit usage, utilization of tax allowances, and forward-looking preparation for the transition to a GmbH are key building blocks for success.

With the right strategy and support from experienced advisors, the UG can become a valuable springboard for your entrepreneurial future—and a tax-efficient launchpad for growth.