Entrepreneurial Company (UG with Limited Liability)

Learn all the essential information about the Entrepreneurial Company (UG). This article explains the characteristics, advantages and disadvantages, as well as the special features of this legal form.

Definition of the Entrepreneurial Company (UG with Limited Liability)

The Entrepreneurial Company (limited liability), abbreviated as UG, is a special form of the GmbH (limited liability company) introduced in 2008 as part of the MoMiG (Law on the Modernization of GmbH Law). It is often referred to as a "mini-GmbH" and allows for company formation with a lower share capital requirement than a traditional GmbH.

Unlike the GmbH, which requires a minimum share capital of €25,000, a UG can be founded with a symbolic one euro. In practice, amounts between €1 and €1,000 are commonly used. This low capital requirement makes the UG particularly attractive for startups and small business owners.

Key Characteristics of the UG

  • The UG is a legal entity with its own legal personality
  • The share capital can range from €1 to €24,999
  • The suffix "limited liability" or "UG (limited liability)" is a mandatory part of the company name
  • The UG is subject to the same legal regulations as a GmbH
  • There is a statutory obligation to build reserves amounting to 25% of the annual net profit
  • The UG can "grow into" a regular GmbH once the share capital reaches €25,000

Formation of a UG

The formation of a UG follows the same procedure as the formation of a GmbH and includes the following steps:

  1. Have the articles of association/bylaws notarized
  2. Deposit the share capital into a business bank account (must be fully paid in)
  3. Register with the commercial register through the notary
  4. Entry in the commercial register (constitutive)

Formation costs (notary, commercial register, possibly consulting) typically range from approximately €300 to €1,000, depending on the share capital and the complexity of the articles of association.

The articles of association must contain at least the following information:

  • Company name and registered office
  • Business purpose
  • Amount of share capital
  • Number and nominal value of shares

Reserve Formation and Conversion into a GmbH

A distinctive feature of the UG is the statutory obligation to form reserves. Each year, 25% of the net profit must be allocated to a statutory reserve. This reserve may only be used for:

  • Loss compensation
  • Capital increase from company funds
  • Offsetting a net loss not covered by retained earnings

Once the accumulated share capital and reserves together reach €25,000, the UG can be converted into a regular GmbH. However, this conversion is not mandatory—the company may continue to operate as a UG indefinitely.

Liability in the UG

As with the GmbH, the UG’s liability is generally limited to the company’s assets for the company’s obligations. Shareholders are typically not personally liable with their private assets.

However, there are important exceptions to this limited liability:

  • Personal liability in cases of undercapitalization or commingling of company and private assets
  • Liability of the managing director in cases of delayed insolvency filing or other breaches of duty
  • Personal liability in connection with guarantees or comfort letters

Due to the low share capital, business partners or banks often require UG shareholders to provide personal guarantees or sureties.

Advantages and Disadvantages of the UG

Advantages:

  • Low capital requirement at formation
  • Limited liability for shareholders
  • Image advantage of a corporation
  • Growth potential with possible conversion into a GmbH
  • Flexibility in admitting additional shareholders

Disadvantages:

  • Mandatory reserve formation (25% of net profit)
  • Higher formation costs compared to partnerships
  • Accounting and financial reporting obligations with associated costs
  • Lower trust from business partners and banks due to low share capital
  • More complex administration including annual financial statements and shareholder meetings

Tax Aspects of the UG

For tax purposes, the UG is treated like a GmbH:

  • The UG is subject to corporate income tax (15% plus solidarity surcharge)
  • Trade tax applies (depending on the municipality’s multiplier)
  • Profit distributions to shareholders are subject to withholding tax
  • The separation principle between the company and shareholders applies

The managing director is generally considered an employee of the UG, and payroll tax and social security contributions must be paid on their salary—even if they are also a shareholder.

The UG as a Stepping Stone to the GmbH

The UG was designed as an "entry-level model" for founders who need to start with limited capital. The obligation to build reserves is intended to allow the UG to gradually "grow into" a full GmbH.

If the business model is successful and the UG is profitable, it can be converted into a GmbH through the following steps:

  1. Resolution on a capital increase to at least €25,000
  2. Notarization of the capital increase
  3. Registration with the commercial register
  4. After registration: change of the company name (removal of the "limited liability" suffix)

This conversion can be done without tax disadvantages and can improve the company’s reputation with business partners.

The UG is particularly suitable for the following scenarios:

  • Startup formations with limited initial capital
  • Service companies with low capital requirements
  • Small business owners seeking limited liability
  • Test phases for business ideas before making larger investments
  • Solopreneurs seeking legal separation between private and business assets

For capital-intensive business models, companies with high credit needs, or industries where solid share capital is important for reputation, the regular GmbH may be the better choice.

Practical Tips for UG Founders

  1. Choose a professional company name—the suffix "UG (limited liability)" must be included
  2. Set an appropriate share capital (not too low)
  3. Ensure careful bookkeeping and separation of private and business assets
  4. Plan for reserve formation in your financial planning
  5. Consider whether conversion into a GmbH makes sense in the medium term
  6. Clearly regulate important aspects such as profit distribution and management in the articles of association

Conclusion

The Entrepreneurial Company (limited liability) offers a cost-effective entry into the world of corporations with limited liability. It combines the benefits of limited liability with low capital requirements and is especially suitable for founders with limited financial resources.

The obligation to form reserves and the potential for later conversion into a GmbH make the UG a "stepping stone" for growing companies. Despite some disadvantages such as higher administrative demands and potential acceptance issues with business partners, the UG has established itself as a popular legal form for startups.

Additional legal forms can be found in the articles on AG, GbR, GmbH, GmbH & Co. KG, KG, and OHG.

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