The German “Unternehmergesellschaft (UG)”, a limited liability company with minimum share capital of €1 – success or failure?

In 2008, the German legislature introduced a limited liability company with a minimum registered share capital of €1, the so called “Unternehmergesellschaft” (“UG”), often translated as “entrepreneurial company”. This article is meant to give a short introduction to the UG and its formation procedure. We will also take a look on some advantages and disadvantages of the UG and the question whether the UG is a success or rather a failure.
 
Overview
 
The most common private company with limited liability in Germany is the “Gesellschaft mit beschränkter Haftung”, in short: “GmbH”. It was already introduced in 1892 and currently more than one million GmbH are registered in Germany. The GmbH allows large amounts of capital to gather whilst, at the same time, granting limited personal liability for the shareholders. In order to provide protection for the company’s creditors, the minimum statutory share capital is currently €25,000.
 
In the last decades it became apparent that there was a demand amongst founders of smaller businesses, in particular in the service industry and (tech-) start-ups, for an incorporated company with limited liability but very low statutory share capital. Encouraged by judgments of the European Court of Justice that allowed the cross-border transfer of company’s registered offices, smaller businesses and start-ups in Germany increasingly used foreign limited liability companies with no or low minimum share capital, such as the UK Ltd., to set up their business. As a reaction, the German Legislative created the UG in 2008 by incorporating a new Art. 5a into the German Act on Limited Liability Companies.
 
The UG is a full-fledged GmbH which is subject to certain additional provisions. The main differences to a regular GmbH are:
 
(i) the minimum share capital of a UG is only €1 (reg. GmbH: €25,000)
(ii) UG must not use the designation “GmbH” but are required to use the designation “Unternehmergesellschaft” or “UG” and “haftungsbeschränkt” (i.e. “with limited liability”)
(iii) the UG will only be incorporated if the full amount of the subscribed share capital is paid in in cash, whereas a GmbH will already be incorporated if a quarter of the subscribed share capital (but at least €12,500) has been paid in in cash
(iv) in a UG the share capital cannot be raised by way of contribution in kind, but only by cash payment
(v) one quarter of the annual profit must be booked to the statutory reserves in the balance sheet of the UG and must not be paid to the shareholders (e.g. as a dividend).
 
In case the statutory share capital is increased to €25,000, the UG can be easily transformed into a regular GmbH.
 
Establishing a UG
 
In general, any domestic or foreign individual or legal entity may establish a UG in Germany.
For setting up a UG, just like a regular GmbH, one or more future shareholders and future managing director(s) need to attend a meeting at a German notary public, where the shareholders need to sign the Deed of Establishment, which will include the company’s initial Articles of Association and the appointment of the first managing director(s). The managing director(s) then need to file for registration of the UG and submit the Deed of Establishment to the Commercial Register at the seat of the Company. Upon registration, the UG will begin to exist as a separate legal entity. The overall costs for notarisation of the Deed of Establishment and for registration of the UG with the Commercial Register will in most cases not exceed € 500.
 
The shareholders will need to bring their passports to the notary public in order to identify themselves. In case the shareholders cannot attend the meeting with the notary public, they may authorise a representative by certified power of attorney to attend notarisation on their behalf. Furthermore, the notary public and the Commercial Register will require a proof of existence of the shareholders, i.e. a certified copy of the passport or ID card or, in case of legal entities, a certified excerpt from the company’s register. The German Commercial Register regularly requests evidence that the persons acting for a legal entity are allowed to represent the entity. In case the (foreign) companies register does not provide such information, some other suitable proof is required, e.g. certified copies of a respective shareholder’s resolution or of a resolution of the board of directors. All certified documents need additional certification for international use by the La Hague Apostille or by Legalisation.
 
Advantages / disadvantages
 
So what are the benefits of a UG? One big advantage of a UG is the limited liability it provides at very low statutory share capital. This makes it an option for founders with very low capital or for businesses that actually do not require very much capital. Furthermore, if a business that was started without an incorporated company is successful and grows bigger, it may require considerable effort and sometimes expensive “legal engineering” to transfer the business into an incorporated company. Using a UG right from the start could therefore save time, costs and efforts at a later stage. There is also a tendency to use UG as only partner with unlimited liability in certain partnerships (“UG & Co. KG”) under German law, which makes it possible to combine, at very low costs, the advantages of a more personal partnership with the limited liability of a capitalistic company.
 
What are the downsides? First of all, since it is known that UG have very low share capital, some market participants are reluctant to make business with UG or they will require broad securities from the shareholders. This will of course thwart the goal to achieve limited liability for the shareholders. Furthermore, if no additional funds are available, there is a huge risk that the company may become over-indebted or insolvent, e.g. if a company with only €1 share capital signs a rental agreement for office space or even only a purchase agreement for a mobile phone. Hence, in most cases the shareholders would need to provide some kind of financing anyway. Another disadvantage certainly is the fact that, when a UG ceases doing business, it will take some effort and a liquidation period of at least one year to have it deleted from the Commercial Register.
 
Success or Failure?
 
At the beginning of 2015, more than 100,000 UG were registered in Germany and it seems that less than 10% of the registered UG were deleted from the register within a period of four years after their formation. At the same time, the number of newly registered UK Ltd. in Germany dropped dramatically. Hence, the UG proved that it is attractive for founders and that the fears that many UG would become insolvent within short time were groundless. Eight years after its introduction we can draw the conclusion that the UG is a success and might be the right choice in Germany for founders with low equity requirements and for some specific types of businesses.
 
Dr. Arne Vogel
Rechtsanwalt / Lawyer
vogel@matzen-partner.de
Dr. Arne Vogel studied law at the University of Kiel, Germany and at Aristotle University in Thessaloniki, Greece. After graduating he worked as scientific assistant at the business law department of Kiel University and gained a doctoral degree in law on the liability of directors of stock corporations. After his admission to the bar in 2008, Arne worked as a lawyer in the international Corporate Law / M&A department of one of the biggest international law firms. In 2014 he joined the law firm M&P DR. Matzen & Partner mbB in Hamburg, Germany, where he now advises in the fields of Corporate Law, M&A and Restructuring / Insolvency Law.