When comparing a UG (limited liability) with a GmbH, we notice some important differences. Although there is no difference in terms of taxation, there is a difference in the start-up costs and other legal obligations. For example, a UG (haftungsbeschränkt) has to put part of its annual profit into a special profit reserve.

UG (limited liability) in comparison to the GmbH – Introduction

Corporations usually offer a decisive advantage over partnerships: the liability of the shareholders is limited to the company capital. For this reason, the legal form that is rightly most popular among corporations has been given the appropriate name “Company with limited liability”, short GmbH. However, this option for starting a company comes with a certain disadvantage, because it requires a share capital of at least EUR 25,000. Although you only have to pay half of this amount into the account of the GmbH when founding, this can already represent a certain hurdle for founders.

When the UK was still a member of the EU, many founders decided to start a limited company (Ltd.), because the requirement for the amount of share capital was significantly lower. For this reason, the Federal Government was also forced to introduce a German legal form as a counterpart. And this is the entrepreneurial company (haftungsbeschränkt), which can be legally correctly abbreviated as UG (haftungsbeschränkt). Since this is also a bit bulky, the abbreviation UG has since established itself in general usage. In the following, we focus on this to increase readability.

Apart from the differences in the designations, UG should have no significant differences compared to the GmbH on the one hand. In particular, there should be convergence in the taxation of the two legal forms, which was not a challenge due to the fact that both are limited liability companies. However, there are a number of differences. Therefore, we offer a comparison of the UG with the GmbH to determine which advantages and disadvantages they cause and which one should perhaps rather prefer.

2. Comparison UG with GmbH: legal basis

First of all, we point out that the introduction of the UG did not require a separate law. With a single, then newly introduced § 5a GmbHG into the existing GmbHG, it was possible to implement all regulations regarding the special features of the UG very efficiently. In all other matters, the same law applies to UG as to a GmbH.

3. Special features of UG compared to the GmbH

3.1. Share capital on incorporation

A GmbH has a share capital of at least EUR 25,000. A UG, on the other hand, comes according to the law with a lower share capital. Since the GmbHG stipulates that the share capital is to be quantified with nominal amounts over whole euros, it follows that a UG with a share capital of at least EUR 1 can be founded. But more on that later.

A further difference to the GmbH with regard to the company foundation lies in the fact that a UG is denied the opportunity to make a material foundation. Thus, only a capital formation comes into question.

3.2. Obligatory formation of a reserve at UG

In order to get UG shareholders to turn their UGs into fully-fledged companies, the legislature has come up with a regulation. Thus § 5a paragraph 3 GmbHG compels the UG to integrate a quarter of its annual profit into a reserve. Importantly, there is no time or other limitation to this obligation, so that the transfer of 25% of the annual profit infinit continues.

Although this separate profit reserve can be used at some point to increase the share capital so that the share capital reaches the minimum of EUR 25,000, this is only possible via a notarized shareholder resolution and the corresponding publication in the commercial register. And this in turn means considerable effort and additional costs. However, there is the advantage that UG is released from the obligation to form the reserve. This is clear from § 5a paragraph 5 GmbHG.

3.3 External effects of an UG vis-à-vis a GmbH

Another aspect of comparing the UG with a GmbH is the perception by third parties. Both customers and suppliers and other business partners, but especially lenders, pay attention to the credit rating. A company whose share capital is lower than the EUR 25,000 required by law for a GmbH makes a less good impression than a fully-fledged GmbH. This is due to the fact that in the event of liability a UG offers a comparatively lower security than a GmbH. Under certain circumstances, this may lead, for example, to lenders obliging the shareholders to provide a guarantee. However, this has once again greatly relativized the great advantage of UG over a partnership. Because then, in the event of liability, the entire private assets of the guaranteeing partners are affected.

4. Conversion of a UG into a GmbH

Suppose a UG develops magnificently over time. Then, year after year, it will still have to put a quarter of its annual surplus into the statutory reserve. For a distribution, however, the money is then blocked. If the shareholders wish to change this, they can either make a capital increase out of this reserve, as just discussed, or convert UG into a GmbH. However, the second alternative has the great advantage compared to the capital increase that the GmbH then enjoys a higher reputation than UG. Therefore, for many UG shareholders, the conversion into a GmbH is the far more advantageous choice.

However, the conversion into a GmbH is also associated with considerable effort. Because first you have to provide a proof of value. You have to prove that the UG now has a value that corresponds at least to the statutory minimum share capital of a GmbH, thus at least EUR 25,000 is worth. However, no normal balance sheet is sufficient for this, which a tax consultant prepares as part of the preparation of the annual accounts. Rather, an auditor has to be commissioned for this, which therefore means additional costs. In addition, there are further costs for the notarization and the registration with the commercial register.

5. Comparison UG with GmbH – Conclusion

Comparison of the decisive criteria

The UG is a bit easier to establish compared to the GmbH. On the one hand, there is no essential prerequisite for the amount of share capital and, on the other hand, the start-up costs are also a little lower. However, this is only half the truth, because in practice you still have to make sure that the UG has enough capital from the beginning to cover these start-up costs. If, on the other hand, a shareholder assumes the founding costs, it is more difficult to count them as an expense for tax purposes. In addition, if there is little capital, there is a risk of insolvency right at the time of establishment. Should this actually occur, there is also the risk of an attack liability on the private assets of the shareholder-managing directors. Both are significantly less risky at a GmbH.

Another advantage of the GmbH compared to the UG is also the optional factual foundation. In some cases, it is therefore worth considering whether the available funds might be used to provide a company value for material foundation that meets the legal minimum requirements.

The biggest advantage of the GmbH compared to the UG is the better standing with business partners. Although you can always search in the commercial register, in which financial situation the UG or GmbH with whom you want to conclude transactions, this is no protection against biased positions.

Finally, the financial advantage that a UG enjoys over a GmbH at the time of its establishment is relatively small in the long term. Because one can assume that a successful UG will sooner or later seek the conversion into a GmbH. However, this comes with additional costs, which quickly shrinks the initial financial benefit. And if you think about it more carefully, then it is additional costs that have no relevance for a GmbH.

Conclusions and final recommendation

The conclusion is that there are differences between UG and GmbH. Although there are no tax differences, there are those that may even have a noticeable impact on the company in everyday business. Overall, the GmbH is in a better position than the UG. Our recommendation, also based on our many years of experience, is that you better start a GmbH and save yourself the detour via a UG.