Eternity Law International — News — UG vs. GmbH and the Pros and Cons of each: Which is right for you?

UG vs. GmbH and the Pros and Cons of each: Which is right for you?

Published:
June 17, 2024

Among all legal forms in Germany it is necessary to emphasise two major of them: first one is UG, second one is GmbH. Every one of them is unique and has its pluses and minuses, so it is vitally important to comprehend which of them is most suitable for company activity. Here are some details in order to fully understand the legal ability UG against GmbH. 

For a first sight

  • UG fits you if you have some doubts about your commercials and are willing to testify to it, also it is perfect if you have a restricted budget.
  • For commencing a UG with capital allocation of 1.00 euro only
  • When you are sure about your commercial activity, the finest one issue will be GmbH
  • In order to begin GmbH you have to have on your account at least 12500 euro accessible.

GmbH & mini-GmbH

Limited liability UG closely resembles a GmbH. However, in this case no need to obtain a high capital share, here the key variation.

If you want to start your commercial activity with only 1 EUR, it seems not a very reliable position, even if it looks very attractive, but it is a very hazardous path. Think about: it is such a tiny sum, which does not cover the notary assistance, required for the company’s inception. It looks like you are beginning your journey with empty pockets, destined for commercial ruin before your first step. Instead it is better to count every savings accompanied with future losses, in order to avoid future problems with bankruptcy.

On the other hand, if you are willing to commence your commercial activity  with GmbH you have to purchase not less than 12500 EUR. Totally you have to save 25000 EUR assets. UG is much liable concerning these circumstances.

A noteworthy aspect is necessary to mention, that Mini-GmbH could not be created as a company through non-monetary savings. Only in the case of the larger realm of GmbH could it be augmented through “natural” contributions. It means transferring valuable business assets, such as land rights, patents, trademarks, vehicles etc. However, UGs or Mini-GmbHs are created through cash deposit, where contributions below 1 EUR are very seldom to pose any notable problem.

Foundation costs & the lowest share capital for a GmbH

As previously stated, establishing a GmbH needs a higher investment, with a minimum of 12500 EUR, in order for establishing a new company you need 25000 EUR of share capital..

In reality, a UG and a GmbH share many similarities. A UG can be transit to a GmbH at any point, providing the nominal capital of 25000 EUR.

Once you have an idea to commence a UG rather than GmbH it is necessary to mention that 25 percent of the annual income that you earn must be set aside until your share capital reaches 25000 euro. Conversely, with a GmbH, there’s no requirement to allocate a portion of your earnings to such provisions.

Additionally, a GmbH poses a vigorous image about a more stable company. It is connected with its base asset, much larger. This assures commercial partners of a certain level of monetary stability, even though the exact amount available for expenses may not be discernible.

UG advantages

  • The base assets require to be at least 1 EUR
  • Could be one or more shareholders
  • Easy to establish
  • Adaptable framework for overseeing corporate operations
  • At any point it is practicable to transfer into GmbH

UG disadvantages

  • May be perceived as lacking credibility compared to a GmbH by sellers, suppliers, and partners
  • Shareholders profit distribution is restricted to 75% of profits until €25,000.00 share capital is amassed.
  • Risk of bankruptcy, if share capital is very low

Summarising: The UG became very famous in the German business environment. It is manageable and rapid to establish, and needs at least one shareholder, and a small amount of capital (1 euro). The UG is elastic, giving the possibility for shareholders to customise the regulatory structure in order to respond to their demand.

On the other hand, there are plenty of weak points to the UG. This type of corporation might appear less trustworthy to customers, suppliers, and partners. Additionally, the distribution of profits to shareholders is constrained until €25,000.00 of share capital is accrued.

GmbH strong sides

  • Restricted shareholder’ liability
  • Approved to be presented by one or several shareholders
  • Trustworthiness among clients, suppliers, and partners

GmbH weak sides

  • Needs larger investments in comparison with UG
  • 12500 EUR of share capital

Summarising: A GmbH, is a business entity in Germany providing shareholders with limited liability. This implies that they are solely accountable for the amount they’ve invested in the organisation and aren’t in charge of any incurred contracts or losses beyond that. GmbHs can have one or multiple shareholders, rendering them a favoured choice for businesses. Moreover, GmbHs are generally perceived as more reliable compared to UGs or sole proprietorships, facilitating the attraction of clients, suppliers, and companions.

However, establishing a GmbH entails higher costs than a UG, along with a minimum capital requirement of 12500 euro.

The limited liability company and entrepreneurial company

The restricted liability inherent in UG and GmbH company formations in Germany ensures that shareholders’ risk is confined to their investment in the organisation. This limitation plays a crucial role, providing them with monetary security. Should an organisation  face lawful action or bankruptcy, they are shielded from personal liability for the company’s charges.

This form of responsibility protection is not universally available and can vitaly influence the decision to establish sales and buyings operations in Germany. For organisations performing activity in Germany, the limited liability safeguards provided by UG and GmbH structures may play a pivotal role in their decision-making process.

In conclusion, both UG and GmbH offer distinct strong and weak sides. The optimal legal form for your business hinges on its specific needs and demands. If you are willing to ask any inquiries or require assistance in selecting the appropriate structure for your business, please don’t hesitate to contact us. We’re here to assist you every step of the way.

What differs UG and GmbH?

The key contrast between UG and GmbH lies in joint share assets requirement.

UG allows you to commence your corporation with a share capital of 1 EUR, which makes it more accessible for small business and start-ups. However, UG needs to save annual income until that time, when it reaches 25000 EUR.

In that point, GmbH needs a higher level of liability and requires minor start capital in the amount of 12500 EUR, this provides immediate credibility thanks to higher start assets. It makes GmbH more suitable for establishments or for those companies which look for greater trust of their partners or clients.

What is UG in Germany?

UG in Germany refers to a type of business environment, often known as a “mini-GmbH” or “entrepreneurial company with limited liability.” It was represented in 2008 as a more flexible and accessible alternative to the traditional GmbH

UG shares many characteristics with GmbH, including limited liability for shareholders of this organisation. Nevertheless, the contrast is the lower start capital requirement for UG, which can be as low as 1 EUR, making it particularly attractive for startups and small businesses with limited monetary resources.

Regardless of lower requirements to share capital, UG is operating under the same regulations as the GmbH in Germany. Besides, UG could be reformed into GmbH, as soon as it saves enough capital.

What does UG stand for in Germany?

In English, UG stands for “Unternehmergesellschaft,” which translates to “entrepreneurial company” in German.

How to close an UG in German?

To dissolve a UG in Germany, you typically go through a series of steps:

  1. Shareholders agreement: Shareholders convene and decide on the cessation, recording their decision in the meeting minutes.
  2. Liquidator appointment: An individual or entity is chosen to oversee the termination process, whether from within the company or an external professional.
  3. Official enrollment: The decision to dissolve is officially enrolling with the local trade office and monetary register.
  4. Creditors’ notification: Creditors are informed of the dissolution, and outstanding charges are settled through asset sales or other means.
  5. Asset distribution: Remaining assets are distributed among shareholders after all charges and accountabilities are addressed.
  6. Formal deregistration: Once all lawful obligations are met, including tax matters, the UG is formally deregistered from the monetary register.

It is recommended to seek guidance from lawful or financial experts familiar with German corporate law to ensure submission and smooth handling of the termination process.

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