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The advantages and disadvantages of the Mini-GmbH – also known as the UG, small GmbH, or 1-Euro-GmbH

Copyright Photo: airdone / depositphotos.com

 

Are you considering just starting small with a Mini-GmbH? Here’s an overview of the factors which might influence your decision.

What is a Mini-GmbH?

In Germany, an entrepreneurial company with limited liability is most frequently referred to as a UG (“Unternehmergesellschaft (haftungsbeschränkt)”). You might also hear it called a mini-GmbH, small GmbH, or even 1-Euro GmbH.

(N.B. In business transactions it is important that any abbreviation is always used with the suffix “haftungsbeschränkt” (limited liability). Otherwise one runs the risk that the limitation of liability it grants will not apply to that transaction.)

A History of the Mini-GmbH – the German “answer” to the English “Limited” company.

Every member state of the European Union is required to have available legal structures for individuals to trade with limited liability. Until recently, Germany’s GmbH performed this function alone. However, where the English equivalent, the “Limited” company, can be founded with only £1, the GmbH has a threshold of 25,000 €. In order to make it easier for smaller businesses to attain limited liability, the German government created the UG (Unternehmergesellschaft) in 2008.

Before this, the most popular option for small companies in Germany was simply to register as an English “Limited” and operate in Germany. This was made possible by the European Court of Justice’s decision to make all domestic legal forms valid throughout Europe. However, as Brexit approaches, many of the companies which have been founded and run in this way face losing their legal capacity within the EU. As a result, the UG is now the most viable option for small capital limited liability within Germany.

The legal structure of the GmbH and UG are largely the same, hence its designation as the ‘Mini-GmbH’. Its form is even provided for within the same piece of legislation. (The Act on Limited Liability Companies (GmbHG), see § 5a GmbHG.)

The most significant difference between them is that the UG/Mini-GmbH can be founded with a share capital of only 1 € to the normal GmbH’s 25,000 €. This is revolutionary within German company law, making limited liability a realistic prospect for small companies.

Mini-GmbH foundation costs

There are two ways to a establish a UG/Mini-GmbH. The most common mimics the founding of a normal GmbH. That will include foundation costs (registration, notarization, lawyers’ fees etc.) that are not necessarily lower than that of the normal GmbH. In fact, if it is founded with a partnership agreement, the foundation costs of the Mini- and standard GmbH do not differ at all.

However, the final cost of founding a UG/Mini-GmbH is a great deal less, since it can use its share-capital to cover its formation costs. For example, were the foundation share capital is to be 2,000 €, a UG could pay all of its fees (including tax) for the services of Q-Found with its share capital – if its share capital amounts to at least 2,000 €.

The so called ‘model protocol’, is only suitable for sole founders and very small companies. It carries a limit of a single director and a maximum of three shareholders. While this model is significantly cheaper, it does come with some disadvantages. Especially worth mentioning is, that the shareholders may sell their shares without consulting the others.

Learn more about these questions in:

The Mini- GmbH cannot be founded as a non- cash company.

Only in the case of the “large” GmbH it is possible to raise the founding share capital “in kind”. That is, transferring valuable assets or rights to the company (e.g. vehicles, land, patent and trademark rights). In contrast, the UG/Mini-GmbH must be established through financial deposits. However, since the minimum threshold for this contribution is only 1 €, this isn’t usually an issue.

Advantages of the 1-Euro-GmbH

In principle, the UG offers the same legal and tax advantages as the GmbH, most importantly the limitation of liability for its shareholders. It also offers the undisputable advantage of being able to start small. The viability of the business plan can therefore be tested with a much smaller initial outlay.

Disadvantages of the 1- Euro- GmbH

Nevertheless, the 1-Euro-GmbH also has disadvantages. For example, it is assumed that it will ultimately graduate to full GmbH status. Its owners are therefore legally obliged to build reserves of capital stock in service of that aim. At least a quarter of its annual profits must go towards this. Until it happens, these profits cannot go to shareholders.

Furthermore, the “upgrade” of the UG to a GmbH does not occur automatically once this threshold of 12,500 € (half of the minimum share capital in the amount of 25,000 €) has been reached. At additional cost, the Articles of Association must be amended and notarized. Finally, if the increase of the capital stock is to be taken from the reserves, an expert (usually auditor) must confirm that these reserves are in order and available.

The conversion costs from Mini- to standard GmbH can therefore be expected to exceed the effort and costs that would have been incurred if the company had originally been founded as a GmbH. In any case the initial capital contribution usually doesn’t go to waste. It is uses for, among other things:

  • Initial investments.
  • Current expenses.
  • A reserve for difficult quarters.

Therefore, using the UG form is only rewarding in the rare situation that a company is so small it could not make use of 12,500 €.

Finally, the UG does not have a high reputation in business relations. Since it can be founded with only one euro, a Mini-GmbH is often fairly or unfairly judged as unlikely to be creditworthy. In truth, there are many Mini-GmbH’s with healthier finances than some Standard GmbHs. But in practice its reputation usually means that Mini-GmbHs are expected to pay for all of their costs up front.

Foundation of a UG / Mini-GmbH

A limited liability entrepreneurial company can be established in one of two ways. You can either use a simplified procedure with a so-called model protocol, or have a partnership agreement. Formation with a partnership agreement is always best if more than one founder is involved or an external managing director is appointed. Read more about this question: Model Protocol or Partnership Agreement

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