Company Form: UG or Mini-GmbH or Unternehmergesellschaft haftungsbeschränkt

This presentation is covering the new "1€-GmbH", which is valid since November 2008.

I have heard that a (r)evolution in German corporate law has occurred. Are they really giving away GmbHs for € 1?

Yes, they are – believe it or not. German parliament has passed the an act enabling the founding of a limited liability company that can compete with its notorious British counterpart. As the Federal Minister of Justice puts it: “The new law on UGs (entrepreneurs company) gives start-ups and investors the necessary framework to quickly and easily realize their entrepreneurial ideas: Simultaneously, this successful legal form has been made fit for international competition: … The UG will become a modern and lean legal form for mid-size companies. This is the most comprehensive reform of GmbH law since it first passed parliament. This act is orientated on the maxims: flexibility and deregulation on the one hand and on the other combat of abuse of this legal form. Besides this, some measures to reduce bureaucracy have been taken.

What are the major advantages?

The new law provides a range of new advantages. Bureaucracy will be significantly reduced, by

  • easing the funding and transferring of shares of the company,
  • introduction of a master company contract,
  • accelerating of registration,
  • relocating the location of the administration to a foreign country,
  • more transparency with shares,
  • bona fide purchase of shares,
  • deregulating of the regulations on equity in kind,
  • combating abuse,

Keep reading. These bullet points will be described in detail below.
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Whenever bureaucracy thinks of accelerating of something, it usually turns out to be an even greater drag. How do they want to speed the founding of companies?

Actually, this new law is only picking up further speed from previous legislation. An act has been passed to convert the company’s registry from paperbound to electronic in 2007. This has been already reported on in an article in this portal. In accordance with this act, applications are to be submitted electronically, then they will be decided on “immediately”, and entered into the registry. Another measure of speeding the foundation is that businesses needing special permission will now be entered without submitting a copy of the granting certificate. So it cannot happen anymore that the company will have a limping existence. It will become registered though it might not yet be allowed to operate. The administrative proceedings will be totally independent of the founding of the company. This is especially relevant for restaurants, bars, handicrafts, chambered free professions, etc.

I’m thinking of a forming a one-man UG. Any there any special reliefs for me?

Why yes, there are. In the future, the office will not ask for special securities anymore. Besides that, you just have to follow the general rules. So keep reading. 

A real help for easily founding a UG would be some kind of relief on the company’s articles of incorporation. What about them? These articles are always so expensive first for the attorney to draft them and the notary to authorize them.

Simple and standard incorporations (e.g. funding with cash, up to three founders) will only need a “master company contract (= Mustergesellschaftsvertrag)”. Keep in mind that German law does not think in terms of an “incorporation of a company” but more of a contract between persons wanting to meet a certain goal. §1 GmbHG states that one or more persons can found a GmbH to pursue a purpose. The rules of such a master company contract are simple and self-explanatory. Therefore, it is actually not necessary anymore for instruction from a notary before signing the contract. The notary now only has to authorize the founders signatures so as to identify them. This master company contract is accompanied by a form to apply for registration (the so-called “founding set” [= "Gründungsset“]). The lack of a requirement for an attorney to draft the contract does not mean that it makes no sense to hire one for a shorter or longer consultation. However, if you want to alter such a master contract, hire an attorney!
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Is there really no catch 22 for such cheap founding? I will be able to invest my profit as I wish, may I not?

Yes and no. Generally, you have the right to do with your profits what you want. However, until the capital of GmbH has been reached (€ 25,000) one quarter of the profits must be left in the company (§5a III 1 GmbHG). Then you may, but do not have to, convert this company to a “normal” GmbH.

Having happily formed my UG, I just had to learn from my financial institution, that I will not have a credit line anymore, as I had when I was still a sole proprietor. Huh? Every GmbH get's a loan but why not my company?

Credit and leasing institutions consider a UG as something like wearing a blinking flashlight on your forehead: "I have no money!" Since you were reluctant, at founding, to sponsor your company with a decent amount of equity, your company might be not considered as credit worthy. This fact is negligible when you are only rendering services or are only "back-end" company.

 What's the difference between a mini-GmbH and a full GmbH?

There are two main difference between these kinds of a GmbH:

  • required capital for the company founding,
  • building mandatory reserve funds.

After a tax year has ended, the UG must put 25% of the profit to a special reserves account in the bookkeeping until company's reserves accumulate to 25 k€. This reserve becomes a part of the statutory capital until the 25k€ have been accumulated. Once this amount has been accumulated, the shareholders may, but do not have to, decide whether to continue with the form UG or "step up" to a GmbH. Typically, it makes sense to step to a GmbH. Why? This relates to the image of a UG.
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