UG vs. GmbH — Selecting the Business Entity

This post is part of a series in which we are sharing our experience of founding a company in Germany. We hope it might help others working their way through the foundation process. Read the first post in the series for more details.

Choosing between UG and GmbH

Although we like to think of ourselves as a global remote company, the two founders are both currently based in Germany, so it made sense to found the companies here. There are many business entity types in Germany. Plenty of sites can provide a good overview of what they are (like this one). It was clear to us that we wanted a limited liability company. You’re already taking a risk when founding a business, so it makes sense to limit your downside by setting the amount you’re willing to lose if it all goes downhill. The point of the limited liability company is to limit the amount you are prepared to lose to the amount of capital you invested in the business in the first place.

We decided to select the Gesellschaft mit beschränkter Haftung (GmbH) as the business entity for our operating business. There are many useful guides and websites that will help you work through the foundation of a company in Germany, they’re even available in English like this one for GmbH and this one for Unternehmergesellschaft (UG). But they tend to be quite generic and they didn’t always cover the questions we were asking ourselves. So we thought it could be useful to share our experience, as a case study, to illustrate the process that we went through step by step.

The GmbH is the most popular form of limited liability company in Germany. But there is a newer and more founder-friendly option called the Unternehmergesellschaft (UG), sometimes called a mini-GmbH. The UG was created in 2008 to compete with the Private Company Limited by Shares from the UK, which was popular for its simplicity and without Brexit in sight at the time could easily be used to operate in Germany due to the EU free market.

A UG is essentially a GmbH, but with lower share capital (equity) required. To found a GmbH you need to pay in €12,500 Euro at the foundation and commit to €25,000 Euro equity in total. So your liability is much higher. With a UG you can put as little as €1 — not that that’s practical in any way, as it won’t even cover the cost of the notary to found the company and you’ll be bankrupt before you even get going.

A GmbH is a bit more expensive to create, I’ll provide an overview of the costs in a later post. But in reality, they are very similar. A UG can be transformed into a GmbH once the share capital reaches 25,000. One distinction of the UG is that 25% of the annual net income must be placed into a provision (we’re talking about accounting here) until the €25,000 share capital is reached.

The drawback of a UG is credibility. A GmbH sends the signal of being a more established business because it’s share capital is higher. A business partner can’t tell how much of that share capital is still available to pay the bills, but at least he knows it was there at some point.

Here’s a video that explains the difference between UG and GmbH:

In the end, we went for a mix. We ended up with a structure that included two GmbH and a UG. Why did we do this? Curiosity mostly.

We knew we would need more than €25,000 in capital to build our product. So making the operating company a GmbH was a no-brainer. The holding companies need to invest the share capital on behalf of the founders. They didn’t need the full €25,000 equity. So a UG made sense, especially since they are passive and basically only exist to hold shares in the operating company. Credibility is not an issue. We ended up with one UG and one GmbH, but we could have gone with two UG or two GmbH. There really isn’t a huge difference. The big question is how much equity you want to put in on day one. If it’s less than €12,500, you can go with the UG.

In this post, I provide an overview of the cost of foundation for each company we founded.

Read the other posts in this series:

Disclaimer: We’re not lawyers or tax advisors, to stay on the safe side consult an expert before doing anything 😉

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