Key Points at a Glance
- A GmbH and a UG are both limited liability companies
- The incorporation of a GmbH requires a significantly higher share capital
- The conversion of a UG into a GmbH is carried out by means of a capital increase
What is a GmbH and what is a UG?
A GmbH is a legal entity whose liability is limited to the company’s share capital. The shareholders and managing directors of the GmbH are therefore not personally liable for the company’s obligations. A GmbH must be established with a minimum share capital of EUR 25,000. The main difference between a GmbH and an entrepreneurial company (“UG”) lies in the share capital. A UG can, in theory, be founded with as little as one euro in capital.
What are the differences between a GmbH and a UG?
Both the GmbH and the UG are forms of limited liability companies (Kapitalgesellschaften) that can acquire rights and assume obligations in their own name, with liability limited to the company’s share capital. However, there are several key differences that are relevant when deciding whether to establish a UG or a GmbH:
- Share capital: Establishing a GmbH requires a minimum share capital of EUR 25,000, although an initial payment of EUR 12,500 is sufficient at the time of formation. By contrast, forming a UG is significantly less expensive, as the statutory minimum share capital is only one euro.
- Contributions in kind: A GmbH may also be established with contributions in kind (e.g. receivables, real estate, or shares in other companies) instead of cash. For a UG, however, contributions in kind are not permitted.
- Notary fees: The notary fees for establishing a GmbH or a UG are roughly the same — generally around EUR 900. Lower costs may be achieved by using a standardized model protocol, in which case the total fees (depending on the chosen share capital) are typically around EUR 300.
- Profit distribution: If a GmbH generates profits, the shareholders are free to decide how to use them. In contrast, a UG is legally required to allocate 25% of its annual profits to a statutory reserve. This reserve enables the UG to gradually build up capital until it reaches the GmbH’s minimum share capital of EUR 25,000. The obligation to create this reserve continues until the UG is “converted” into a GmbH.
- Reputation: Due to its low capital requirements, the UG is primarily used by founders with limited funds. Consequently, in business practice, the UG does not convey the same level of credibility and financial solidity as a GmbH.
When is it advisable to establish a UG?
Setting up a UG can be advantageous in the following situations:
- Low capital requirements: When forming a GmbH, it is sufficient to pay in only half of the minimum share capital — i.e. EUR 12,500 — at the time of incorporation, with the remaining EUR 12,500 payable later. In contrast, a UG can be established with share capital as low as one euro. However, in a UG the full amount of share capital must be paid in at the outset. Therefore, forming a UG is advisable if less than EUR 12,500 is available and the company does not require additional capital for its operations.
- Holding structure: A UG is often used by founders who wish to hold shares in their operating company through a holding entity. Such holding structures can be particularly beneficial for tax purposes. In addition, a holding company typically has no significant operating capital requirements of its own.
When is it advisable to establish a GmbH?
Forming a GmbH is advisable when sufficient funds are available at the time of incorporation and the business model requires substantial operating capital. In such cases, it is often more practical to avoid the additional costs associated with later converting a UG into a GmbH. A GmbH also conveys greater credibility and professionalism — an important factor, particularly if external investors are to be brought in at a later stage.
How is a UG converted into a GmbH?
The “conversion” of a UG into a GmbH is achieved by increasing the company’s share capital. To do so, the share capital must be raised to EUR 25,000. This process is not a conversion within the meaning of the German Transformation Act, but rather a capital increase that also changes the legal designation (for example, Autowerkstatt GmbH instead of Autowerkstatt UG.
The capital increase can be carried out in two ways:
- Increase from company funds: The share capital can be increased using the company’s own funds. In this case, retained earnings are converted into share capital. However, this requires an audited balance sheet, which typically incurs additional costs of several thousand euros.
- Cash or non-cash contribution: Alternatively, new shares can be issued in exchange for cash payments or contributions in kind (e.g. real estate). This method has the advantage that no audited balance sheet is required, thereby avoiding significant additional costs.
The main reasons for later converting a UG into a GmbH are the higher reputation associated with a GmbH and the elimination of the statutory requirement to allocate 25% of annual profits to a legal reserve.
