One quarter of a mini-GmbH’s annual profit has to be contributed to its capital reserves until they reach €25,000, at which point the UG can become a regular GmbH. As a legal entity the mini-GmbH is much the same as a corporation. It has a management board, is subject to corporate taxes, can acquire property, own assets, sue and be sued. The company’s name must contain either the word Unternehmergesellschaft (Business Corporation) or the abbreviation UG.
An advantage of the mini-GmbH is that the founding of it is relatively unbureaucratic and inexpensive. Rather than a complicated protocol, drawn up by a lawyer, the law provides a standard protocol, requiring little information except the purpose of the company, the names of the management board members and a list of shareholders. A notary must confirm the genuineness of the signatures on the protocol, but that is all he needs do. His duties with a GmbH are much more complex and expensive.
Companies formed under this standard protocol may only have one managing director and no more than three shareholders. A UG differs from a GmbH in several other respects also. It may not accumulate capital in anything but cash. A GmbH may also have in kind investments of goods or services. Also in contrast to the GmbH the UG’s managing director must not have been convicted of certain business crimes.
Even with a simplified set-up procedure, there are still many issues from a legal and tax perspective that have to be considered when starting a new business in a new and possibly unknown market.
For example, a company name has to comply with German business law. The name will be entered in the Commercial Register. If there is a question about the company name, the Industrie- und Handelskammer (IHK) can offer the courts an opinion on the admissibility of the company name.
On tax side there is no difference between a mini-GmbH and a GmbH. Both have to be registered at the local tax office. A tax number is assigned that must be uses when required on tax returns and other tax forms.
Working with experts who know the law and tax regulations is recommended. Professional advisors can help an investor learn all that is needed about the process of incorporation and will most likely be able to minimize the financial and personal risk.
Businesses can also be operated as sole proprietorships, but in some ways a corporation, whether a UG or a GmbH, has an advantage. A big one is that the founder’s liability is limited to the company assets. His personal assets can’t be touched except in case of fraud.
A disadvantage of the mini-GmbH may be the requirement that a fourth of the profits be contributed to the capital reserve. Shareholders may be unhappy that so much of the profit they depend on for living expenses is not available to them. This is a good reason for converting to a GmbH as soon as possible.
Also the requirement that the terms Unternehmergesellschaft or UG be added to the company name may make it look as though the managers don’t have enough money for a genuine GmbH. This might affect creditworthiness.
(Article by Ted Shoemaker. Our thanks to Consulting House International for their help with this article.)