Which legal form of company in Germany is the best for a foreigner?
The most popular forms among foreign entrepreneurs are UG (haftungsbeschränkt or so called "Mini GmbH) and GmbH (Limited liability company, LLC). They are “flexible” and more affordable than most of the other types of limited liability companies in Germany. Furthermore, in most cases GmbH and UG provide everything you need to officially run a business in Germany.
Except for some unique details, the UG (Mini-GmbH) generally shares the same responsibilities as the standard GmbH. Even though for the UG registration one needs a significantly lower share capital, the optimality of the choice between the UG vs GmbH (Mini Gmbh vs GmbH) directly depends on a set of parameters.
There are a lot of articles on UG and GmbH. However, many of them are written in complicated legal language and don’t explain the main benefits and disadvantages for a foreign entrepreneur. In this article we will try to explain the main differences between a UG and a GmbH in plain language.
1. What UG and GmbH have in common
Both UG and GmbH are an independent legal company with an individual shareholder. The company bears most responsibilities, not the shareholder. The company makes contracts, possesses assets and is responsible for taxes.
Liability: Limited liability of the shareholders. It means that the liability of the shareholders is limited to corporation legal assets, including the share capital. There is no personal liability of the shareholders of both UG and GmbH unless a fraud is made.
Shareholders: The shareholders of both GmbH and UG can be individuals or legal entities who are German or foreign nationals. It is not required to have more than one shareholder.
Managing director: GmbH and UG must be represented by a Managing Director(s). The Managing Director(s) can be either a shareholder or a 3rd person outside the company. It is not necessary that the Managing Director of the GmbH or UG is a German citizen. If he or she is managing the company from abroad, they must ensure the ability to enter the country (e.g. have a business visa).
What does it mean for foreigners? Every foreigner can register a UG and a GmbH in Germany, even if they are not EU citizens.
NB. Though it is not required for company registration that the Managing Director is an EU citizen or has a residence permit, some banks might decline opening an account when there is no company representative in Germany. Depending on the district and tax authority, the same problem may occur with obtaining a tax number. That is why it is suggested to assign a local authorized recipient who can at least receive documents on behalf of the company.
2. Share Capital: UG vs GmbH
The minimum amount of share capital required for a GmbH is 25 000 euros. For GmbH registration it is enough to deposit half of that amount, i.e. 12 500 Euros. The contributions in the share capital of a GmbH can be made in cash or in kind (equipment, property or other assets).
The minimum amount of share capital required for a UG is 1 euro. This is a significant advantage over the GmbH for most start-up businesses. However, one must keep in mind the following conditions:
While it is allowed to register a UG with 1 Euro of share capital, the company must consider all possible operational costs before the company formation. Even with minimum operational costs the company must pay the rent, fees, accounting services. If, for example, the company budget is only 1500 Euros, the UG can very soon fail to meet its obligations. As a result the company must file for insolvency. Not filing for insolvency or late filing is a criminal offense.
Many start-up UGs failed because of underestimating the start-up budget of the company. That is why we provide budgeting and cost optimization as part of our company formation packages.
Unlike GmbH the contributions in share capital of the UG can only be made in cash (no contribution in kind is permitted).
3. Profit distribution: UG vs GmbH
The UG can not fully distribute its profit. Instead, it must build statutory provisions (reserves) by transferring 25% of its net profit each year. This reserve cannot be used for any other purpose other than to increase the share capital. Upon reaching 25 000 euros of statutory provisions-including the shared capital-the UG can be transformed into a GmbH. There is neither a particular timeline nor the obligation to transform the UG into a GmbH.
Note: Usually the transformation of the UG into GmbH turns out to be more expensive than simply registering a GmbH from the start.
4. Credibility: UG vs GmbH
By law you are obligated to write the full name of your company including its legal form. For example: “Mango Export GmbH” or “Mango Export UG”. It means that all your business partners and customers will clearly see that the share capital of 25 000 euros has been invested or it is just a “1 euro” company.
If you are going to win the market or become a long term supplier for German companies, the image of a GmbH might be quite important. Conservative Germans are often very skeptical about those who are not capable of supporting the business with contributions, and take the UG form as a sign that the owners have no money. It becomes even more important if you are a foreigner without a German manager and a real office.
On the other hand, if you are not aiming for big sales, your products or services are inexpensive, or you are just testing the market it is not a bad idea to start with a UG. The more expensive and complicated your products are, or the more sales you are aiming for, the chances are greater that the UG company legal form will make a negative impact on your business.
The other thing a foreign person should consider when choosing between UG and GmbH is their intention to apply for German residence. While owning a GmbH does not automatically give the shareholders the right to obtain residence, it is a good step to show to the foreign office the seriousness of your intentions to run a business in Germany.
Compact comparison: UG (Mini-GmbH) vs GmbH
|Share capital||25 000 €||from 1 €|
+25% annual net profit
can be foreign person
can be foreign person
|Company image and credibility||****||**|
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This document (and any information accessed through links in this document) is intended for general informational purposes only and is not a substitute for professional advice. Each situation is unique and professional advice should always be obtained before taking or refraining from any action.