Ha ha. A mini company. Where the heck does this miniature approach come from?
The UG was introduced into German law on November 1, 2008. As a rule, Germans do not immediately accept new concepts... The concept of the Mini-GmbH results from the strong competition of the UK Ltd, which needs only one pound sterling to be exempted from private liability. Many Germans, however, wanted to have a limited liability, but could not afford to set the "high amount" of 25 k€. During UK's membership in the EU, obtaining a Ltd. was fairly uncomplicated. Although absolutely legal, a UK Limited caused lawyers and judges enormous headaches in deciding which law would be applicable when and for what in Germany. The Ltd is a British company incorporated under British law and its branch office, which is actually headquarters. operates in a foreign jurisdiction. Concerns revolved around debtor protection and the reputation of the Ltd.
What's the image of UG in daily business? I heard it be awful! Is it really that bad? What is so awful about a UG?
Non-entrepreneurs are not very familiar with this form of company. Only when you say "Mini-GmbH" will they have an idea. Acceptance otherwise depends on your industry and the risk involved. If your company is a business that will make a six-figure profit per annum, you should choose a GmbH directly when deciding whether or not it is a UG. Otherwise you will only lose face! Conservative Germans will frown upon you: "They are so broke that they can't come up with a serious contribution (of 25 k€)!" or "They want to make six-digit profits but only commit with 1 €, that can't be a serious business". If your company is heavily dependent on suppliers, it may be best to have a GmbH. If you are a freelancer and want to appear larger, then the UG is perfect and your company can grow into big business.
The UG is ideal for attracting investors! While you prove your success with your first sales, you earn your first money while looking for a venture capitalist. So what is the bottom line with an UG? You have a legal structure that is suitable for small to medium sized companies. Make sure that your letterhead correctly refers to your company! It is important to add the legal phrase "limited liability" – in German "haftungsbeschränkt".
When better to form a GmbH and not a UG?
Not only the money itself is a major difference in both kinds of companies. It also has to do with the company's acceptance in the market. If your company is dependant on a standing credit line for deliveries, chances are high you will not get one. Why? Conservative / anxious German banks will think around "A UG is an advertising pillar topped with a red alarm light reading "I have no money!" If you have the capital for a GmbH but only found a UG (for cost reasons) and want to play with the big boys in business, you will loose your face "They want to play big but are not able to put down a real contribution for their company? We can't take them for serious!
You're always so negative about a UG; isn't there something good about a UG? When is a UG the right legal form for a business?
Sure, a UG is something good. However, if you are startup hunting for an risk capitalist, this approach will be fine! Why? You can prove with first turnover that your business idea is wanted on the market. You will already have a vehicle to invest in. Investing into an existing company is quicker than first having to open and register. Taking over, stepping up to GmbH, accepting new shareholders all will happen simultaneously to the running business. They give you a head start when connecting with risk capitalists.
What's the financial difference of a UG to a GmbH?
The shareholders of a UG are restricted in using the annual profit. They must put 25% of the profit into a reserve fund and this fund is to save money in order to step up to fully fledged GmbH.
Huh? fully fledged GmbH? What do mean? Is a UG not a legal corporate form and am I doing something wrong?
Relax! You are fine. In the understanding of the lawmaker, a UG is little girl that is to grow up to an adult GmbH.
When do I have to convert my UG to a GmbH?
By the word of law, never. The Act on Limited Liability Companies (GmbHG) does not demand stepping up. Any such demand would violate the principle of private autonomy inside a free market. The shareholders may resolve this change when they deem it best.
Cool. So, once I have saved 12.500 € in the mandatory reserves, I can resolve to change to GmbH and need not add new capital.
Well, theortecally yes, but practicaly, I would not recommend it. In order to convert with only the mandatory reserves, you will have to hire a public auditor to vet that you really have so much valuables/worth in the company and not only in the balance sheet. Such audit is typically expenisive. It is cheaper and quicker to add fresh money and just visit the notary.