How to set up a UG company: Your guide to starting an entrepreneurial company in Germany

How to start a UG

Quick reference guide

1. Plan the company structure
2. Formulate the UG’s company name and business purpose
3. Sort out the articles of association and share capital
4. Get a notary to certify the UG
5. Open a business account for the UG
6. Register a trade and apply for a tax number
7. Set up bookkeeping for the UG
8. Get some more registrations
9. Want to know more? 

 

 

UG quick reference guide

1. UG stands for Unternehmergesellschaft
2. It’s the “mini” version of the GmbH – a limited company with limited liability
3. The most streamlined way to form a UG is with the Musterprotokoll (model/standard protocol)
4. Can be formed with low share capital
5. Its share capital can only be cash (i.e., no assets-in-kind)
6. It gets entered into the Handelsregister (commercial register)
7. It comes with the obligation to build reserves until its share capital has grown to €25,000
8. Double-entry bookkeeping & annual accounts are mandatory

Find more information about the UG company here.

#1 Plan the company structure

Before you start anything, make sure you answer the big questions: Who, how, where and how much?

Shareholders (Gesellschafter)

• Who will be Gesellschafter (shareholders) of the new UG?
  Every UG must have at least one. The shareholders pay in the share capital and are the decision-makers.

Management (Geschäftsführung)

• Who will you appoint as the managing director?
  You need at least one managing director at the time of UG formation. Shareholders or employees can fill this position

Articles of association (Gesellschaftsvertrag)

• Are you going to use the Musterprotokoll (the official founding documentation template) or draft an individual Gesellschaftsvertrag (articles of association) for your company? If you decide on the latter, get help from an experienced business lawyer. 
  (More information on this, below.)

Share capital (Stammkapital)

• How much is the Stammkapital (share capital) of the new UG?
  The legal minimum is €1 per shareholder. However, forecast all the expenses that the company could incur before it starts generating revenue. Think about establishment costs, office rent, necessary equipment, initial salary payments and legal/tax advice. The amount of share capital you start with should cover these expenses with a buffer. Otherwise, the share capital that shareholders put into the company after its incorporation usually has to be in the form of a shareholder loan – creating more work for your tax adviser.

Company HQ

• Where should your Firmensitz (headquarters) be located?
  Factors such as rental costs or the regional trade tax rate play a role here. A purely virtual business address is not sufficient. If founders want to use their private residential address, they should answer the next two questions in advance.
• Will you use a private address as the UG’s business address?
  In purely residential areas, commercial enterprises need a permit or are generally prohibited. The municipal or city administration or the building authority is where to enquire about this.
• Will you use a rental property as the UG’s business address?
  Is a commercial operation from the flat permitted under the tenancy agreement? Get written permission from the landlord to prevent disputes down the line.

Erlaubnisse, Lizenzen, Genehmigungen (permits, licences, authorisations)

• Do you need official permission to operate your type of business?
  For some businesses, founders need separate permits, for example, liquor licence for a new bar, professional qualification for opening a driving school, operating-licence for a day-care centre, etc.Check beforehand which permits are due from the authorities. Prioritise these applications before anything else because the processing time is longer than everything else you need to do

 

# 2 Formulate the UG’s Firmenname & Unternehmensgegenstand (company name & objective)

The company name of the UG is published in the Handelsregister (commercial register) and has to appear in all your business communication. Below is a rough guide for naming a new company.

• Names of the founders
  • Fran Miller UG (haftungsbeschränkt)
  • Leimann and sons UG (haftungsbeschränkt)
• Description of the business activity with a personalisation
  • TBM Dry Construction UG (haftungsbeschränkt)
  • 360grad Digital Marketing UG (haftungsbeschränkt)
• Made-up fantasy name
  • Busy Unicorn UG (haftungsbeschränkt)
  • Greenergy UG (haftungsbeschränkt)
• Combination of names
  • Ullrich Buss Locksmith UG (haftungsbeschränkt)
  • iCensor Trading UG (haftungsbeschränkt)

NB: The company name must always have “UG (haftungsbeschränkt)” at the end.

In addition to the company name, founders must formulate an Unternehmensgegenstand (company objective) – this defines the activities of the UG. Click here to find out what you need to know when putting this together

Get checked

Before going to the notary, founders should have the desired name and business purpose pre-checked by the IHK (chamber of commerce). This check has two advantages: The IHK assesses whether they’re legally compliant and whether the name is still permissible in the area of the UG’s Amtsgericht (competent district court).

If you skip this step, you risk the district court rejecting the company name after notarisation. If this happens, you’ll have to get everything notarised all over again – resulting not only in double the notary fees but also in prolonging the formation by days or even weeks.

#3 Sort out the Gesellschaftsvertrag & Stammkapital (articles of association & share capital)

What kind of documents should you use for your company?

There are two options in terms of founding documents: the Musterprotokoll (model articles of associations prescribed by law) or individually drafted articles of association. (Want to know more about the differences?)

A Musterprotokoll is only an option if the company has no more than three shareholders and one managing director, and no alterations to the model statutes are necessary.

If you draft your own articles of association, a company founding team can create company regulations that are a precise fit for the new company.

Founders often opt for the Musterprotokoll to speed up the formation of the UG and save on notary fees. Later down the track, customised articles of association can replace the Musterprotokoll document via another notary appointment.

Determine the Stammkapital for forming a UG

A cornerstone of the articles of association is the Stammkapital (share capital) – here, you have to make many consequential decisions. How much Stammkapital should the new UG have? How should the shares be divided among the partners? An amount between €1-24,999 is possible. Things to think about when making these decisions:

• Setup costs: The chosen share capital should cover all the UG’s starting-up costs.
• Capital contributions: Shareholders have to pay their respective share capital into the business bank account (Geschäftskonto) straight after the notary appointment. (NB. Finding a bank that’ll accept you can be tricky, especially if you’re an international, so work this out well in advance.)
• Resolutions: The shares of the share capital determine the percentage of voting rights in decisions at general meetings.*
• Profits or losses: Surpluses or debts of the UG are also distributed according to shares.*
• Threshold: If the UG share capital exceeds €12,500, a GmbH formation is also an option (but there are liability issues if you do)

*The rules regarding these things are stipulated in the articles of association.

After clarifying these matters, it is time for the notary appointment.

 

#4 The notary appointment

The official part of the UG formation begins with the notary appointment to certify the incorporation. Here, the notary certifies all formation documents and prepares the application to the commercial register. Before the appointment, the founding team should have completed the points on this checklist:

•  Determine the Firmenname (company name) and Unternehmensgegenstand (company objective).
• Submit all documents to the notary’s office (the articles of association and certified powers of representation, if applicable).
• Confirm that shareholders (or their representatives) and managing directors can participate.
• Check that all participants have valid ID documentation and can bring it with them to the appointment.
• Schedule an appointment for the opening of the business bank account.

For more FAQs on the notary appointment, click here. And, if you want to know about the online notary appointment on the horizon, read this article.

 

UG in Gründung

After this step, the UG is ‘in Gründung‘ (‘in formation’). But what does that mean exactly? The UG can already conclude contracts, make purchases or accept orders. But, until the entry in the Handelsregister (commercial register) has been made, the UG shareholders are still personally liable.

#5 Open a business bank account (Geschäftskonto) for your UG

The next step is to deposit the share capital. To do this, you need to open a new Geschäftskonto (a bank account for businesses) for the UG. When choosing a bank, bear in mind that most traditional branch banks require all shareholders and directors to show up at the appointment. The share capital specified in the articles of association must be deposited with the bank in cash – and proportionately by the respective partners.

The bank will then issue a deposit slip. A valid receipt is a bank statement showing that the UG is the account holder.

The UG comes into existence only after:

1. The founders have sent the account statement of the share capital to the notary’s office.
2. The notary’s office has transferred the application to the commercial register to the district court.
3. The district court has not found any reasons to object to the registration.
4. The Handelsregister (commercial register) entry of the UG was published.

 

The post can get you into trouble

Now is the right time to put the company name on the letterbox of the business address. Why? Because the registration court sends the invoice for the entry in the commercial register to the company’s registered office. If the letter is sent back, you risk a significant delay in the formation of the UG.

Unfortunately, it often happens in this phase that founders receive several scam letters at once. The senders scan the Handelsregister for new entries and send invoices that pretend to be official ones from the district court. In reality, the senders only copy the layout and content to get you to transfer the money. This scam is brazen but is in a legal grey area because the recipient of the bill gets entered into a dubious online register. Do not pay under any circumstances if you are not 100% sure that the letter is authentic. Make sure you know how to avoid falling into this trap.

 

#6 Register with the trade office (Gewerbeamt) and the tax office (Finanzamt)

As soon as the UG has received a Handelsregisternummer (commercial register number), you should register with the Gewerbeamt (trade office). Depending on the region, you can do this either in person, in writing or digitally. There is a small fee that varies from state to state.

At the same time, the founders must register the new company with the tax office. To do this, the founders must fill out and submit the tax registration questionnaire. Getting a tax adviser to calculate turnover forecasts etc., is what most (smart) German entrepreneurs do. The tax adviser can also prepare the opening balance sheet, which is a compulsory requirement.

The tax office usually takes a few weeks to issue the tax number. Until then, the UG cannot yet send out bonafide invoices. The sooner this step is completed, the sooner the UG is ready for business.

#7 Set up accounting for the UG

Every UG has to do its own accounting. Therefore, founders should take care of a solution early on. There are several options here. Accounting software is practical but requires at least basic knowledge and is a time sink (make sure you calculate the opportunity cost carefully).

If you don’t have in-house finance people, think about outsourcing the company’s accounting to an external service provider. To save yourself a lot of pain down the road, bed down a good bookkeeping system before doing business. Chaotic stacks of documents or accounting errors become expensive when professionals have to work through them retrospectively.

 

#8 Do more registrations

Depending on how you structure your UG, other bureaucratic things also need your attention.

Employees

When you hire your first employees, a few registrations will be needed, including if your only employee is the managing director. First, apply for a Betriebsnummer (company number) at the Bundesarbeitsagentur (federal employment agency). Then set up the company’s payroll accounting (Lohnbuchhaltung). Both these tasks are essential as they’ll enable you to record and pay wage and salary payments, wage tax and social security contributions correctly.

Statutory accident insurance

For most companies, membership in a Berufsgenossenschaft (employers’ liability insurance association) is compulsory – even without employees. Find out which Berufsgenossenschaft is responsible by contacting the governing body of the DGUV (German statutory accident insurance).

Membership of an official chamber

Membership of the IHK (chamber of commerce and industry), HWK (chamber of trade) or Berufskammer (chamber of professions) is required for almost all companies and is not free of charge. Usually, the responsible chamber will contact you after you have registered your business.

VAT identification number

If your UG will be trading B2B within the EU, the Umsatzsteuer-Identifikationsnummer (VAT ID) number is a must. You need this specific separate tax ID if you issue or receive invoices to companies from other EU states.

Transparency register

Due to an EU directive aimed at combating money laundering, most companies have to register with the Transparenzregister (the German transparency register). Luckily, this step in the company formation process can easily be done online.

Can an Einzelunternehmen be converted into a UG?

A common question about the UG is: Can Kleingewerbe (small businesses), Einzelunternehmen (sole proprietorships) or GbR (civil law partnerships) be “umgewandelt” (converted) into a UG? The term umgewandelt comes from the UmwG (transformation act) – the law that regulates legal form conversions.

However, the UmwG bars Einzelunternehmen from converting into a UG because contributions-in-kind are not permissible in UG formations (§ 5a (2) GmbHG). The contribution of assets such as an existing company is also considered a contribution in kind. However, it is possible to contribute assets-in-kind as capital reserves to the UG after its formation. But, this usually requires the dissolution of the old company – this is where things get complicated, so it’s best to get guidance from a lawyer.

Creditor protection

Why did the legislator ban UG conversions? The crucial point is the difference between liability and creditworthiness. For small businesses and GbRs, the owners or partners are personally and unlimitedly liable. And, whenever it enters into a contract, the liability risk is known to both sides. In contrast, UGs – due to their low share capital – have a poor credit rating but still have limited liability.

Self-employed persons could easily exploit the difference in terms of liability. For example: In a time of crisis, for example, shareholders of a GbR could convert it into a UG. Then the GbR would “outsource” all its liabilities to existing creditors to the new UG. In the event of a UG’s insolvency, the creditors would lose out because the company’s liability would be limited to its tiny corporate assets.

Not allowing unlimited liability businesses to convert into limited liability companies protects the interest of creditors. It is therefore a matter of Gläubigerschutz (creditor protection).

Converting a UG into a GmbH

Under certain conditions, a UG can become a GmbH – the technical term for this is Umfirmierung. First and foremost, you have to increase the Stammkapital (share capital) of the UG to at least €25,000. The UG can get the money either by building up the revenue reserve (§ 57c GmbHG) or by capital contributions from the shareholders. Then there is the passing of the shareholders’ resolution, a notary appointment and other steps. (A change of name is an option but not an obligation.)

 

 

Want to know more?

Our UG (haftungsbeschränkt) essential reading:

1. What is the UG (haftungsbeschränkt) company in Germany?
2. The UG corporation
3. The pros and cons of the UG (haftungsbeschränkt)
4. How to set up a UG company<<<

 

The master list:

All Company Formation blog articles can be found here.