Contents
- The gUG legal form: Definition
- How does UG become a not-for-profit?
- Avoiding pitfalls
- Directness of the non-profit company
- The gUG vs. the UG
- Want to know more?
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The gUG (haftungsbeschränkt) legal form: Definition
The term “gUG (haftungsbeschränkt)” is the abbreviation for “gemeinnützige Unternehmergesellschaft (haftungsbeschränkt)“. In English, this translates to a non-profit enterprise company (limited liability). The gUG (haftungsbeschränkt) legal form is particularly attractive for entrepreneurs with little share capital who do not want to waive the limitation of liability when setting up their company. You can establish a gUG (haftungsbeschränkt) for as little as one euro of share capital.
If €25,000 in share capital is saved through reserves, the gUG (haftungsbeschränkt) can be converted into a gGmbH. If this threshold is exceeded, no additional reserves are necessary. Contributions are generally excluded when setting up a gUG. The non-profit business purpose is characteristic of the gUG (haftungsbeschränkt) legal form. This is the difference to the UG (haftungsbeschränkt), which does not pursue charitable purposes but rather primarily economic interests. Beyond that, the non-profit UG (haftungsbeschränkt) is the baby-brother version of the non-profit GmbH – the gGmbH. In short, this means that both the legal form gUG (haftungsbeschränkt) and gGmbH have a non-profit purpose and they’re both bound by the GmbH-Gesetz (limited liability companies act).
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How does UG (haftungsbeschränkt) become non-profit?
In order to be recognised as a non-profit UG (haftungsbeschränkt), you must specify certain features in the Gesellschaftsvertrag (articles of association). Only if you observe these can your gUG (haftungsbeschränkt) be provisionally recognised as a non-profit by the tax office.
What does this “provisional recognition of charitable status” mean for your gUG?
If you establish your gUG (haftungsbeschränkt), you will only receive a preliminary determination of non-profit status from the tax office. You’re allowed to call your company a non-profit limited liability company (UG) and handle the day-to-day business accordingly. Still, the final recognition is always done after the annual tax declaration. If you do not sufficiently fulfil your charitable purpose, the tax office can revoke your Status der Gemeinnützigkeit (non-profit status). In the worst case, you will have to pay additional taxes.
Non-profit purpose
The GmbH-Gesetz (limited liability companies act) stipulates that the purpose of your gUG (haftungsbeschränkt) must be non-profit, charitable, and/or ecclesiastical. When the company is founded, the tax office checks this purpose. You can read about a non-profit business purpose in our professional article about the business purpose of the non-profit GmbH.
Asset commitment for your gUG (haftungsbeschränkt)
A beneficiary organisation must be specified in the articles of association when the company is formed. In the event of dissolution of the non-profit UG (haftungsbeschränkt), it will receive any surpluses earned. It must also be non-profit. These include, for example, non-profit associations, gGmbHs, foundations or other gUGs (haftungsbeschränkt). Alternatively, it is possible to determine only the charitable purpose, which is to be supported with any surpluses in the event of dissolution.
You can’t use the standardised founding documents
Forming a gUG/gGmbH using the Musterprotokoll (standardised template) is not possible. The standardised template cannot be altered to serve the needs of a non-profit company.
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Avoiding certain pitfalls in business operations
Altruism of the non-profit UG (haftungsbeschränkt)
Altruism essentially means that only persons who are directly involved in the fulfilment of the business purpose may benefit. This means that generally, no profits can be distributed to the shareholders of gUG (haftungsbeschränkt). Salaries or wages must also be related to performance. For example, suppose you have opened a language school for migrants and enjoy high income. In that case, you cannot simply distribute these profits to the partners, increase salaries disproportionately or transfer the money to people who have nothing to do with the language school. That doesn’t mean that the salaries of employees shouldn’t be increased, but only that these increases should be within a normal range. The profits are ultimately intended to serve the common good.
The directness of the non-profit company
If your gUG (haftungsbeschränkt) has profits or income to register, then these must be supplied in principle directly to the non-profit business purpose. This also means that the charitable purpose should be fulfilled directly. A company that works for a company that pursues a non-profit purpose is not a non-profit organisation. For example, suppose you start a cleaning company that cleans changing rooms in a non-profit sports club or rents property to non-profit organisations. In that case, such companies are generally not recognised as non-profit. However, even here, there are some gaps in the legislation. That’s why consulting a tax consultant or lawyer is worthwhile.
The employment contract and the salary of the managing director of your non-profit UG (haftungsbeschränkt) should be checked by a lawyer or tax consultant. If a managing director’s salary is too high, it may be regarded by the tax office as a hidden distribution of profits. In special cases, this can be regarded as tax evasion and may mean the loss of charitable status. That’s why the support of a lawyer or tax advisor is advisable for the current course of business and with larger foundations, non-profit associations and gGmbHs. Early consultation saves costs in the long term.
Got questions about setting up a business in Germany?
- Startup expert
- 10+ years experience
Hi, I’m Andreas, and I’ve been advising businesses in Germany for over a decade.
I’d be happy to call you and answer any questions you have in a one-on-one consultation.
The gUG vs. the UG
gUG share capital
As described above, the gUG (haftungsbeschränkt) is the non-profit version of the UG (haftungsbeschränkt). The enormous advantage of the non-profit UG (haftungsbeschränkt) and UG (haftungsbeschränkt) over the more traditional gGmbH and GmbH is that both can be founded for only € 1 in share capital. However, the law stipulates that a gUG (haftungsbeschränkt) must form reserves from 25 per cent of the profit reduced by the loss carried forward each year. This is intended to ensure that gUG (haftungsbeschränkt) has at some point saved a share capital of 25,000 € and can be converted into a gGmbH.
The gUG vs. the GmbH-Gesetz – limited liability company laws
On the one hand, you would have to follow the Grundsatz der Unmittelbarkeit (principle of immediacy) and transfer all profits to the charitable purpose of your non-profit limited partnership as defined in the articles of association. On the other hand, 25% of the profit must also be allocated to the share capital. So there’s a conflict between the non-profit and company law. In this case, the GmbH-Gesetz takes precedence. 25% of the annual profit of the non-profit company must be used to increase the share capital until this amounts to €25,000. Only then can a gUG (haftungsbeschränkt) be converted into a gGmbH.
You should state in your articles of association that in the event of dissolution, only the originally paid-in share capital will be paid out to the shareholders. If you want to form reserves, this is only possible to a certain extent, under certain conditions and the formation of reserves should be indicated in the balance sheet. Otherwise, you would be in breach of the Grundsatz der unmittelbaren Mittelverwendung (principle of direct use of funds).
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gUG limitation of liability
The GmbH-Gesetz (limited liability companies act) generally limits the liability of the partners for the share capital. Therefore, the same laws apply to gUG (haftungsbeschränkt) as to gGmbH.
How does a non-profit UG compare to a non-profit GmbH?
In principle, the legal forms of non-profit UG (haftungsbeschränkt), gGmbH, non-profit association, and foundation are suitable for implementing a non-profit purpose. The attractiveness of gUG (haftungsbeschränkt) and gGmbH is due to their entrepreneurial orientation. So, anyone planning a charitable mission on a large scale should use gGmbH.
If you want to start smaller, form a gUG (haftungsbeschränkt). This has the advantage that it is also possible to establish a company without €25,000 of share capital. However, 25% of the annual profit must be used to build reserves. As such, this 25% will not flow into your social projects.
In the end, both the gUG (haftungsbeschränkt) and gGmbH legal forms are bound by the German LLC law. Therefore, the two legal forms hardly differ from each other.
Want to talk to a human about setting up a business in Germany?
- Startup expert
- 10+ years experience
Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.
Want to know more about the UG?
What is a UG?
What is a UG (haftungsbeschränkt)?
The UG Corporation
The pros and cons
How to guides for the UG
How to set up a UG company
How to set up a company
How to choose the right legal form
When to form a UG
When to form a UG or GmbH
Should I use the calendar year?
Master list:
All Company Formation articles
