In contrast to the GmbH, the UG (haftungsbeschränkt) can theoretically be formed with as little as €1 in share capital. This is the legislator’s response to the demands of German entrepreneurs for the creation of a limited liability corporation
- with lower capital requirements than the GmbH (€12,500 or €25,000 minimum share capital) but
- with a better reputation than the Limited (£1 (GBP)/€1 (ROI) minimum share capital; bad reputation of the suffix LTD in Germany).
The shareholders’ contributions must be paid into the business account in full before the UG is entered in the commercial register (Section 5a, (2)(1) GmbHG).
Amount of UG share capital
Although share capital of only one euro is legally sufficient for the formation of a UG, more capital should be used. The managing director of a UG is obliged to file an application for the opening of insolvency proceedings if
- the company’s assets no longer cover its liabilities (arithmetical over-indebtedness) and
- they are not able to demonstrate that the company can still be continued in the next two years (Section 15a (4) InsO (German Insolvency Code)).
If the share capital of a UG is only one euro, the company will be arithmetically over-indebted as soon as it purchases two stamps at €0.62, if its assets are not increased by shareholder loans or income from business activities. For this reason, the UG should be provided with sufficient capital when it is formed to allow it to be operational until the first calculated income is received. Short-term liquidity bottlenecks are generally overcome using shareholder loans.
Obligation to save up to €25,000 when operating a UG
The legislator’s intention in creating the UG was for it to be transformed into a “proper” GmbH. Therefore, the managing director is obliged to save a quarter of annual profits until the minimum share capital of the GmbH, which is €25,000, has been reached (Section 5a (3) GmbHG), following which the shareholders change the UG’s name to that of a GmbH by means of a so-called capital increase resolution.
In reality, profits are often eaten up by the salary of the shareholder managing director and the managing director’s income, which is exempt from social security contributions, usually replaces withdrawal. The savings are made through their private assets from which the conversion into a GmbH is made.