Entrepreneurial company (UG)

Entrepreneurial company / Unternehmergesellschaft (UG)

June 11, 2024

The entrepreneurial company (UG) is a special form of the German limited liability company (GmbH). It was introduced as a legal form of company in 2008 and its legal basis is set out in the German Limited Liability Companies Act (GmbHG), while the provisions that differ from those of the GmbH are set out in Section 5a GmbHG.

Like the GmbH, the UG is a corporation, i.e. a company in which membership is based on capital participation in the company and not on the personal co-operation of the shareholders. Corporations are legal entities and therefore have legal capacity, their shareholders are not personally liable and can freely sell their shares in the company.

The UG must operate under the name ‘Unternehmergesellschaft (haftungsbeschränkt)’ or ‘UG (haftungsbeschränkt)’ in accordance with Section 5a (1) GmbHG. This is intended to differentiate it from the GmbH with regard to the minimum share capital, but also to indicate the limitation of liability, which is the same as for the GmbH.

Formation and termination

While the share capital of a GmbH must be at least EUR 25,000 in accordance with Section 5 GmbHG, a UG can be founded with a share capital of just EUR 1 per shareholder in accordance with Section 5a (1) GmbHG. With one founder, the minimum share capital is therefore EUR 1, with two founders EUR 2 and so on.

In contrast to a GmbH, the share capital of a UG must be paid in full and contributions in kind [LINK] are not possible, cf. section 5a para. 2 GmbHG. This also applies to capital increases as long as the share capital remains below EUR 25,000.

Apart from these differences, the regulations on the formation and termination of the GmbH [LINK] apply to the UG: The formation takes place by notarisation of the articles of association (also articles of association) and application for entry in the commercial register. The UG is terminated by a resolution of the shareholders to dissolve the company on the basis of the grounds for dissolution in § 60 GmbHG.

Position of the shareholders

As with a GmbH, only the person entered in the list of shareholders is the owner of a share. This list and any changes to it must be submitted to the commercial register. Shareholders can be natural persons, partnerships and other legal entities.

In all other respects, in particular with regard to the obligations of the shareholders towards the company and the options for leaving the UG, the corresponding regulations for the GmbH also apply.

With the introduction of the UG, the legislator wanted to open up the possibility of founding a corporation for companies with a weaker capital base. In order to ensure that profitable UGs grow to a minimum share capital of EUR 25,000, there are special retention obligations for the UG: a quarter of the annual net profit less the loss carried forward from the previous year must be included in the balance sheet as a reserve in accordance with Section 266 (3) HGB, Section 5a (3) GmbHG.

In deviation from § 49 Para. 3 GmbHG, according to which an extraordinary shareholders‘ meeting must be convened if half of the share capital is lost, § 5a Para. 4 applies to the UG, according to which such an extraordinary shareholders’ meeting only has to be convened if there is a threat of insolvency.

Management, representation and liability

With regard to management and representation by the shareholder(s), the corresponding provisions for a GmbH apply.

Transition to the GmbH

If the UG succeeds in increasing its share capital to at least EUR 25,000, it can be converted into a GmbH. This is not mandatory; it can continue to operate as a UG. However, this is not a change of legal form within the meaning of reorganisation law, but merely a change of company (i.e. change of name), § 5a Para. 5 GmbHG.

As soon as the reserve amounts to at least EUR 25,000, the shareholders can increase the share capital to at least EUR 25,000 in a notarised resolution and the UG becomes a GmbH as a result of this capital increase and a shareholder resolution on the change of company name. The special regulations for UGs then no longer apply.

Pros and cons

The advantages of forming a UG include the low minimum share capital, the limitation of liability to the company's assets and lower taxation. The disadvantages are the obligation to save or retain profits (see above), which excludes the distribution of all profits, the inability to make contributions in kind, disadvantages in the assessment of creditworthiness and the frequent occurrence of over-indebtedness.