Introducing the German Mini-GmbH
Thanks to a legal reform passed in 2008, it is now easier to found a new company in Germany, or shift sole proprietorship to a corporation. The new law both makes the process of doing so, simply, and also less expensive.
Shortened to the ‘mini GmbH’ the law reform is more properly called the Unternehmergesellschaft of UG.
It can be set up with just a Euro of capital, or any other financial sum up to the maximum of 25,000 Euros, which is required to set up a regular corporation.
This low investment is attractive for global investors who are keen to invest in Germany and grow their business across Europe.
As part of the mini-GmbH arrangement, 25pc of its annual profits must be transferred to the corporation’s capital reserves fund, until a total of 25,000 Euros has accrued. At this point, the corporation can transfer its legal status to a regular GmbH.
A body with mini-GmbH status has legal status much akin to a corporation, with a management board, a reuqirement to pay corporation taxes, the ability to sue and be sued, and the right to own assets and acquire property.
Under the law, the corporation’s name must include the UG abbreviation, or the full word ‘Unternehmergesellschaft’ which translates into ‘Business Corporation’.
Advantages of the mini-GmbH
This type of set-up is advantageous because it is relatively low cost and also attracts less bureaucy. No lawyers are required to set up complex individual protocols – instead these are standardised and simplified as far as possible by the law, which requires minimal information other than:
- The company purpose
- The names of the management board, and;
- A shareholder list
The notary will confirm that the signatures are genuine, but this is the limit of their required involvement.
The requirements of the full UG
This is far more complex to administer, and costs significantly more. Those firms incorporated under the standard GmbH protocol are only allowed one single managing director and a maximum of three shareholders.
The UG differs in other ways too. It can only accumulate its capital in cash, whereas a GmbH can accrue in-kind services or goods in its capital reserves.
With a UG, the Managing Director must also have no prior record of any business related crimes.
Tax and legal considerations
It is important to note however that, even with the new simplified incorporation procedure, there are a range of legal and tax issues that must be factored in when contemplating a new business venture in an unknown market.
One example relates to the corporate name, which has to be compliant with strict regulations under Germany’s business laws. This name will be confirmed andl isted in the Commercial Register, and if any question arises about it, the Industrie- und Handelskammer (IHK) will be asked to give their opinion on the name’s admissability to the German courts.
For taxes, the requirements are similar for both full GmbH corporations and mini GmbH companies. Both are required to be fully registered at their local taxation office and will use their assigned unique number when submitting returns and taxation documentation.
It is also recommended to work with corporation experts who can advise on tax and legal regulations when considering a new incorporation. Investors will always benefit from accessing specialist advice from professional advisors and minimise the risk of personal and financial risk by doing so.
The consideration of sole ownership
Businesses are also able to operate under sole ownership arrangements, but corporations of both types discussed above offer key advantages in Germany. A primary advance regards limitation of liability to company assets for the founder – with a corporation, the founder’s assets can only be accessed if fraud has occurred.
There is a possible disadvantage of the mini-GmbH structure which is the requirement to distribute one quarter of all profits to the capital reserve. This may limit shareholder profit access, but it is one good reason to rapidly convert to the full GmbH status when possible.
One other potential downside is that the company name inclusion of UG or Unternehmergesellschaft can flag up to external parties that the corporation’s managers may lack the necessary funds for the full GmbH status, and negatively affect the firm’s creditworthiness.
As ever, professional advice is recommended before taking any decisions.