In attempting to become more friendly to global entrepreneurs, Germany introduced changes in the Residence Act in 2012, in which residence permits can be issued when starting a viable business in the country. Entrepreneurs can receive a residence permit for self-employment according to § 21 (1) of the Residence Act.
Qualified candidates should fulfill the following requirements:
Be able to prove a legitimate commercial interest or regional demand for the product or service that the business offers.
Be able to present positive impacts on the economy based on the business’ activity.
One attractive business type embraced by entrepreneurs and start-ups is the UGentrepreneurial company with limited liability (or Unternehmergesellschaft (haftungsbeschränkt) in German). It is similar to the more common GmbH (Gesellschaft mit beschränkter Haftung, or limited liability company), with the main exception being the lower required capital to start the company.
UG vs GmbH: Which is better for entrepreneurs?
There are certain factors to consider when deciding between establishing a UG or GmbH company. First, there are some basic shared similarities:
Both are commercial entity types with limited liability.
Both are private legal entities with individual shareholders.
Both must be represented by at least one managing director, who is either the shareholder or a 3rd party separate from the company. This individual can even be a non-German.
Now let’s consider the differences:
Starting Cost: UGs are very attractive based on the considerably low cost required to be established. It is sometimes known as the “1-Euro Company” since you can theoretically start the business with just €1 in cash. This is a stark contrast to the €25,000 minimum shared capital that a GmbH must have (although only €12,500 of the capital is required at signing). Nevertheless, entrepreneurs should consider all the additional costs required to open their business beyond the minimum requirements for the share capital. Furthermore, contributions to the share capital of a GmbH can be made in cash and various other assets (such as equipment or property value). On the other hand, the share capital of a UG can only be made in cash.
Credibility: Being the standard entity type in Germany, the GmbH is widely respected domestically as well as abroad. Conversely, there is a certain reputation that comes with UGs, stemming from the low initial investment cost. If the product or service is more on the inexpensive end, or if you only intend to test the market, then it is reasonable to establish it as a UG. However, starting the company with very little funding may signify to investors or business clients that there is “no money in the company”. This may prove to be a challenge for startups who intend to provide a complex, expensive service or achieve big sales.
Profit accumulation obligation: UGs must allocate 25% of its cash profit each year as a reserve until it reaches the €25,000 minimum. Once a UG’s annual profit has reached €25,000, it can become a regular GmbH. However, in reality, it may be more costly to convert a UG to GmbH than to just register as a GmbH from the beginning.
While we support entrepreneurs with any range of capital, overall we recommend opening a GmbH over a UG in most cases. Aspiring company founders interested in legal assistance are welcome to contact our experienced German bilingual attorneys to help navigate through the bureaucratic process.
Contact us for help in establishing your start-up in Germany
At ZELLER & SEYFERT, German Attorney at Law Dr. Christian Zeller is in charge of the Employment & Corporate Law department and would be happy to help you establish your start-up in Germany. Our law firm is situated in Frankfurt and Berlin, but we have successfully counseled and represented expats based all over Germany, including Düsseldorf, Munich, Hamburg, Stuttgart, and in many other German cities and towns. We are available to you 24 hours a day, 7 days a week by phone (+49 (0) 69-58 80 972-40) or by email (email@example.com). Through our 24/7 Contact button on the right, you can fill out the Direct message form, book an initial consultancy appointment (free of charge) with an expert in German Employment Law, request a Call-back within 24 hours, or start a Live chat with our law firm. Regardless of how you choose to get in touch, we look forward to hearing from you.