Why choosing a UG as a legal form does not always make sense

Finding the right legal form for your company is not always easy. For this reason, you should always be well informed about the advantages and disadvantages of a legal form. Here you will find an overview of all the disadvantages of the UG.

The distribution is limited for the UG, especially at the beginning. If the share capital is less than EUR 25,000, the UG is obliged to pay 25% of the profits in the financial year into the business account each year as a reserve. This obligation exists until the EUR 25,000 has been paid in as share capital reserves, regardless of the financial situation of the shareholders.

In addition, contributions in kind are not permitted as share capital reserves for the UG. Deposit payments must be made in full in cash. In practice, this means that the company’s capital cannot be increased by tangible reserves such as machinery, patents or buildings.

There are no differences in the taxation of profits. The UG is obliged to pay trade tax. In addition, the shareholders pay capital gains tax (25%). The UG must also pay VAT of 19% and corporation tax of 15% (plus solidarity surcharge).

The UG can be founded with a minimum capital value of just one euro. This makes entrepreneurship easy and accessible for many start-ups. What is an advantage in this respect is also a disadvantage. If the share capital is too low, the risk of insolvency is very high if, for example, invoices cannot be paid. A UG with a low capital value brings no marketing advantage. Many contractual partners would therefore like more security in commercial transactions and therefore obligate shareholders of the UG personally.

Founding an entrepreneurial company (haftungsbeschränkt) makes particular sense for entrepreneurs who wish to limit their liability in their self-employment and manage with little capital. In principle, the GmbH enjoys a higher reputation in commercial transactions due to its high share capital. Nevertheless, the choice of a UG can make sense and, with its low minimum share capital value, enables an easy entry into entrepreneurship.

The Unternehmergesellschaft (UG) is an interesting and flexible legal form that enables founders to start a business with minimal capital. The UG offers limited liability and is therefore particularly attractive for start-ups and small businesses. However, despite the advantages, such as the simple formation and the low minimum capital, there are also some disadvantages to consider, such as the limited distribution of profits and the low level of trust among business partners. However, anyone who is aware of the risks and observes the reserve regulations can use the UG as an ideal entry-level form to become a GmbH in the long term and thereby gain prestige.