Would you like to found a company with just €1 of start-up capital? That sounds very attractive for many sole proprietors and start-ups. With UG (Unternehmergesellschaft) this is theoretically possible and that is why it is a popular alternative to the GmbH.
But beware: If you are thinking about transforming your company to another legal form or planning a start-up and are looking for a good alternative to a GmbH, you should not hastily opt for a UG. Because in my opinion, there are in fact four legal forms that might be suitable for you.
In this article will explain these four legal forms.
Please note: The alternatives presented here are suitable for GmbH owners who want to further optimize their tax situation, as well as sole proprietors or new entrepreneurs.
The GmbH alternatives at a quick glance:
- Alternative 1: “Mini” limited liability corporation (UG)
- Alternative 2: Limited partnership (KG)
- Alternative 3: Limited partnership with a GmbH as general partner (GmbH & Co. KG)
- Alternative 4: Atypical silent GmbH (atypisch stille GmbH)
This post was updated on 3 August 2021.
GmbH Alternative 1: “Mini” limited liability corporation (UG)
A UG (Unternehmergesellschaft) is a limited liability corporation with almost no initial stock capital. The UG or so-called mini-GmbH was introduced in 2008 as the German answer to the British Limited and is the little sister of the GmbH.
To found one, you only need a minimum of €1 initial stock capital. This is the main difference to the GmbH, otherwise the UG is basically subject to the same laws as the GmbH (see Section 5a German Limited Liability Company Act (GmbHG)).
The advantages of the UG
- Low liability capital: In theory, a UG can be founded with only €1 of liability capital. However, bear in mind that you also have to pay notary and court costs. This is why, you can expect total costs of at least. €1,000.
- Company pension scheme: With a UG you have the option of a company pension.
- Succession is easy to regulate in the articles of association: Company succession is easy to regulate with a UG, since the “right in rem”, which refers to the legal assignment of things, such as property, to persons, is inherited. In other words: With a UG, you can actively participate in determining how something is distributed. With partnerships (e.g. GbR), on the other hand, everyone involved must agree.
- Low cost of converting into a GmbH: If you already own a UG, it is not expensive to convert it into a GmbH. You have, in essence, created a platform for other corporations.
The disadvantages of a UG
- Higher level of administration: There are more formal regulations and requirements governing a UG.For example double entry accounting, which leads to higher tax consultancy fees, additional costs for your own payroll system, etc.
- Higher tax rate: The tax rate for a full distribution is 49%(corporation, trade and income tax). The maximum tax rate is 45% for sole proprietorships or partnerships (e.g. a KG). This means: Even if you have low profits you already pay the highest possible tax rate with a UG!
- Poor credit rating: The low stock capitalcan affect your company’s credit rating. As a result of this low liability capital, banks and contractual partners may be suspicious of you.
- No absolute limited liability: Limited liability can be disregarded by tax offices or bank guarantees.
My conclusion about a UG: In my experience, a UG is never a long-term alternative to a GmbH. As a sole proprietor or new business owner, you may well see a UG as a transitional alternative to the GmbH. However, as soon as you have saved up the required €25,000, you should convert your UG into a GmbH.
If you want to learn more about the differences between a UG and a GmbH, I recommend my detailed article on the subject: GmbH or UG: What is the difference?
GmbH Alternative 2: Limited partnership (KG)
The KG (Kommanditgesellschaft) is a limited partnership with at least two partners. The so-called general partner is liable without limitation with their private assets, while the limited partner is only liable up to the value of their contribution.
The general partner is usually responsible for the management, while the limited partner often does not work in the company at all.
The advantages of the KG
- No minimum capital required: You do not need any fixed capitalto set up a limited partnerships. Theoretically, you could set up a limited partnership with only €1.
- Low taxes on retained earnings:Thanks to the so-called retained profit benefit you pay only 28.25% tax on retained profits (see Section 34a German Income Tax Act (EStG)). This is not possible for a sole proprietorship where all of your profits are always taxed at your personal tax rate of probably more than 40%.
- Positive image and good credit rating:Although you do not have to pay in any minimum capital with a KG, this legal form has a good reputation. As a rule, you have a better standing with banks and business partners than a sole proprietor or UG.
- Private withdrawals are possible:In contrast to a GmbH or UG, you can simply withdraw money from the limited partnership (KG). These cash withdrawals do not have to be taxed and are also not deemed to be hidden profit distribution.
- Lower administrative costs:With a limited partnership, your ongoing costs for accounting and annual financial statements are lower than with a limited liability company.
The disadvantages of a KG
- No limitation of liability for the general partner:As managing director you are always fully liable for the debts of the KG with your private assets. The liability risk here is therefore definitely higher than if you have a GmbH or UG.
- You need at least 2 partners to set up the company:It is often difficult for a sole trader to set up a KG. However, you can register your spouse or another family member as a limited partner.
- Company pension schemes are not possible:Compared to pension provisions for employees, as an entrepreneur you are largely on your own when it comes to retirement plans. Popular ways of providing for retirement, such as a pension commitment are not possible with a KG.
My conclusion about a KG: If you want to avoid the higher administration costs and formalities of a GmbH, a KG can be a good alternative for you. You also benefit from being able to make private withdrawals and you don’t have to raise any minimum capital.
GmbH Alternative 3: Limited partnership with a GmbH as general partner (GmbH & Co. KG)
A GmbH & Co. KG is a combination of the KG presented above and the traditional GmbH.
From a purely legal point of view, it is a limited partnership. Thus, there must be at least one general partner and one limited partner.
However, the role of the general partner is not assumed by a natural person, but by a limited liability company. The limited partners, however, are usually people.
The advantages of a GmbH & Co. KG
- No one is liable without limitation with their private assets:Because the role of the general partner is taken over by a GmbH natural persons are safeguarded from this unlimited liability. For the shareholders of the GmbH, the liability is limited anyway.
- No hidden profit distribution possible:Unlike with a GmbH, you cannot (unintentionally) take financial benefits at the expense of the company (private use of the company car). The offence of hidden profit distribution does not exist with this form of company.
- Lower total tax burden than with a GmbH:When you distribute profits, your tax burden is only 42% or 45% instead of the 49% for a regular limited liability company.
- You can make private withdrawals:As with the KG or a sole proprietorship, you can simply withdraw money from the company.
The disadvantages of the GmbH & Co. KG
- High formation costs:Since you need to establish both a GmbH and a KG for a GmbH and Co. KG, many of the costs (notary, lawyer, tax consultant) are doubled.
- High running costs:The same principle applies here as with the formation costs. Both the ongoing accounting and the annual financial statements have to be done twice and accordingly cost more money.
My conclusion on the GmbH & Co. KG: For owners of a GmbH, a GmbH & Co. KG can be a good alternative, as it combines the advantages of a KG (no hidden profit distribution, private withdrawals, etc.) with the advantages of the GmbH (limited liability, good image).
Due to the high costs, however, a GmbH & Co. KG is usually not an option for new entrepreneurs.
GmbH Alternative 4: Atypical silent GmbH (atypisch stille GmbH)
An atypical silent GmbH is a GmbH in which a silent partner is involved. To be able to use this legal form, you must therefore already own a GmbH.
The silent partner pays an agreed amount into your GmbH. In return, they receive a share of the profits and also participate in the increase in value of the GmbH.
The advantages of an Atypical silent GmbH
- You reduce your total taxation from 49% to 45% or 42%:Because an atypical silent GmbH is taxed like a partnership. When you distribute your profits, you do not pay 49% tax as you would with a normal GmbH. Instead, all profits are “only” taxed at your personal tax rate of probably 42% or 45%.
- You get additional capital quickly:Since the conversion is relatively easy and almost without formal provisions, you can quickly add a silent partner to your GmbH.
- The silent partner does not appear in any registers:Unlike shareholders of UGs, KGs or GmbHs, an atypical silent partner does not appear anywhere, making them invisible to the outside world.
The advantages of an atypical silent GmbH
- You have to prepare two balance sheets:Since, under tax law, your GmbH is now a partnership, you must prepare a heavily modified tax balance sheet in addition to the commercial balance sheet. This means additional costs for you.
- The tax law conversion is only tax neutral after seven years:Under tax law, the silent partner should remain in your company for at least seven years. If the atypical silent GmbH is dissolved earlier, the conversion at that time is then taxable and you will have to pay thousands of euros in arrears.
My conclusion about the atypical silent GmbH: With the right silent partner, an atypical silent GmbH can be a good way to raise capital easily and reduce tax. However, you absolutely need the right silent partner, because if you terminate before the seven-year period mentioned above expires, you will be left with a substantial bill for back tax.
I have summarized the points you have to pay attention to in detail with the atypical silent GmbH in a separate article. Just click on the following link to get to the article: https://www.steuerberatung-breit.de/atypical-silent-partnership-with-a-limited-liability-company-gmbh-more-liquidity-less-taxes/
Conclusion: The GmbH is not always the best legal form for your company
Regardless of whether you already own a GmbH or are thinking about converting: From a tax and also financial perspective, you should always consider possible alternatives to the GmbH. However, many tax consultants (unfortunately) almost always recommend the GmbH to everyone.
As I hope I have been able to show you in this article, there are in fact four good alternatives to the “traditional” GmbH: the UG, the KG, the GmbH & Co. KG and the atypical silent GmbH.
As you can see, there is no “one-size-fits-all” answer to the question: “Which form is best for my company?” Every situation has to be analyzed in detail in order to find the answer.
Before you make a decision on the legal form of your company, you should therefore seek the advice of an experienced tax consultant.
If you have any further questions about the legal forms presented here or need advice, please feel free to contact me.
You can reach me at any time via phone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or my contact form.
Kind regards,
Thomas Breit
Photo: © Günter Menzl – fotolia.com
