Company Form: UG or Mini-GmbH

This presentation is covering the new "1€-GmbH", which is valid since November 2008..

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Contents:

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1.  Founding a Unternehmergesellschaft

I have heard that a revolution in German corporate law has occurred. Are they really giving away GmbHs for € 1?

Yes, they are – believe it or not. German parliament has passed the “Act on GmbHs and against Abuse” enabling the founding of a limited liability company that can compete with its notorious British counterpart. As the Federal Minister of Justice puts it: “The new law on UGs (entrepreuneurs company) gives start-ups and investors the necessary framework to quickly and easily realize their entrepreneurial ideas: Simultaneously, this successful legal form has been made fit for international competition: … The UG will become a modern and lean legal form for mid-size companies. This is the most comprehensive reform of GmbH law since it first passed parliament. This act is orientated on the maxims: flexibility and deregulation on the one hand and on the other combat of abuse of this legal form. Besides this, some measures to reduce bureaucracy have been taken.
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What are the major advantages?

The new law provides a range of new advantages. Bureaucracy will be significantly reduced, by

• accelerating the founding of companies
• easing the funding and transferring of shares of the company
• introduction of a master company contract
• accelerating of registration
• relocating the location of the administration to a foreign country,
• more transparency with shares,
• bona fide purchase of shares,
• deregulating of the regulations on equity in kind,
• combating abuse,

Keep reading. These bullet points will be described in detail below.

Whenever bureaucracy thinks of accelerating of something, it usually turns out to be an even greater drag. How do they want to speed the founding of companies?

The long period of founding a corporation in Germany has been considered as a competitive disadvantage compared to foreign forms like the British Ltd. because they require much less conditions to be fulfilled than has been the case in Germany to date. Actually, this new law is only picking up further speed from previous legislation. An act has been passed to convert the company’s registry from paperbound to electronic in 2007. This has been already reported on in an article in this portal. In accordance with this act, applications are to be submitted electronically, then they will be decided on “immediately”, and entered into the registry. Another measure of speeding the foundation is that businesses needing special permission will now be entered without submitting a copy of the granting certificate. So can it happen that the company will have a limping existence. It will become registered though it might not yet be allowed to operate. The administrative proceedings will be totally independent of the founding of the company. This is especially relevant for restaurants, bars, handicrafts, chambered free professions, etc.
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I’m thinking of a forming a one-man UG. Any there any special reliefs for me?

Why yes, there are. In the future, the office will not ask for special securities anymore. Besides that, you just have to follow the general rules. So keep reading. 
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A real help for easily founding a UG would be some kind of relief on the company’s articles of incorporation. What about them? These articles are always so expensive first for the attorney to draft them and the notary to authorize them.

Simple and standard incorporations (e.g. funding with cash, up to three founders) will only need a “master company contract (= Mustergesellschaftsvertrag)”. Keep in mind that German law does not think in terms of an “incorporation of a company” but more of a contract between persons wanting to meet a certain goal. §1 GmbHG states that one or more persons can found a GmbH to pursue a purpose. The rules of such a master company contract are simple and self-explanatory. Therefore, it is actually not necessary anymore for instruction from a notary before signing the contract. The notary now only has to authorize the founders signatures so as to identify them. This master company contract is accompanied by a form to apply for registration (the so-called “founding set” [= "Gründungsset“]). The lack of a requirement for an attorney to draft the contract does not mean that it makes no sense to hire one for a shorter or longer consultation. However, if you want to alter such a master contract, hire an attorney!          
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Is there really no catch 22 for such cheap founding? I will be able to invest my profit as I wish, may I not?

Yes and no. Generally, you have the right to do with your profits what you want. However, until the capital of GmbH has reached € 10,000, one quarter of the profits must be left in the company. Then you may, but do not have to, convert this company to a “normal” GmbH.
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2.  Shares

You mentioned that the German limited has become cheap and competitive to the British limited. How much money do I need to fund the company so it will be registered?

Cheap is not exactly the right word! Think of it as affordable. In any case, the minimum capital of the new GmbH has been reduced from € 25,000 to € 10,000. This amount was extensively debated in parliament. The requirement of a minimal capital stock as considered as a meaningful “threshold for seriousness”. Especially for start-ups having and needing only very little equity (e.g. service providers), the new law brings a starting variation, the so-called “limited entrepreneur’s company” (§5a GmbHG). This is not a new legal form but moreover a UG that can be founded with hardly any equity. € 1 will suffice for founding the company. However, the company may not fully distribute its profits and must use one fourth of its profits to fund the company – bit by bit.
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Since everything is sped up, nobody will notice that non-cash contributions to fund the company are somewhat overvalued. What chances are there?

The registry will not carefully examine if your contributions to the funds represent its alleged value or not. The officer will only make a plausibility test to find out if the values are “not inessentially” overvalued. If the registry has significant grounds to mistrust the reported values only then will they investigate. The law clearly instructs the registry to only then ask for further details when serious doubts about the factual correctness exist. In other words, if you really have to “cheat”, do not overdo it. In case you get caught you will be held personally liable for the amount of company funds missing because of your cheating! Correct, this will pierce the corporate veil of personal non-liability. To put it in a nutshell: The court will always accept your details unless somebody snitches or they are too bluntly exaggerated.   
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Has parliament done something to end the misery on “verdeckte Sacheinlage”? Whenever we want to raise the stock capital of our company with real estate, we had the problem that this wasn’t accepted at the market value. We never really had security because case law was so diverse and not understandable.

Legal uncertainties will be cleared especially considering the legal doctrine of “hidden non-cash contribution (= “verdeckte Sacheinlage”)” is now clearly defined in the act. A hidden non-cash contribution to the company’s capital exists when a cash contribution has formally been agreed and paid but – from the economic perspective, the company is to receive a tangible asset. The previous and not really understandable case law on this topic, which has been heavily criticized, has become obsolete. (Thanks God!) According to this previous case law, a founder sometimes had to deposit his share twice. The new law will allow hidden non-cash contribution but the future shareholder must be able to prove that this item really has the value it is claimed to have, otherwise this shareholder will have to pay the difference.        
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How about passing on shares? If and how has this been eased?

The company’s shareholders will now be able to determine individually the amount of their shares and so line up the company more in accordance with their wants and needs. Until 2008, it is only possible to have a share with a minimum of € 100 and may only be subdivided in € 50 units. The new law allows a minimum share of € 1. In the future shares will therefore be much more easily distributed. The new flexibility continues with the fact that shares can be more easily split, combined, and be transferred separately or jointly.                                      
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I’ve heard something strange about the registry keeping a list of shareholders? What’s that all about?

Take it literally. The court will be keeping such a list because only those persons who are on the list will be legally considered as a shareholder. By the way, such a list is nothing new. This list enables purchasers and sellers to know easily if a person belongs to the company or not. As pointed out in a previous article, these details will be retrievable online. A side effect will also be a motivation for the shareholders to keep this list continuously up to date. The purchaser has the right to demand inclusion in the shareholders list. The government hopes to curb misuse such as money laundering when shareholders are clearly and easily seen. This is to enhance the trust in this kind of legal entity.   
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You just mentioned that we shareholders will be more motivated to keep the shareholders list up to date. How and why? I don’t see a reason why we should be so picky about it as any changes will surely effect fees of the one kind or other.

If you want to be sure that really only the persons you want are holding shares, then you will keep the list up-to-date.
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As I just found out, a former shareholder of a GmbH sold me shares because he wanted to quit. What I didn’t know was that he had already sold his shares to another person before he signed the contract with me. What about my purchase now?

Your problem can now much more easily be solved because the rules on purchasing in bona fide have been so far almost a nightmare to clarify. Whoever now purchases shares will now purchase in good faith if he buys from a person named in the shareholders list of the company. Whenever an improper entry in the shareholders list has been undisputed for more than three years, the list will then be considered as correct for everybody. The same will be true if the alleged shareholder knows that the list does not show the current shareholders. Until now, the purchaser always had to consider the risk that in reality the share belonged to somebody else.                          
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Until now, it has only been possible to fund the company without cash with great difficulties. What kind of relief does the new system provide?

The regulations in §§30 ff. GmbHG relate to funding the company without and especially with equity by using loans from the shareholders. Is this now a loan or is it equity? That has been the question until now. During bankruptcy, equity comes last after all other creditors. The basic idea of the amending law is that the managing directors of a healthy GmbH or UG should be able to find a simple and clear company structure. There will no longer be a distinction made between “equity replacing” and “normal” shareholder loans.    
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3.  Combating Abuse

It sounds interesting that I can have the headquarters of my company abroad. Now my creditors won’t get a hold of me so easily. Hah! Good thing this new law.

Well, don’t celebrate too much! The new regulation that you can have your headquarters abroad will prevent service of legal documents! The possibility for service is to be simplified. This will be achieved if creditors know to whom and where service can be made. Therefore, all GmbHs must have a domestic address for service.                                        
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Oh well, my managing director has split. I can’t find him anywhere and nobody knows his whereabouts. Who cares?

You should care! According to the old law, only the managing director was obliged to file for bankruptcy when the company became unable to pay. Being without management does not mean that the shareholders can rest and do nothing. They now are also n the position to file bankruptcy, unless the shareholders did not know that there was no managing director appointed or did not know of any grounds for bankruptcy. The obligation to file for bankruptcy cannot be circumvented by the Geschäftsführer (= managing director = CEO) disappearing.                   
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My managing director is refuses to deplete the company’s funds because we shareholder want to split to the Bahamas. The company is broke and I don’t want to take care of it anymore. Can the managing director refuse to follow the shareholder’s wish?

It’s a very good idea for your managing director to disobey your orders. If he were to obey, he would be aiding and abetting a fraud (of the creditors). The prohibition on payment in §64 GmbHG is to ensure this. 
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Darn it! I had a feeling that I shouldn’t have given that guy a second chance. I hired a guy as a managing director that had been sentenced to jail because his books weren’t quite up to snuff. Does the amended law give me any protection in future?

Well, that’s the result. Rest assured, such a thing cannot happened a second time. Persons with a crime criminal record cannot be appointed as a managing director (= Geschäftsführer). §6 II 3 GmbHG bars persons having been sentenced for dragging out bankruptcy §§64, 84 StGB, as well as any crime related to business (§§265b, 266, or 266a StGB). The general rule is that a person who has violated central rules of commercial crime law cannot be appointed as a Geschäftsführer. The same is true not only for comparable domestic but also for foreign crimes.       
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