On November 1st 2008, a new law bringing significant change for limited liability companies (German GmbHs) in Germany was put into effect – Law for the Modernisation of the German Liability Company Law and the Prevention of Misuse (MoMiG; Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen). Under the new law, the new legal type of GmbH (UG – Unternehmergesellschaft) may be formed with share capital of just €1. Unofficially, this type of company is also referred to as the 1-Euro GmbH or the Mini GmbH. It remains to be seen whether such types of company are suitable for life science start-ups.
Like regular limited liability companies (GmbHs), the "UG" is also an incorporated company with legal responsibility. It can take someone to court and can be taken to court, it can acquire properties and own assets. It is an independent entity and is represented by a management board. It is also subject to corporate tax.
The UG is a special type of GmbH, intended to facilitate and accelerate the GmbH formation process. It is basically on par with a regular GmbH. The new law comes with significant simplification for people intending to set up a business (see Table 1), but there are also some restrictions (see Table 2). The specific regulations are laid out in §5a GmbHG. The new law requires the abbreviation "UG" or the term "Unternehmergesellschaft" to be included in the company name; this can be roughly translated into English as "business company".
According to an analysis by the Institute of Legal Reality Research at the University of Jena (Institut für Rechtstatsachenforschung) over 1500 UGs have been established since the new law came into effect. The Institute speaks of a real flood of company establishments.
a) Limited liability
The establishment of a Mini GmbH is an excellent alternative to the establishment of a one-man business or a non-incorporated firm, since it limits the liability of the founder to the company assets. The founder is only personally liable in case of wilful intent.
b) Company shares
A Mini GmbH can be formed with a share capital of just €1. In contrast to standard GmbHs, the Mini GmbH can accumulate share capital of €25,000 over time. The Mini-GmbH is obliged to allocate one quarter of its annual profits to its capital reserve until the €25,000 level is achieved. Once a share capital of €25,000 has been reached, the UG can be transformed into a regular GmbH. It is actually advised to do so. If the company decides to remain a UG, it is obliged to put part of its annual profit into a capital reserve.
The establishment of a regular GmbH requires a company to have acquired 50% of the minimum share capital (12,500 €) prior to registration. Investment in kind is possible, but has to be placed prior to registration. Hidden investment in kind is prohibited.
The establishment of a Mini GmbH requires the founders to place the full minimum share capital in cash. Investment in kind cannot be placed. Since, in theory, companies can be founded with a share capital of €1, investment in kind is not needed either. In order to prevent heavy indebtedness or insolvency, the level of company assets should be adjusted to the concrete requirements of the business activity. The ability to meet financial obligations and the creditworthiness of the limited liability company should always be taken into account. The level of optimal capital reserve must be determined on an individual basis.
c) Foundation modalities /expenditures
The legislator provides a "standard protocol" for uncomplicated company foundation, comprising company treaty, information on the management board and the shareholder list. The use of the standard protocol enables a relatively unbureaucratic and inexpensive establishment of a company as it does not require notarisation. The only requirement is that the signatures are acknowledged. Since the costs of the notary depend on the level of the share capital, the costs involved in the establishment of a Mini GmbH are far lower than those of a regular GmbH.
The English "Limited" company has similar conditions and advantages. The MoMiG formally allows the GmbH to relocate to a different jurisdiction. If a founder or entrepreneur chooses a foreign form of company, they will of course have to adhere to the legal regulations of the country where the company is to be founded.
What about the disadvantages?
The MoMiG refines the criteria for appointing managing directors. It disallows potential candidates who have been convicted of delaying the filing of insolvency proceedings, making false statements in connection with the incorporation of the GmbH, and general criminal offences related to entrepreneurial activity. In addition, the company underlies the obligation of retention. For company shareholders who pay their living expenses from profits, the obligation to save money might turn out to be an important obstacle. Companies using the standard protocol cannot have more than three shareholders.
The use of the standard protocol saves time and money, but it is very inflexible and offers no possibility of individual design. Therefore, there is a risk that the use of the standard protocol reduces the amount of legal advice that the founders use before starting up a company. This might mean that the articles of corporation lack individual protection.
Activities undertaken prior to company foundation might become fiscal hurdles. These activities might lead to high tax debts. If the company founders were active on the market prior to establishing a Mini GmbH, this meant that they had some kind of commercial entity. In such cases the fiscal authorities assume that a company's value existed prior to foundation, and that such a company then became part of the new Mini GmbH. The company's value will be determined by the financial authorities and assessed retrospectively. This often entails large amounts of backdated tax.
The obligatory addition of "UG" or "Unternehmergesellschaft" leads to a certain stigmatisation, because it could appear that people setting up a Mini GmbH do not have enough money to establish a standard GmbH. The future will show whether this affects the creditworthiness of Mini GmbHs. In addition, the UG status is not yet an established type of organisation and the owners might come up against the scepticism of business partners who are unsure about potential legal consequences. Here also, Mini GmbHs will have to prove their worth in everyday situations.
The biggest hurdle for life science start-ups is, however, that Mini GmbHs do not envisage investments in kind. Bringing in any intellectual property (IP) is thus rendered impossible. Thus, Mini GmbHs do not seem suitable for the majority of people intending to establish a life science company. Since the new law also includes changes for standard GmbHs, the formation of traditional GmbHs would appear to be even more attractive for life science ventures.
The advantages of establishing a Mini GmbH are impressive - at least at first sight. It remains to be seen in individual cases how big the obstacles are and whether a Mini GmbH is a suitable or even the optimal company status for life science start-ups.
Partnership agreement needs to be formulated by a lawyer; can be flexibly adjusted to the company's requirements.
Notarisation of articles of corporation/partnership agreement required.
Investment in kind prohibited - share capital has to be supplied in cash at time of foundation.
Share capital is accumulated over time (profit retention: 25% of the company's annual profit must be placed in a capital reserve).
Mini GmbHs can be transformed into regular GmbHs once minimal nominal capital of €25,000 is reached.