UG vs. GmbH: the differences and which legal form suits you

UG and GmbH compared

Criterion	UG (haftungsbeschränkt)	GmbH
Minimum capital	€1, in practice €500 to €2,500 makes sense	€25,000
Payment at formation	in full, before the application for registration	at least €12,500, at least a quarter on each share
Contribution in kind	excluded, cash only	possible, with a formation report and proof of value
Reserve	25% of annual net profit until €25,000 share capital is reached	no statutory reserve obligation
Name	mandatory suffix "UG (haftungsbeschränkt)" or written out in full, may not be abbreviated	suffix "GmbH"
Liability	limited to the company's assets, from registration	limited to the company's assets, from registration; shareholders owe any unpaid contributions
Formation process	model protocol or articles of association, notary, commercial register	identical
Formation costs (notary, register)	model protocol from approx. €160 notary, individual articles approx. €350 to €750, register approx. €300	model protocol from approx. €280 notary, individual articles approx. €350 to €750, register approx. €300
Time to registration	usually 5 to 14 days from notarisation	usually 5 to 16 days from notarisation
Taxes	corporation tax, solidarity surcharge, trade tax	identical
Reputation	sometimes viewed sceptically because of low capital	regarded as the standard by banks, customers and landlords

What is the difference between a UG and a GmbH?

Legally, the UG is a GmbH. It was introduced in 2008 so that founders could use limited liability without raising €25,000. The GmbH Act applies to it, with the special rules of Sec. 5a GmbHG. Everything not regulated differently there is the same: management, shareholders' meeting, list of shareholders, liability, insolvency law and taxation.

So the difference is not one of legal form, but one of capitalisation and of the obligations the law imposes to compensate for the low capital.

Share capital: amount, payment, contribution in kind

GmbH: The share capital is at least €25,000 (Sec. 5 (1) GmbHG). At least €12,500 must be paid in before the application to the commercial register (Sec. 7 (2) GmbHG). The rest remains an outstanding contribution. The company can call it in by shareholder resolution (Sec. 46 no. 2 GmbHG), and in an emergency the insolvency administrator can. Instead of cash, you can also contribute assets, such as a vehicle or machinery. This requires a formation report on the contribution in kind and proof of its value, and usually takes several weeks.

UG: The share capital is below €25,000; legally, €1 is enough. It must be paid in full and in cash; contributions in kind are excluded (Sec. 5a (2) GmbHG). In practice, however, one euro is too little: the UG bears its own formation costs. If the capital is smaller than the notary and register fees, the company is technically over-indebted from day one. We recommend at least €500, better €1,000 to €2,500.

The UG's statutory reserve

To compensate for the low capital, the UG must each year put a quarter of its annual net profit, reduced by any loss carried forward from the previous year, into a statutory reserve (Sec. 5a (3) GmbHG). You may not distribute this reserve. The UG may only use it for three purposes:

• for a capital increase from company funds (the route to the GmbH),
• to offset an annual net loss,
• to offset a loss carried forward from the previous year.

The obligation applies until the share capital has been increased to €25,000 (Sec. 5a (5) GmbHG). According to the wording of Sec. 5a (5) GmbHG, merely having a reserve of that amount does not end it. The reserve comes from taxed profit, so it does not save any tax. It only limits how much you can distribute to yourself. A managing director's salary is not affected, as it reduces the annual net profit beforehand.

Worked example: how long does it take to reach €25,000?

Assumption: the UG starts with €1,000 share capital and needs a €24,000 reserve to increase the share capital to €25,000 from its own funds. No losses, only the mandatory reserve, no voluntary additions.

Annual net profit	Mandatory reserve per year	Time to €24,000 reserve
€8,000	€2,000	12 years
€20,000	€5,000	just under 5 years
€40,000	€10,000	just under 2.5 years
€80,000	€20,000	just over 1 year

With small profits, the route to the GmbH under its own steam takes a long time. It is faster if the UG voluntarily retains more profit, or if you inject money and increase the capital in cash. Then you don't have to wait for the reserve.

Formation: model protocol or articles of association, and what it costs

For both the UG and the GmbH you have the same choice: the statutory model protocol or individual articles of association. Both must be notarised.

Point	Model protocol	Individual articles of association
Shareholders	three at most	any number
Managing directors	exactly one	any number
Provisions	no changes to the template	freely designed, e.g. pre-emption rights, compensation, voting rights
Notary fees (UG)	approx. €160 for one, approx. €240 for two to three shareholders	approx. €350 to €750
Suitable for	solo formation, simple circumstances	teams, shareholdings, special provisions

With the model protocol, the company only bears formation costs up to €300, and at most up to the amount of its share capital; the shareholders pay the rest themselves.

Formation costs at a glance

Cost item	UG	GmbH
Recht 24/7 fee (fixed price)	€259 net plus VAT	€319 net plus VAT
Notary, model protocol	approx. €160 to approx. €240	approx. €280 to approx. €420
Notary, individual articles	approx. €350 to €750	approx. €350 to €750
Commercial register	approx. €300	approx. €300
Trade registration	depends on the municipality	depends on the municipality
Payment of share capital (not a cost, belongs to the company)	from €1, recommended €500 to €2,500	at least €12,500

For both legal forms, the fixed price covers all formation documents from the lawyer, including the articles of association, list of shareholders, application to the commercial register and managing director's contract. The step-by-step process is described in the guide Forming a UG: step by step.

Reputation with banks, customers and landlords

Legally, a UG's liability is no weaker than a GmbH's. In day-to-day business, however, impressions count too. The suffix "haftungsbeschränkt" shows every contractual partner that the share capital is below €25,000, possibly just a few euros. This has consequences:

• Suppliers more often demand payment in advance or shorter payment terms from a young UG.
• Landlords of commercial premises often require a higher deposit or a personal guarantee.
• Banks look mainly at the business plan and collateral for both legal forms. For small companies, they almost always require a personal guarantee, whether UG or GmbH.
• Large customers and tenders sometimes set minimum requirements for capital or creditworthiness.

The GmbH is the standard legal form for small and medium-sized businesses in Germany. If you trade as one, you have to explain your legal form less often. The reputation of a UG, on the other hand, depends heavily on how soundly it is run. A UG with a good payment record and orderly accounts is hardly treated any differently after a few years.

Taxes and accounting: no difference

The UG and GmbH are taxed in the same way: 15% corporation tax on profits (until 2027, then gradually reduced to 10% from 2032, Sec. 23 (1) KStG) plus a 5.5% solidarity surcharge on that, as well as trade tax at your municipality's multiplier. If the company distributes profits to you, 25% flat-rate withholding tax plus solidarity surcharge is due on them. Neither has a trade tax allowance like a sole proprietorship.

Bookkeeping is also the same: both are required to prepare balance sheets, draw up annual financial statements and publish them. The running costs for bookkeeping, tax advice and the chamber of commerce therefore hardly differ. The only accounting difference is the UG's statutory reserve, which is shown separately in the balance sheet.

If you are torn between a UG and a sole proprietorship, the tax comparison with a worked example is in the guide UG or sole proprietorship.

Risks of the UG: what to watch out for

The suffix "haftungsbeschränkt": In legal transactions, the UG must always appear as "Unternehmergesellschaft (haftungsbeschränkt)" or "UG (haftungsbeschränkt)", on invoices, the website, email signatures and in contracts (Sec. 5a (1) GmbHG). If you omit the suffix or just write "UG", you can be personally liable according to case law, because the contractual partner was entitled to assume unlimited liability (Federal Court of Justice, III ZR 210/20; on the incorrect suffix "GmbH", Federal Court of Justice, II ZR 256/11). In addition, the mandatory information on business letters under Sec. 35a GmbHG, such as registered office, register court, register number and all managing directors, applies equally to the UG and GmbH.

Undercapitalisation: A UG with €1 or €100 in capital has no buffer. The first rent payment or purchase of goods can already make it insolvent.

Duty to file for insolvency: If the company is insolvent or over-indebted, the managing director must file for insolvency without culpable delay, at the latest after three weeks in the case of insolvency and six weeks in the case of over-indebtedness (Sec. 15a InsO). Anyone who acts too late is personally liable and commits a criminal offence. In a UG, the managing director must additionally convene a shareholders' meeting without delay as soon as insolvency is imminent (Sec. 5a (4) GmbHG). These risks exist in the same way for the GmbH, but the larger capital buys more time there.

Before registration: For both legal forms, you are personally liable as the person acting between the notary appointment and registration.

UG vs. GmbH: when to choose the UG, when the GmbH?

The UG is the better fit if …

• you cannot raise €12,500 at the start or don't want to tie it up.
• you want to test a business model with low capital requirements, such as consulting, software or an agency.
• you want to keep profits in the company anyway, so the reserve hardly matters.
• your reputation with suppliers and landlords does not play a major role.
• you are forming alone or with a few partners.

The GmbH is the better fit if …

• you can pay in €12,500 or more.
• you want to contribute assets such as a vehicle, machinery or stock.
• you want to distribute profits soon and in full.
• banks, large customers, landlords or tenders play a role.
• you want to bring in investors or build a holding structure.

Rule of thumb: if you have the capital, you usually form the GmbH straight away and save yourself the capital increase later. If you don't, you start with the UG and have the same limitation of liability from the outset.

From UG to GmbH: when, how and what it costs

The UG is not a preliminary stage that must become a GmbH at some point. You can run it as a UG indefinitely. If you want to switch, this is not a change of legal form under the Transformation Act, but a capital increase with an amendment to the articles of association. The company remains the same: contracts, accounts and tax number carry on.

To the GmbH in four steps (Grafik: UG → capital → resolution → register → GmbH)

1. Clarify the capital. Where will the missing euros up to €25,000 come from? From the reserve (capital increase from company funds), by payment (cash capital increase) or a combination. According to Federal Court of Justice case law, a contribution in kind is also possible for an increase to at least €25,000 (Federal Court of Justice, II ZB 25/10), and payment as for a GmbH is sufficient.
2. Shareholder resolution at the notary. The shareholders resolve the capital increase and the new company name with at least three quarters of the votes cast; the resolution is notarised (Sec. 53 GmbHG). A capital increase from company funds requires an audited balance sheet whose reporting date is no more than eight months before the application (Sec. 57e, 57f GmbHG).
3. Application to the commercial register. The notary submits the application; for a cash capital increase, the managing director confirms the payment (Sec. 57 (2) GmbHG), and for an increase from company funds, that there has been no reduction in assets since the balance sheet date (Sec. 57i (1) GmbHG); a new list of shareholders is submitted.
4. Registration and changeover. Upon registration, the UG's special rules no longer apply. Then switch invoices, website, letterheads, bank and contractual partners to the new company name. Incidentally, you may also keep the suffix "UG (haftungsbeschränkt)" (Sec. 5a (5) GmbHG).

What it costs: Notary fees for the resolution and application, based on the amount of the increase, register court fees and, for an increase from reserves, the cost of the balance sheet audit. Recht 24/7 does not currently offer a separate fixed-price service for switching from UG to GmbH.

What happens to the reserve: In a capital increase from company funds, the reserve is converted into share capital. If you increase the capital in cash instead, the reserve remains; its restriction ends when €25,000 is reached, because Sec. 5a (3) GmbHG no longer applies (Sec. 5a (5) GmbHG).