UG or sole proprietorship: which suits your business start-up?

UG and sole proprietorship compared

Criterion	Sole proprietorship	UG (haftungsbeschränkt)
Liability	unlimited, including private assets	limited to the company's assets, from registration
Formation	trade registration, liberal professions register with the tax office	articles of association or model protocol, notary, commercial register
Minimum capital	none	at least €1, in practice €500 to €2,500 makes sense, to be paid in full in cash
Formation costs	trade registration fee, depending on the municipality	notary approx. €160 (model protocol, one shareholder) up to approx. €350 to €750 (individual articles), register approx. €300
Duration	usually 1 to 3 days for activities not requiring a permit	usually 5 to 14 days from notarisation
Bookkeeping	cash-basis accounting up to €800,000 turnover and €80,000 profit	balance sheet, annual financial statements, publication of the annual financial statements
Taxes	income tax at your personal rate, trade tax from €24,500 profit, largely creditable	15% corporation tax (until 2027, then gradually reduced to 10% from 2032) plus solidarity surcharge, trade tax, flat-rate withholding tax on distributions
Withdrawing profit	freely at any time	via managing director's salary or distribution, 25% reserve until the share capital is increased to €25,000
Public image	your name; as e.K. in the commercial register, mandatory for a commercially organised business (Sec. 1, 29 HGB)	company with the mandatory suffix "UG (haftungsbeschränkt)"
Switching later	into a UG or GmbH possible, with transfer of contracts	change of name to GmbH from €25,000 share capital

Liability: personal or limited?

As a sole proprietor, you are the business. You are personally liable for every obligation, with your account, car and home. An expensive mistake on a job, a cease-and-desist letter or a supplier who doesn't get paid: it always hits you.

The UG is a separate legal entity, legally a variant of the GmbH under Sec. 5a GmbHG, introduced in 2008. Only the company's assets are liable for its debts. But this separation has limits that founders often underestimate:

• Before registration: Between the notary appointment and registration, you are still personally liable as the person acting.
• Guarantees: Banks almost always require a personal guarantee from the shareholder of a small company. You are then still personally liable for that loan.
• Managing director's liability: As managing director, you may be personally liable for breaches of duty towards the company (Sec. 43 GmbHG) and for filing for insolvency too late (Sec. 15a, 15b InsO).
• Commingling: Anyone who mixes company and private money or deliberately strips the company risks personal liability (piercing the corporate veil or liability for destroying the company's existence).

Part of the liability risk can also be covered for a sole proprietorship through professional or business liability insurance. But insurance does not help against payment defaults, rent arrears or contractual penalties.

Formation: effort, duration, costs

Sole proprietorship: You register your trade with the municipality; liberal professions register directly with the tax office. Then comes the tax registration questionnaire. A notary is only needed if you are entered in the commercial register as a registered merchant (e.K.). Registration is mandatory as soon as your business requires a commercially organised operation (Sec. 1, 29 HGB); otherwise it is voluntary (Sec. 2 HGB). Notary and register then cost around €270 in total. For activities not requiring a permit, you are usually ready to start in 1 to 3 days.

UG: You need notarised articles of association or the model protocol, a business account, payment of the share capital and the application to the commercial register. The model protocol is cheaper (notary approx. €160 for one shareholder), but allows at most three shareholders and one managing director. Registration usually takes 5 to 14 days from notarisation. Important: the UG bears its own formation costs. If the share capital is smaller than these costs, it is technically over-indebted from day one. So plan for at least €500, better €1,000 to €2,500 share capital.

At Recht 24/7, both formations cost €259 net plus VAT as a fixed price: Set up a sole proprietorship plus the trade registration fee, Form a UG plus notary and court fees, IHK and trade registration. The step-by-step process is explained in the guide Forming a UG: step by step.

Ongoing effort: bookkeeping, balance sheet, reserve

This is where the biggest practical difference lies, and it is often underestimated.

Sole proprietorship: Up to €800,000 turnover and €80,000 profit a year, cash-basis accounting is sufficient. Many do it themselves with accounting software. As a small business under Sec. 19 UStG, you also don't charge VAT as long as turnover did not exceed €25,000 in the previous year and does not exceed €100,000 in the current year.

UG: The UG is always required to prepare balance sheets, regardless of turnover. This includes double-entry bookkeeping, annual financial statements, a separate tax return for the company and publication of the annual financial statements in the company register (Sec. 325 HGB). Anyone who forgets to publish faces administrative fine proceedings. At around €50,000 turnover, you should expect about €600 a year for bookkeeping, tax obligations and the IHK, correspondingly more as turnover rises.

Then there is the reserve: every year, the UG must put a quarter of its annual net profit into a statutory reserve until it increases its share capital to €25,000 (Sec. 5a (3) and (5) GmbHG). This money is not available to you privately.

UG or sole proprietorship: which is cheaper for tax purposes?

Sole proprietorship: Your profit is taxed at your personal income tax rate, progressively up to 42% and at the top 45%. Traders also pay trade tax, but only from €24,500 profit (an allowance only for unincorporated businesses), and it is largely credited against income tax (Sec. 35 EStG). With a multiplier of around 400%, this almost balances out.

UG: The company pays 15% corporation tax (until 2027, then gradually reduced to 10% from 2032, Sec. 23 (1) KStG) plus a 5.5% solidarity surcharge on that and trade tax without an allowance. With a multiplier of 400%, this comes to around 30% in total. If you distribute the rest to yourself, 25% flat-rate withholding tax plus solidarity surcharge is added.

Worked example at €30,000, €60,000 and €100,000 profit

Assumptions: single, no church tax, commercial business, multiplier 400%, 2026 income tax scale, no managing director's salary in the UG. All figures rounded.

Profit	Sole proprietorship (income tax, trade tax after credit)	UG, profit stays in the company	UG, profit fully distributed
€30,000	around €4,200 (approx. 14%)	around €8,900 (approx. 30%)	around €14,500 (approx. 48%)
€60,000	around €14,200 (approx. 24%)	around €17,900 (approx. 30%)	around €29,000 (approx. 48%)
€100,000	around €31,000 (approx. 31%) plus solidarity surcharge	around €29,800 (approx. 30%)	around €48,300 (approx. 48%)

What the example shows:

• If you need your profit to live on, the sole proprietorship is usually cheaper for tax purposes with small and medium profits.
• The UG pays off for tax purposes mainly when profits stay in the company and are invested there.
• In practice, the UG's managing director pays themselves a salary, which counts as a business expense for the company and is subject to wage tax for you. This shifts the calculation. The right split is a matter for your tax adviser.

Public image and financing

To some business partners, a UG looks more professional than a sole proprietorship, especially with larger customers or abroad. But the mandatory suffix "UG (haftungsbeschränkt)" also shows that there may be little capital behind the company. Suppliers therefore not infrequently demand payment in advance.

With banks, the legal form plays a smaller role than many think: what matters are the business plan, collateral and creditworthiness. For a young UG, the bank will as a rule require your personal guarantee. As a sole proprietor, you are personally liable anyway. For investor participation, on the other hand, the UG has a clear advantage: a sole proprietorship cannot issue shares.

When the UG, when the sole proprietorship?

The sole proprietorship is the better fit if …

• you are starting alone and your liability risk is manageable, for example as a consultant, designer or freelancer.
• you need the profit privately on an ongoing basis.
• you want to get going quickly and with little effort.
• you want to test your business model first.
• you want to deal with bookkeeping as little as possible.

The UG is the better fit if …

• your activity carries a high liability risk: trading goods, production, large contracts, staff.
• you want to keep profits in the business and reinvest them.
• you are starting with partners or want to bring in investors later.
• you want to keep business and private assets clearly separate.
• paying in €12,500 at the start for a GmbH is too much for you.

If a lot speaks for limited liability and you can pay in €12,500, it is worth looking at the GmbH. You can find the comparison in the guide UG or GmbH.

From practice: two typical cases

The cases are simplified examples for illustration.

Case 1: the copywriter. Lena writes copy for agencies as a freelancer, expects €40,000 profit in her first year and needs the money to live on. She doesn't buy in any goods; her biggest risk is an error in a text, which professional indemnity insurance covers. For her, almost everything speaks for the sole proprietorship: no notary, no balance sheet, and according to the worked example, rather cheaper for tax purposes.

Case 2: the online retailer. Tim sells electronics accessories from China through his own shop. He buys goods in advance, is liable as an importer like a manufacturer (Sec. 4 (2) ProdHaftG) and receives cease-and-desist letters if legal texts are missing. He wants to invest profits in stock. Here, a lot speaks for the UG: a recall or a damages claim would only hit the company, and retained profits are taxed at a lower rate. For the supplier credit, the bank will still demand his guarantee.

Switching later: from sole proprietorship to UG or GmbH

Many start as a sole proprietorship and switch when risk or profit grows. This is possible at any time, but not at the push of a button:

• New formation and transfer: You form the UG or GmbH with cash and transfer contracts, customers and assets individually. This is the most common route. Every contractual partner must agree.
• Formation by contribution in kind: Contributing the business as a contribution in kind is only possible with a GmbH. For the UG, contributions in kind are excluded (Sec. 5a (2) GmbHG).
• Hive-down under the Transformation Act: As a registered merchant, you can hive down your business as a whole to a corporation (Sec. 152 et seq. UmwG). Contracts then transfer automatically.

Old debts from the sole proprietorship remain your personal debts. For tax purposes, the business can often be contributed at book value under Sec. 20 UmwStG, with a seven-year lock-up period (Sec. 22 UmwStG). We support the switch to a GmbH with Convert a sole proprietorship into a GmbH for €1,069 net plus VAT, notary and court fees and change of trade registration.