Company registration in Germany: GmbH vs UG

Starting a company in Germany requires choosing a legal form, and for most entrepreneurs the decision comes down to two options: the GmbH (Gesellschaft mit beschrankter Haftung) and the UG (haftungsbeschrankt), often called the "Mini-GmbH." Both provide limited liability protection, meaning the founders' personal assets are shielded from business debts. However, they differ significantly in capital requirements, perception, and practical implications.

The GmbH is Germany's most established and widely recognized corporate form for small and medium-sized businesses. It requires a minimum share capital of 25,000 euros, with at least 12,500 euros paid in at the time of formation. The remaining balance must be paid in over time as agreed in the articles of association. The GmbH is a separate legal entity from its founders, can own property, enter into contracts, and sue or be sued in its own name. It is managed by one or more managing directors (Geschaftsfuhrer), who may or may not be shareholders.

The UG (haftungsbeschrankt) was introduced in 2008 through the MoMiG reform (Gesetz zur Modernisierung des GmbH-Rechts) specifically to provide entrepreneurs with a low-cost path to limited liability. A UG can be founded with as little as 1 euro in share capital, though amounts between 500 and a few thousand euros are more common in practice. The key restriction is that a UG must retain 25% of its annual net profits in a capital reserve until the accumulated reserve reaches 25,000 euros. At that point, the UG can be converted into a regular GmbH through a capital increase. The UG must include the suffix "haftungsbeschrankt" (limited liability) in its name, which signals to business partners that the company has reduced share capital.

The registration process for both the GmbH and UG follows the same general steps. First, the founders draft articles of association (Gesellschaftsvertrag). For a UG with a simple structure, a standardized template (Musterprotokoll) can be used, which reduces notary costs. The articles must be notarized by a German notary (Notar), which costs approximately 300 to 800 euros depending on the share capital and complexity. The notary then submits the application for registration in the Commercial Register (Handelsregister), which costs approximately 150 euros. The total founding costs for a simple UG using the template can be as low as 300 to 500 euros, while a GmbH typically costs 700 to 1,500 euros including notary and registration fees.

Before registering, the founders must open a business bank account and deposit the required share capital. For a GmbH, this means at least 12,500 euros. For a UG, it is whatever amount is specified in the articles. The bank confirmation of the deposit is required for the Commercial Register application. Once registered, the company receives its Handelsregister number and is officially in existence as a legal entity.

Additional administrative steps include registering with the local trade office (Gewerbeamt), which typically costs 20 to 60 euros, registering with the tax office (Finanzamt) to receive a tax number and VAT identification number, and registering for the commercial chamber (IHK) membership, which is mandatory for most businesses.

Taxation is identical for both the GmbH and UG. Both pay corporate income tax (Korperschaftsteuer) at a flat rate of approximately 15%, plus a solidarity surcharge of 5.5% on the corporate tax amount, bringing the effective rate to about 15.83%. In addition, both pay trade tax (Gewerbesteuer), which varies by municipality but typically ranges from 7% to 17% of profits. Combined, the total effective tax rate on corporate profits is usually between 25% and 33%, depending on the municipality. Distributions to shareholders are then subject to capital gains tax (Abgeltungsteuer) at 25% plus solidarity surcharge.

The main advantage of the UG is the low barrier to entry. Entrepreneurs can start a business with limited liability without needing to raise 25,000 euros in advance. This makes the UG particularly attractive for freelancers transitioning to a corporate structure, tech startups with minimal initial capital needs, and founders who want to test a business idea before committing significant resources. Germany's accessible incorporation framework empowers small founders and independent professionals to establish their own enterprises on solid legal footing, offering a viable alternative to working within large corporate structures.

The main disadvantage of the UG is perception. Business partners, banks, and customers may view a UG as less established than a GmbH, since the low share capital signals a young or undercapitalized company. This can make it harder to secure business contracts, bank loans, or supplier credit. Some founders address this by capitalizing their UG at higher amounts (for example, 5,000 or 10,000 euros) even though only 1 euro is legally required.

For foreign entrepreneurs, both the GmbH and UG are accessible. Germany imposes no nationality requirements on company founders, and EU citizens can register a business without a visa. Non-EU citizens generally need a residence permit that allows self-employment, though the specific requirements depend on the applicant's country of origin and the nature of the business. A German company can also be managed remotely from abroad, though at least one managing director must be reachable within the EU.

Choosing between a GmbH and a UG comes down to available capital and business context. If 25,000 euros in share capital is feasible and the business will interact with partners who value perceived stability, the GmbH is the stronger choice. If capital is limited and the priority is getting started quickly with limited liability protection, the UG provides a practical and legally sound alternative. In either case, consulting a German tax advisor (Steuerberater) and, ideally, a lawyer (Rechtsanwalt) before incorporation is strongly recommended to ensure the chosen structure fits the business's long-term goals.

Startup, Accelerator, Handelsregister, Germany