GmbH vs UG company in Germany

The GmbH and UG (haftungsbeschrankt) are the two most common limited liability company forms in Germany, and choosing between them is one of the first decisions entrepreneurs face when incorporating. Both provide personal liability protection for their shareholders, but they differ significantly in capital requirements, perception, and certain operational obligations.

The GmbH (Gesellschaft mit beschrankter Haftung) is Germany's traditional limited liability company, governed by the GmbH-Gesetz (GmbHG). It requires a minimum share capital of 25,000 euros, of which at least 12,500 euros must be paid in cash at the time of formation (the remainder can be paid in later or contributed as assets in kind). The GmbH is a fully independent legal entity: it can own property, enter into contracts, sue and be sued. Shareholders' liability is limited to their capital contributions, meaning their personal assets are protected from the company's debts.

The UG (haftungsbeschrankt), introduced by the Modernization of GmbH Law (MoMiG) in November 2008, is legally a sub-form of the GmbH. It was created specifically to provide German entrepreneurs with a low-capital-requirement alternative to the British Limited (Ltd.), which had gained popularity due to its minimal formation costs. The UG can be established with a share capital as low as 1 euro, though the share capital must be paid in full in cash at formation -- no contributions in kind are permitted. In practice, most advisors recommend a share capital of at least several hundred euros to cover initial expenses and demonstrate a minimum level of seriousness.

The key ongoing obligation that distinguishes the UG from the GmbH is the profit retention requirement. The UG must allocate 25% of its annual net profits to a capital reserve (Rucklage) each year. This reserve accumulates until the total share capital reaches 25,000 euros, at which point the company can pass a shareholder resolution to convert the UG into a regular GmbH. This conversion is not mandatory, but most businesses pursue it because the GmbH designation carries greater prestige.

Perception and credibility represent an important practical difference. The GmbH is universally recognized and respected in German business culture. Banks, suppliers, landlords, and business partners immediately understand what a GmbH is and tend to view it favorably. The UG, by contrast, is sometimes viewed with skepticism. The mandatory suffix "UG (haftungsbeschrankt)" signals that the company was formed with minimal capital, which some business partners may interpret as a sign of financial weakness or lack of commitment. Whether this perception matters depends on the industry and the nature of the business relationships involved.

The formation process is nearly identical for both. Both require notarized articles of association (Gesellschaftsvertrag), registration in the Commercial Register (Handelsregister), and a business bank account. The UG can use a simplified standard protocol (Musterprotokoll) for straightforward single-shareholder or dual-shareholder formations, which reduces notary costs. Both forms require at least one managing director (Geschaftsfuhrer), who can be a shareholder or an external appointee. Foreign nationals can serve as shareholders and managing directors of both GmbH and UG entities.

Tax treatment is identical for both forms. Both are subject to corporate income tax (Korperschaftsteuer) at a rate of approximately 15%, the solidarity surcharge of 5.5% on the corporate tax, and trade tax (Gewerbesteuer) at rates that vary by municipality but typically range from 7% to 17%. Distributions to shareholders are further subject to capital gains tax (Abgeltungsteuer) at 25% plus solidarity surcharge. Both forms must prepare annual financial statements, and depending on their size, may be subject to audit requirements.

The practical recommendation for most entrepreneurs is clear. If you have access to 25,000 euros in starting capital and want maximum credibility from day one, form a GmbH. If capital is limited and you need to start with minimal investment, the UG provides a legitimate path to limited liability with a built-in mechanism to grow into a full GmbH over time. In either case, working with a German notary (Notar), lawyer (Rechtsanwalt), and tax advisor (Steuerberater) during the formation process ensures that the articles of association, tax registration, and ongoing compliance obligations are properly handled.

One important note: neither the GmbH nor the UG comes into legal existence until it is registered in the Commercial Register. Between notarization and registration, the entity operates as a "GmbH i.G." (in Grundung, meaning "in formation") or "UG i.G." During this interim period, the founders may bear personal liability for obligations entered into on behalf of the company, which is why completing the registration process promptly is essential. Both the GmbH and UG provide entrepreneurs with a path to building independent businesses under German law, free from the complexities and dependencies that come with relying on foreign corporate structures.

Startup, Accelerator, Handelsregister, Germany