UG vs GmbH: a comparison of legal forms

Choosing the appropriate legal form is a crucial step for the success and legal security of your company. Especially for founders in Germany, the question often arises: Should I establish an UG (Entrepreneurial Company with Limited Liability) or a GmbH (Limited Liability Company)?

Both types of companies are capital companies with limited liability and protect your personal assets. However, they differ mainly in the requirements regarding the share capital, formation costs, as well as their external impact and creditworthiness.

In this article, we compare the two types of corporations, UG and GmbH, from a legal, financial, and practical perspective.

The Limited Liability Company (GmbH) is one of the most popular and widely used legal forms for companies in Germany. Legally, it is a corporation with its own legal personality. This means that the GmbH acts as an independent legal entity: it can acquire property, enter into contracts, and sue or be sued in court.

Legal сlassification

The GmbH is governed by the Act on Limited Liability Companies and belongs to the group of capital companies. Its shareholders are generally liable only with their paid-in share capital, not with their personal assets. This provides a limitation of liability, which is particularly attractive for many businesses.

Minimum capital and liability

To establish a GmbH, a minimum share capital of €25,000 is required. At least €12,500 of this amount must be paid in when registering the company in the commercial register. The shareholders’ liability is limited to this capital, thereby restricting personal risk towards creditors.

Advantages of a GmbH

High reputation and trust: The minimum capital makes the GmbH a solid and trusted legal form among banks, investors, and business partners.

Clear limitation of liability: Shareholders are liable only up to their investment and are not personally responsible for debts.

Flexible company structure: A GmbH can be founded by one or several shareholders and offers diverse structuring options in its articles of association.

Legal and tax clarity: As an independent legal entity, the GmbH is subject to clear statutory and tax regulations, providing certainty.

The Entrepreneurial Company with Limited Liability (UG), often referred to as the mini-GmbH, is a special form of the Limited Liability Company (GmbH) and belongs to the capital companies with limited liability. The UG was introduced in 2008 primarily to offer founders with low starting capital an easy and cost-effective way to start a business.

Definition and characteristics

The UG is an independent legal entity which, similar to the GmbH, limits the liability of its shareholders. This means the shareholders' liability is restricted to the company's assets, protecting their personal assets. The formation requires notarisation and registration in the commercial register.

Minimum capital 

The significant advantage of the UG is the lower minimum share capital, which can start as low as 1 euro. This low capital requirement makes the UG particularly attractive for startups and small businesses that do not yet have the financial means to meet the full GmbH's minimum share capital of 25,000 euros. However, there is a legal obligation to retain at least 25% of the annual surplus as reserves within the company until the share capital of 25,000 euros is reached.

Why is the UG often called a "mini-GmbH"?

Since the UG is subject to the same legal regulations as the GmbH but differs in the lower minimum capital requirement, it is often called a mini-GmbH. This name highlights the similarities in limited liability and structure but also points to the lower capital requirement, making the UG a popular choice for founders with limited starting capital.

When choosing between an Entrepreneurial Company with Limited Liability (UG) and a Limited Liability Company (GmbH), several factors play a crucial role. The following outlines the main differences in terms of minimum capital, formation costs, creditworthiness, liability risks, contributions in kind, reserve requirements, and administrative and accounting efforts.

Minimum capital and formation costs

The GmbH requires a minimum share capital of €25,000, of which at least €12,500 must be paid in at the time of formation. The UG can be established with a share capital as low as €1, which significantly reduces formation costs. Due to the lower capital requirement, overall formation costs for the UG are lower, partly because of a simplified formation process.

Creditworthiness and image

With its higher share capital, the GmbH enjoys better creditworthiness and a stronger reputation among banks, business partners, and investors. The UG is sometimes seen as less creditworthy, which can affect financing and business relationships.

Liability risks 

Both entities offer limited liability confined to the company's assets.

However, in cases of intentional or grossly negligent conduct, personal liability can be imposed on shareholders, for example, in cases of delayed insolvency filing or tax evasion.

Contributions in kind

The GmbH allows contributions in kind, such as real estate, machinery, or vehicles as capital. The UG does not allow this; the entire share capital must be paid in full in cash into the business bank account.

Reserve requirements for the UG

The UG is obliged to retain at least 25% of its annual surplus as reserves until the share capital reaches €25,000. This rule is designed to strengthen the company’s equity base and enable the UG to be converted into a GmbH at a later stage.

Administrative effort and accounting

Both company forms are required to keep double-entry bookkeeping and prepare annual financial statements. The administrative burden is generally comparable, though the UG may be somewhat easier to handle due to its lower capital requirements.

Choosing the right legal form largely depends on individual circumstances, goals, and financial capabilities. Both the Entrepreneurial Company with Limited Liability (UG) and Limited Liability Company (GmbH) offer advantages that can weigh differently depending on the stage and planning of the business.

UG: for founders with limited start-up capital

For founders with limited capital, the UG is often the preferred choice. With a minimum share capital of just one euro, the UG can be founded relatively easily and inexpensively. It allows young entrepreneurs to enter the business world with a limited liability company structure that protects their personal assets. The reserve obligation also ensures steady capital accumulation so that the UG can be converted into a GmbH in the long term.

GmbH: for larger businesses and investors

Companies that require higher creditworthiness, want more trust from banks and business partners, or plan larger investments should establish a GmbH. The €25,000 minimum capital implies more seriousness and makes credit approval and negotiations with investors easier. The GmbH also offers flexible structuring options and is well established in the German business environment.

From UG to GmbH

A unique strength of the UG lies in its potential to convert into a GmbH. Once the UG has accumulated sufficient profits as reserves and reached the share capital of €25,000, the shareholders can convert the UG into a GmbH. This step combines the advantages of both legal forms: the cost-effective entry via the UG and the later benefits of the GmbH in terms of reputation and creditworthiness.

A suitable business bank account makes day-to-day operations easier from the very beginning — from paying in the share capital to ongoing bookkeeping. It forms the basis for proper financial management, simplifies payment processing, and builds trust with business partners and banks. For UGs and GmbHs, a separate business account is not only recommended but also legally required.

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Key features:

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Criteria for choosing the right business account

When deciding on a business account, founders and entrepreneurs should consider the following aspects:

• Costs and fees: monthly account charges, transaction costs, and additional services overview
• User-friendliness: intuitive operation and digital access via app or web portal
• Customer support: availability and quality of service, ideally with personal advice
• Security: SSL encryption, two-factor authentication, and deposit protection
• Integration: compatibility with accounting software and other financial tools
• Additional features: services such as Visa cards, access restrictions for team members, or support with tax filings

Considering these criteria will help you find a business account that optimally fits the needs of your UG or GmbH and makes daily financial management significantly easier.

Whether a UG or a GmbH makes more sense mainly depends on how much capital is available, how quickly the business is expected to grow, and what kind of external impression you need. While both legal forms limit liability to the company’s assets, they differ in several key aspects that you should weigh carefully.

Summary of the main differences:

• UG allows a cost-effective entry (minimum share capital is 1 euro), but obliged to retain 25% of its annual profit as reserves
• GmbH requires a minimum capital of 25,000 euros, better creditworthiness and reputation is higher
• GmbH offers more flexibility in profit distribution, permits contributions in kind
• UG can only be founded with cash contributions
• Both companies limit private liability, in case of violations of duties - a possibility of piercing the corporate veil

Recommendation for founders

If you want to start with limited capital or do not yet have significant financial reserves, the UG is an attractive and pragmatic legal form. Once your company has stabilised and capital has sufficiently grown, it is advisable to convert to a GmbH to benefit from its advantages regarding creditworthiness and reputation.

Use of professional advice

Choosing the right legal form is an important step that has long-term implications for your business. Especially when it comes to growth, financing, or multiple shareholders, tax or legal advice can help you avoid costly changes later on. This way, you ensure that your choice fits your business idea and individual situation perfectly.