GmbH vs UG: Which Should You Choose in Germany?

Capital: the headline difference

This is the central money comparison, and the only place where the two forms genuinely diverge on day one. The GmbH demands more capital up front; the UG demands less but with stricter pay-in rules. The table sets it out.

Item	GmbH	UG (haftungsbeschränkt)
Minimum subscribed capital	€25,000 (§5(1) GmbHG)	€1, any amount below €25,000 (§5a(1) GmbHG)
Paid in before registration	€12,500 (half; ≥25% per share, §7(2)/§8(2))	Full amount, 100% (§5a(2))
Contributions in kind	Allowed	Not allowed, cash only (§5a(2))
Realistic practical minimum	€25,000 subscribed, €12,500 up front	~€500–€1,000, "around €900" (Orrick)

The €1 myth, honestly

Yes, you can technically register a UG with €1 of share capital (§5a(1)). But that figure is misleading. The full stated capital must be paid in before registration (§5a(2)), and €1 cannot pay the notary or the €225 Handelsregister fee. A €1 UG is, in practice, born undercapitalised. Orrick puts the realistic floor at "around €900" once you account for incorporation costs. So the genuine gap is not "€1 versus €25,000". It is closer to "€500–€1,000 to get a UG on its feet" versus "€12,500 paid in now, with €25,000 owed in total" for a GmbH. Treat €1 as a legal floor, not a business plan.

The GmbH's €12,500-vs-€25,000 nuance

There is a matching trap on the GmbH side. The €25,000 is the total subscribed capital; only €12,500 (half) has to be on the company account before the Handelsregister entry (§7(2), §8(2)). The remaining €12,500 is not forgiven: it stays legally owed and callable later, and the founder is liable for the full €25,000. So never read a GmbH as something that "only costs €12,500". The balance is a real obligation.

Liability: identical (and that surprises people)

Many founders assume the GmbH offers more protection. It does not. Both are limited-liability companies: shareholders are not personally liable, and liability is capped at the company's assets. Because the UG is a sub-form of the GmbH under §5a, there is no liability difference between them.

Two caveats apply equally to both. First, before the Handelsregister entry the company does not legally exist, and anyone acting in its name is personally and jointly liable (§11(2) GmbHG). Second, a UG must always write "UG (haftungsbeschränkt)" in full on contracts and letterhead, never a bare "UG". Dropping "haftungsbeschränkt" can expose the managing director to personal liability (§5a(1)). "More protection" is not a reason to pick the GmbH.

Credibility and perception: the real reason to choose a GmbH

If liability is identical, why pick the GmbH at all? Credibility. The "GmbH" suffix signals €25,000 of committed capital, while "UG (haftungsbeschränkt)" openly advertises that you started below the GmbH minimum. That perception has practical consequences:

• Banks and lenders may treat a low-capital UG as undercapitalised, applying stricter terms, asking for personal guarantees, or offering smaller credit lines.
• Suppliers and B2B clients may request advance payment or shorter terms.
• The suffix is public on the Handelsregister and appears on every invoice.

A UG saves cash up front but carries a credibility discount. A GmbH costs €12,500 or more up front but reads as fully capitalised. That trade-off, not legal protection, is the honest reason to choose a GmbH.

Costs and taxation: mostly the same

The cost gap is smaller than people expect. The Handelsregister first entry is €225 for both (since 1 June 2025; it was €150). Notary fees scale with capital, so a small-capital UG is cheaper to notarise than a €25,000 GmbH (a standard GmbH notary runs around €476 including VAT). Both forms can use the Musterprotokoll for a reduced notary fee if there are no more than three shareholders, one managing director, standard rules and cash. Gewerbeanmeldung is roughly €20–60, and the Transparenzregister entry is free, the same for both.

Taxation is identical. Both are corporations: corporate income tax of 15% plus a 5.5% solidarity surcharge gives 15.825%, and on top sits municipal trade tax, for roughly 30% combined. Neither form is more tax-efficient (PwC). A legislated corporate-rate step-down begins in 2028 and applies equally to both. For the full euro picture, see our guide to company formation in Germany.

The UG profit reserve and converting to a GmbH

This is the most misunderstood part of the comparison. A UG must place one quarter of its annual surplus (after deducting any loss carried forward) into a statutory reserve every year, until capital plus reserve reaches €25,000 (§5a(3)). In practice that means at most 75% of annual profit is distributable during the build-up. A GmbH has no such restriction.

Reaching €25,000 in reserves does not automatically turn a UG into a GmbH. Conversion is not automatic (§5a(5)). Shareholders must take three deliberate steps:

1. Resolve a capital increase to at least €25,000 (the accumulated reserve can fund it).
2. Notarise the resolution and the amended articles.
3. File with the Handelsregister.

The §5a rules cease only once the increase is entered in the register, which is constitutive. After that it is a full GmbH and may rename to "... GmbH". Conversion costs another notary and register fee later, and the reserve constrains payouts in the meantime. If you expect to take this path, you can form a UG (haftungsbeschränkt) now and convert when the numbers support it.

Decision matrix: when to choose which

Use the table below to map your situation to a lean. None of these is a hard rule, but together they point clearly.

If you...	Lean toward
Have €12,500+ to commit now, want max credibility (banks, B2B, leases, finance)	GmbH
Want to contribute assets, equipment or IP as capital (in-kind)	GmbH (UG is cash-only, §5a(2))
Plan to pay out most profits early	GmbH (no 25% reserve)
Want a clean name with no "(haftungsbeschränkt)" stigma	GmbH
Are capital-light, testing an idea, want limited liability cheaply	UG (realistic ~€500–€1,000)
Expect to reinvest profits anyway (the reserve won't bite)	UG, build toward conversion
Are a solo bootstrapper, mostly B2C, with low external-credibility needs	UG
Are undecided between these and partnerships or sole proprietorship	See "compare all German legal forms"

Bottom line

Same liability, same tax, same formation steps. Choose the UG to preserve cash and ease in, accepting the 25% reserve, the cash-only rule and the credibility trade-off. Choose the GmbH if you can fund €12,500 now and want full credibility plus unrestricted payouts. The UG can always become a GmbH later, but not automatically: it takes a notarised capital increase entered in the Handelsregister (§5a(5)). Whichever way you lean, the legal form underneath is the same.