Looking for the whole field rather than these two? All German legal forms compared, from the sole trader to the AG.
Statutory provisions are cited so you can check them yourself. Figures we describe as verified come from documents in our own files. Anything drawn from our own casework is marked as what we see, not presented as a general rule. Where we cannot support a claim, we leave it out rather than repeat what other guides assert. Rules, fees and bank policies change; verify the current position before you rely on anything here.At a glance
- The 25,000 euro capital of a GmbH is not a fee. It is your money, in your company's account, available for the business. Founders who pick a UG to avoid it are usually avoiding a cash-flow problem, not a cost.
- What a UG actually saves is a portion of the notary and court fees, because those are calculated from the value of the transaction. The order of magnitude is a few hundred euros.
- § 5a(3) GmbHG requires a UG to lock away a quarter of its annual profit until the reserve and the capital together reach 25,000 euros. That is a restriction on distributions, and for many founders it is the decisive one.
- § 5a(1) GmbHG requires the company to carry UG (haftungsbeschränkt) in its name, in the register, on the letterhead, on every quotation. German business customers read it.
- Founding on the legal minimum is the genuine risk. A UG that cannot pay its own formation invoice is already unable to pay its debts, and § 15a InsO gives the managing directors three weeks to file, with personal and criminal consequences for missing it. § 5a(4) GmbHG even moves the shareholder-meeting trigger forward for a UG, to impending illiquidity.
- Our advice: if you are seriously building a company in Germany, found a GmbH. The capital is not frozen and you will need it for the business anyway. A UG is the right instrument for a small founder in Germany with little starting capital who expects revenue quickly, a different situation from setting up a German company from abroad.
- For a founder abroad the legal form is not the hard part. The bank, the address and the document chain are. Choosing a UG does not make any of those easier, and in our own casework it makes the bank conversation slightly harder.
What the two forms actually are
Both are limited liability companies. In both, liability is limited to the assets of the company, both are legal persons, both are entered in the commercial register, both pay corporation tax and trade tax. The UG is not a different kind of company. § 5a GmbHG describes it as a variant of the GmbH with a lower capital threshold and three conditions attached.
A GmbH needs share capital of at least 25,000 euros (§ 5(1) GmbHG), of which at least a quarter per share and at least 12,500 euros in total must be paid in before the company is filed (§ 7(2) GmbHG). A UG can be founded with as little as one euro, but under § 5a(2) the capital must be paid in in full and in cash, and contributions in kind are not permitted.
That second sentence is worth pausing on. A UG has no partial payment. Whatever capital you declare, all of it is on the table before the company is filed.
The 12,500 euro misunderstanding
This is the reason most founders give for choosing a UG, and it rests on a misreading.
The share capital is not a cost. It is not paid to the state, to the notary or to anybody else. It is paid into your own company's bank account, it belongs to your company, and from the moment the company can operate you may spend it on rent, equipment, salaries or stock. It appears on your balance sheet as equity. Nobody takes it away.
What the 12,500 euros really is, is a liquidity requirement. You have to be able to put that money into a German account at a particular point in time and leave it there long enough to be certified. If that is genuinely difficult, and for many founders it genuinely is, then a UG solves a real problem. But it solves a cash-flow problem, not a cost problem, and the two lead to different decisions.
Founders who could raise the capital and choose a UG anyway, to "keep it cheap", have usually saved a few hundred euros in fees and taken on the three conditions below for years.
The reserve nobody reads about first
§ 5a(3) GmbHG requires a UG to place one quarter of its annual profit, after deducting any loss carried forward, into a statutory reserve. That reserve may be used only for specific purposes set out in the provision. The obligation runs until the reserve, together with the share capital, reaches 25,000 euros.
In practice: for as long as the UG is building up to 25,000 euros, a quarter of every year's profit cannot be distributed to the shareholders. If your plan involves taking profits out of the company in the first few years, and for a founder financing a family, a relocation or a second market, it usually does, this is the provision that will bite, and it will bite every year until the threshold is met.
A GmbH has no such obligation.
The name you have to carry
§ 5a(1) GmbHG requires the company to carry the designation Unternehmergesellschaft (haftungsbeschränkt) or UG (haftungsbeschränkt). This is not optional and it is not cosmetic. It goes in the commercial register, on your letterhead, on your invoices and quotations, in your email footer and in your imprint.
The German word haftungsbeschränkt means "liability limited". Every German business reader knows what the designation signals: a company that may hold very little capital. Whether that matters depends entirely on who you sell to. It is close to irrelevant for a software business selling online. It is not irrelevant when you are a new supplier asking a Mittelstand purchasing department to place a first order, or when you are asking a landlord for a commercial lease.
What changes when you found from abroad
Most comparisons of UG and GmbH are written for founders who live in Germany. Three things are different if you do not.
The bank
Opening a business account for a company in formation is already the hard step for a founder without a German residence permit, that is the subject of a separate article, and it is where most formations actually stall. What we see in our own files is that a very low capital figure adds one more question to a file that is already being read sceptically, at exactly the moment you want fewer questions. We cannot turn that into a rule, and no bank owes us an explanation. But if the bank is your bottleneck, it is worth asking your intended bank about the legal form before you decide it, rather than afterwards.
The customer
If your German company exists in order to sell to German companies, the designation in your name travels with every document you send. A foreign-owned company is already an unfamiliar counterparty for a German purchasing department. Adding a legal form that signals minimal capital is a choice, and it should be a deliberate one.
The residence permit
If you intend to move to Germany yourself, § 21 AufenthG is a separate examination with its own criteria, an economic interest or a regional need, expected positive effects on the economy, and secured financing. The immigration authority involves the competent expert bodies, in practice the chamber of commerce, and the trade authority. The legal form as such is not the test, and we will not tell you that a UG rules anything out. What we will say is that the capital base of the company is part of what gets assessed, and that a registration number of any kind does not replace that examination.
The cost difference, honestly
Notary and court fees in Germany are not freely priced. They follow the GNotKG and are calculated from the value of the transaction, which for a formation is normally the share capital. A lower capital therefore does produce lower fees, but the fee table is degressive, so the saving is far smaller than the difference in capital.
You can put your own numbers in and see the arithmetic on our formation cost calculator, which computes the notary positions from the statutory fee table rather than quoting an estimate. Our own fees are deliberately not in it.
The honest summary: the fee saving is real and it is of the order of a few hundred euros. The running costs afterwards, accounting, annual accounts, corporation tax return, chamber of commerce contribution, publication, are the same for both forms. Over a first year, the legal form is one of the smaller lines in the budget.
The real risk at the bottom end: a UG that is too thin
This is the part that the price comparisons leave out, and it is the reason we argue about the capital figure with founders more often than about anything else.
A company that cannot pay its bills is insolvent. It does not matter that it is young, that revenue is coming, or that the shareholder has money in a private account in another country. The test in § 17 InsO is whether the company is able to meet its due payment obligations, and a UG founded on one euro fails it the moment the first invoice arrives, the notary's fee, the register court's fee, the first accounting bill.
What follows is not a slow process. § 15a InsO obliges the managing directors to file for insolvency without undue delay, and at the latest within three weeks of the company becoming unable to pay and six weeks of over-indebtedness. Missing that deadline is Insolvenzverschleppung, it carries personal liability, and it is a criminal offence. Payments made after that point can have to be repaid personally under § 15b InsO.
A managing director sitting in India, unfamiliar with these deadlines and assuming a young company is allowed to be short of money, is exposed to all of it. This is the one area of German company law where not knowing the rule is genuinely dangerous.
And there is a provision written specifically for the UG that almost nobody mentions. § 5a(4) GmbHG requires the shareholders' meeting to be convened immediately on impending illiquidity, expressly departing from the ordinary GmbH rule in § 49(3), which triggers at the point where half the share capital has been lost. Half of one euro is not a meaningful signal, so the legislator moved the trigger forward. The practical reading is that the law itself treats a thinly capitalised UG as the more fragile case and expects the shareholders to be pulled in earlier.
None of this is an argument against the UG. It is an argument against founding one on the legal minimum. Work out what the company owes in its first twelve months, formation costs, accounting, the chamber of commerce contribution, the annual accounts, any rent or software, and capitalise at least that. If a founder cannot raise that much, the honest conclusion is usually that the company is not ready yet, not that the capital should be lower.
If the company does get into difficulty, this is a point to take to a lawyer immediately and not to work out from a web page. The deadlines are short and they run whether or not anybody noticed.
What we advise, and why
We will give you our position plainly, because a comparison that ends in "it depends" is not much use to anyone.
Our recommendation
If you are seriously building a company in Germany, found a GmbH. The decisive reason is the one in the section above: the share capital is not frozen. It is your money, in your account, available for the business from the moment the company can operate. A company that is meant to succeed will need that money for equipment, stock, the first hire, a deposit, marketing and the accountant, you were going to spend it anyway. Choosing a UG does not release it to you. It only means you never put it in.
Once you accept that the capital is not a cost, the question becomes: what does a UG actually buy you? From where we sit, for the founder this site is written for, the honest answer is nothing. You save a few hundred euros in notary and court fees. Against that you take on the reserve obligation, the designation in your name, a marginally harder bank conversation, the earlier shareholder-meeting trigger under § 5a(4), and, if the business works, a second set of notary and court fees when you convert.
The reputation question
This is the part founders abroad underestimate most, and it is worth being blunt about.
UG (haftungsbeschränkt) is not a neutral label in Germany. It is read, correctly, as signalling a company that may hold almost no capital. German business readers see it in the same breath as your company name, on the quotation, on the invoice, in the register extract they pull before they order anything. A purchasing department at a Mittelstand company that is already weighing up an unfamiliar foreign-owned supplier does not need a second reason to hesitate. Nor does a commercial landlord, nor a bank, nor a customer being asked to pay in advance.
The GmbH is the ordinary, expected, unremarkable form. Being unremarkable is worth a great deal when everything else about your company is unfamiliar.
Who the UG is actually for
The UG was created for a real situation, and it is a good instrument for it: a small founder living in Germany who has very little starting capital and expects revenue quickly. Someone leaving employment to go out on their own, with a first customer already in view, who needs a limited liability wrapper now and will build the capital out of the business. For that person the UG does exactly what it was designed to do, and the reserve obligation costs them nothing because they were reinvesting anyway.
That is a different person from the one setting up a German company from India to trade with German customers. If the 25,000 euros genuinely cannot be raised, then the UG is your route and it is a legitimate one, but be clear that you are solving a liquidity problem, not saving a cost, and capitalise well above the legal minimum for the reasons in the previous section.
Whatever you choose, do not found on one euro. A company that cannot pay its own formation invoice starts life unable to meet its debts, with the deadlines described above already running.
Converting later
A UG becomes a GmbH by raising its capital to at least 25,000 euros. § 5a(5) GmbHG provides that once the capital reaches that level, the special UG rules no longer apply. The increase is a notarised shareholders' resolution followed by a register filing, and the reserve that has been building up can be used for it.
It is a normal step and thousands of companies take it. It also costs notary and court fees a second time, which is worth knowing at the start: if you are reasonably sure you will convert within two or three years, founding as a GmbH straight away is usually the cheaper path overall.
What to do, in which order
- Decide whether the 25,000 euros is available, honestly. Not whether you want to spend it, it is not spent. Whether you can place it in a German account and leave it there.
- Ask your intended bank about the legal form before you fix it. The bank is the bottleneck in a remote formation, so let it speak first.
- Look at who your customers are. If they are German companies, the designation in your name is part of your sales material whether you like it or not.
- Check your profit plan against the reserve obligation. If you intend to distribute early, a UG will hold back a quarter of it every year until the threshold is reached.
- Run both figures through the calculator so the fee difference is a number rather than an impression.
- Whatever you choose, do not found on the legal minimum. Capitalise for the first year.
Questions
Sources
§ 5 GmbHG, share capital: gesetze-im-internet.de
§ 5a GmbHG, Unternehmergesellschaft (haftungsbeschränkt): gesetze-im-internet.de
§ 7 GmbHG, payment of capital before filing: gesetze-im-internet.de
§ 21 AufenthG, residence permit for self-employment: gesetze-im-internet.de
§ 15a InsO, obligation to file for insolvency: gesetze-im-internet.de
§ 15b InsO, payments after insolvency maturity: gesetze-im-internet.de
§ 17 InsO, inability to pay: gesetze-im-internet.de
GNotKG, notary fees and the value of the transaction: gesetze-im-internet.de
Written by Christoph Schuler
Founder, Business Center Reutlingen. Fifteen years in international automotive at Daimler,
two of them living in Bengaluru.
Published 29 August 2026
Business Center Reutlingen provides administrative and organisational support and introduces you to licensed professionals. We do not give legal or tax advice, in Germany only admitted lawyers (Rechtsanwälte) and tax advisors (Steuerberater) may do so.