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UG vs. GmbH and the Pros and Cons of each: Which is right for you?

In Germany, there are two main types of corporations: Unternehmergesellschaft (haftungsbeschränkt) (UG) and Gesellschaft mit beschränkter Haftung (GmbH). Both have their pros and cons, so it’s important to know which one is right for your business. Keep reading to learn more about the legal form UG vs GmbH.

At a glance

  • UG is best if you want to test a business idea or have limited assets
  • You can start a UG with share capital contribution of only 1.00€
  • GmbH is best if you are serious about your business
  • For a GmbH you need to have the share capital contribution of 12,500.00€ available

The differences between the two legal forms of limited liability companies in more detail

There are more different forms of limited liability companies in Germany. But the most popular one is the GmbH. On the other side most people, who want to start a business do not know, that there is a newer and more founder-friendly version called Unternehmensgesellschaft haftungsbeschränkt (UG). This limited liability company form is also called mini-GmbH. This type was created in 2008 with the intent to compete with the Private Company Limited by Shares from the UK.

For both forms of german companies you don’t need a business partner, you can start it completely on your own. But you need a managing director / CEO for your entrepreneurial company, no matter if it is a UG or a GmbH.

The formation costs for the business registration of a UG haftungsbeschränkt and a GmbH are different concerning the needed share capital. The exact minimum capital needed for the formation of a limited liability company depends on the given form.

UG & Mini-GmbH foundation costs

A UG haftungsbeschränkt is basically very similar to a GmbH. The main difference is the lower share capital (equity), which is needed to found a UG.

You can start your UG with as little as 1.00€. Even though this is not recommended in any way, because it won’t even cover the costs of the notary for the foundation of the company. So you will be bankrupt before you even get started. So you should definitely invest enough money to cover the basic costs.

For the foundation of a GmbH you need to pay at least 12,500.00€ or more. In total you will have to commit to €25,000.00€ equity. So the liability for a GmbH is much higher than for a UG.

An important point to mention is that the Mini- GmbH cannot be established as a non- cash company. Only with the big GmbH can the initial shares be raised “in kind”. This means transfer to a business valuable assets and right of use including vehicle, land rights, patents and trademarks rights, etc. UGs/Mini-GmbH can be established using cash deposits. Since it is usually less than 1 € a contribution is rarely problematic at all.

Start-up costs & minimum share capital for a GmbH

As already mentioned a GmbH is more expensive to create. You need at least 12,500.00€ for the creation and in total you will have to commit to €25,000.00€ equity.

In fact a UG haftungsbeschränkt and a GmbH are very similar. A UG can be transformed into a GmbH at any time. The only pre-condition for this transformation is, that your share capital reaches the mark of 25,000.00€.

When you decide to start a UG instead of a GmbH it is important to mention the fact, that 25% of the annual net income you generate with your UG must be placed into a provision. This has to be done until the share capital of 25,000.00€ is reached. If you decide on a GmbH you will not have to place any of your generated net income into such a provision.

Further a GmbH sends a strong signal of being a more established company. This is because its share captial is much higher. So a business partner knows, that there’s at least a certain amount of share capital – even though he can not tell exactly how much share capital is still available to pay the bills.

Unternehmergesellschaft (haftungsbeschränkt) (UG) Pros

  • Minimum capital requirement of only 1,00€
  • Can have one or multiple shareholders
  • Simple and fast to set up
  • Flexible corporate governance structure
  • Can be converted into a GmbH at any time

Unternehmergesellschaft (haftungsbeschränkt) (UG) Cons

  • May be seen as less credible than a GmbH by customers, suppliers, and partners
  • Profit payout to shareholders is limited to 75% of profits until €25,000.00 share capital is accumulated
  • Very easy to go bankrupt, if the initial share capital is too low

Conclusion: The Unternehmergesellschaft (haftungsbeschränkt) (UG) is a popular business structure in Germany. It is simple and fast to set up, and requires only one shareholder and only a minimum capital requirement of 1,00€. The UG is also flexible, allowing shareholders to customize the governance structure to suit their needs. The UG can also be converted into a GmbH at any time.

However, there are some drawbacks to the UG. The UG may be seen as less credible by customers, suppliers, and partners. Furthermore the profit payout to shareholders is limited until €25,000.00 of share capital are accumulated.

Gesellschaft mit beschränkter Haftung (GmbH) Pros

  • Limited liability for shareholders
  • Can have one or multiple shareholders
  • Credibility with customers, suppliers, and partners

Gesellschaft mit beschränkter Haftung (GmbH) Cons

  • More expensive to set up than a UG
  • A minimum capital requirement of 12,500.00€

Conclusion: A Gesellschaft mit beschränkter Haftung, or GmbH, is a type of business entity in Germany that offers limited liability for its shareholders. This means that shareholders are only liable for the amount of money they have invested in the company, and they cannot be held responsible for any debts or losses incurred by the company. A GmbH can have one or multiple shareholders, which makes it a popular choice for businesses. Additionally, a GmbH is generally seen as more credible than a UG (Unternehmergesellschaft), or sole proprietorship, and this can make it easier to secure customers, suppliers, and partners.

However, setting up a GmbH is more expensive than setting up a UG, and there is also a minimum capital requirement of €12,500.00.

The limited liability company and entrepreneurial company

The personal liability of UG and GmbH company forms in Germany is limited. This means that the personal risk for the shareholders is limited to their investment in the company. The main advantage of this liability limitation is that it provides financial security for the shareholders. In the event that the company is sued or goes bankrupt, the shareholders will not be held personally liable for the debts of the company.

This type of liability protection is not available in all countries, and it can be a major factor in determining whether or not to incorporate a business in Germany. For companies that are considering doing business in Germany, the personal liability protection offered by the UG and GmbH forms may be a deciding factor.

UG vs. GmbH Conclusion on the suitable legal form

As you can see, there are pros and cons to both UG vs GmbH. The right corporate structure for you depends on your specific business needs. If you have any questions or need help choosing the right structure for your business, don’t hesitate to reach out to us. We’re always happy to help!