Is UG or GmbH Better for German Companies?

It can be a serious dilemma to choose the legal entity of your business in Germany, but not if you are well-informed. Here, we are going to help you get familiar with the differences of UG and GmbH. No matter which one you choose, there will be significant consequences on the long term.

There are, in fact, many limited liability company (LLC) forms to choose from in Germany. This can be confusing at first and if you are not familiar with them, you might not know which one to choose. Let’s see the main differences of the two potential options for your company, GmbH and UG.

UG is Actually Mini-GMBH

In fact, UG is only a different version of GmBH, also popularly called as Mini-GmBH. The UG is basically an entrepreneurial company that has limited liability, or “haftungsbeschränkt”, as the Germans call it. It is a great choice for those entrepreneurs who do not have such a big amount of capital to start with.

In order to form a UG, €1 of share capital or equity is all you need. Another often-used name for it is 1-Euro-GmBH. It is really cheap but should you go for it? Are you going to be bankrupt before you even started?

The Main Differences Between UG and GMBH

Starting a german GmBH is much more expensive, requiring you to commit with a share capital of €25000 total. Forming a UG, on the other hand, requires a €1 minimum commitment, which is an incredibly small amount compared to GmBH.

Small startups that do not have a lot of capital to begin with can take advantage of the limitation of liability offered by a UG. With a GmBH, you can establish a company in kind with material value representing your share capital.

With a UG (haftungsbeschränkt), this is not the case. Instead, it allows you to turn your company into a GmBH once your equity has increased to €25000. This conversion, however, is not something you must do. You can just continue functioning as a UG company if you want to.

Choosing the UG comes with the benefit of lower formation costs. These costs are somewhere between €240 and €300 with a UG, while they are between €500 and €1000 with the GmBH. When it comes to company formation costs, the UG with one shareholder enjoys the benefits of the Musterprotokoll, or “model protocol” in English.

A Musterprotokoll not only costs less but it can be done quickly as well. Every UG has the obligation to set aside 25% of its annual net income as reserve. This is all part of the process of converting the UG into a GmBH, or “forming the reserves”. Once the provision is as much as €25000, it can be converted.

One of the weak points of UG (haftungsbeschränkt) is that its credibility is low due to the fact that a GmBH has significantly bigger share capital. In general, a company will only be acknowledged as an established business when it becomes a GmBH.

Legal Forms Besides UG and GmBH

The UG and GmBH are only two of the range of legal forms that people turn to. It really depends on which one aligns the most with their ambitions. Two of the more complicated ones are the GmBH & Co. KG, which is limited liability company with limited partnership and the Aktiengesellschaft (AG) or stock company. Or there are the non-profit versions, such as the gUG or GmBH.

Check our Shelf Companies in Germany.

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