GmbH vs. UG: which limited company should you start?
Both offer the same limited liability. The real difference is €25,000 and a mandatory profit reserve. Here's when to start small and when to go straight to GmbH.
If you want limited liability in Germany — your personal house, car and savings shielded from business debts — you have two realistic choices: the UG (haftungsbeschränkt) or the GmbH. They give you the same liability protection. What separates them is upfront capital, reputation, and one quirky rule about profit.
The same shield, two price points
A UG and a GmbH are both Kapitalgesellschaften — separate legal persons. Creditors can reach the company's assets, not yours. The difference is what it takes to start.
| Aspect | UG (haftungsbeschränkt) | GmbH |
|---|---|---|
| Minimum share capital | €1 (realistically ≥ €1,000) | €25,000 (€12,500 paid at registration) |
| Funding type | Cash only | Cash **or** in-kind (Sachgründung) |
| Mandatory reserve | 25% of annual profit until €25k | None |
| Limited liability | Yes — company assets only | Yes — company assets only |
| B2B reputation | Lower — signals early stage | Higher — full counterparty trust |
| Notary cost (Musterprotokoll) | ≈ €150–300 | ≈ €300–400 |
| India parallel | One Person Company (OPC) | Private Limited (Pvt. Ltd.) |
The UG: Germany's "mini-GmbH"
Introduced in 2008 (§ 5a GmbHG) as a German answer to the British "Ltd.", the UG lets you start a real limited company without €25,000 locked up. The catch is the 25% reserve rule: each year you must retain a quarter of your profit until your capital plus reserve reaches €25,000 — at which point you can convert to a full GmbH.
Worked through:
- Start: UG founded with €1,000. Reserve €0.
- Year 1: €10,000 profit → €2,500 to reserve. Reserve €2,500.
- Year 2: €15,000 profit → €3,750. Reserve €6,250.
- Year 3: €20,000 profit → €5,000. Reserve €11,250.
- Year 5: reserve reaches ~€24,000; capital + reserve hits €25,000. Convert to GmbH — the rule ends.
Two more things to know: a UG can only be funded with cash (no contributing a laptop, a car or IP — that's Sachgründung, which only a GmbH allows), and if you make a loss in a given year, there's simply no profit to reserve, so the rule pauses.
The GmbH: the standard vehicle
The GmbH is Germany's most trusted corporate form — roughly 60% of new companies choose it. Minimum share capital is €25,000, of which at least €12,500 must be paid in cash before registration. There's no mandatory reserve, so you can distribute, reinvest or retain profit freely.
And yes — you can spend the €25,000. The capital goes into the company bank account and from day one can pay for legitimate business expenses: notary fees, first month's rent, software, contractors. "Spending it" means using it for operations, not pocketing it personally.
Which one is right for you
Choose a UG if you're bootstrapping or testing an idea, you're a freelancer/consultant who just wants limited liability, you don't have €25,000 to lock up, or your business is service-light (consulting, software, content). You can convert to GmbH later.
Choose a GmbH if you want maximum credibility with German clients, banks and partners, you plan to raise investment or sign serious B2B contracts, you want to allow in-kind contributions, or you'll bid on public tenders. Remember only €12,500 is needed at registration.
The decision isn't permanent: the entire point of the UG is to soften the capital shock and let you grow into a GmbH. As the founders' rule of thumb goes — the best legal form is the one that lets you start.
When you're ready, the pre-incorporation checklist and the §21 visa guide cover what comes next, and you can compare every legal form side by side.
Informational only — not legal or tax advice. Figures are 2026 values and change frequently.
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Informational only — not legal, tax or immigration advice. Figures are 2026 values and change frequently. Verify against official sources or a qualified professional before acting.