UG vs GmbH: Choosing a German Company for Your Startup

Founders arriving in Germany from the UK or the US often expect something like a Companies House form or a Delaware filing. Instead they meet a notary, a commercial register and two acronyms that look like different legal forms. They are not. The UG (Unternehmergesellschaft haftungsbeschränkt) is a GmbH with less capital and a few extra rules, all set out in a single section of the GmbH Act.

So the real decision is narrower than it looks. How much capital do you want to tie up at the start, and will you need what only a full GmbH offers?

UG and GmbH side by side

Criterion	UG	GmbH
Minimum share capital	€1	€25,000
Paid in before registration	100% of capital	at least €12,500
Contributions in kind
Mandatory reserve	25% of annual profit
Limited liability
Tax treatment	same	same
Formation fees, model protocol, 1 shareholder	about €330	about €430
Formation fees, custom articles	about €730	about €730

Rounded register and notary fees; notary fees plus 19% VAT. UG figures assume €1 share capital.

Source: GmbH Act §§ 5, 5a, 7; fees from IHK Saarland fact sheet GR41, March 2026

The fees come from a March 2026 overview by the Saarland Chamber of Commerce. Notice the last row. With custom articles of association, a UG and a GmbH cost roughly the same to form, because the notary then calculates from a minimum value regardless of capital. The real cost gap is the capital, not the paperwork.

The model protocol: cheap, rigid, fine for solo founders

German law provides a standard template, the Musterprotokoll, that combines articles, appointment of the managing director and the shareholder list. It cuts notary fees substantially. The conditions are strict: at most three shareholders, one managing director, cash contributions only, and no changes to the wording.

For a solo founder that is usually the right call. For a team, it rarely is. The template contains nothing about leaver rules, pre-emption rights or deadlocks, which is exactly what co-founders fight about later. The Saarland chamber itself strongly recommends custom articles for multi-shareholder companies. Founder vesting goes into a separate shareholders’ agreement anyway, as our guide on how to find a technical co-founder explains.

The UG reserve rule in numbers

Under § 5a(3) GmbH Act, a UG must put a quarter of its annual net profit, after deducting any loss carried forward, into a statutory reserve. That reserve can only be used to convert into share capital or to cover losses.

Take a UG with €60,000 net profit and a €12,000 loss carried forward from the previous year. The base is €48,000, so €12,000 goes into the reserve and at most €36,000 can be distributed. For a startup reinvesting everything, that barely matters. It starts to bite once shareholders want dividends, which is usually the moment to upgrade.

When a GmbH is the better start

You want to contribute assets rather than cash: existing software, domains, hardware. Contributions in kind are banned for a UG.

You are selling to large corporate customers early. Some procurement teams look at share capital or credit ratings, and a UG with €500 capital can stall a deal. That is a commercial issue, not a legal one, but it is real.

You have the €12,500 and do not need it elsewhere. Paid-in capital is not a fee. The company can spend it on operations after registration.

Notary, language and ID for non-German founders

Every UG and GmbH formation goes through a German notary, in person or by video. Deeds are normally drafted in German. If you do not understand German well enough, the notary has to translate the deed for you under § 16 of the Notarisation Act, either personally or through an interpreter, and you can ask for a written translation to be attached.

The online procedure via the Federal Chamber of Notaries portal needs an NFC-capable smartphone with the Notar app and an electronic ID. EU nationals use an eID card with the online function activated; non-EU nationals an electronic residence permit with online ID, usually with a passport so the app can read the photo chip. Without a compatible ID, you will be booking a flight or a local notary appointment.

Budget time for the bank account. You need one to pay in the share capital before the notary can file, and identity checks for non-residents can take longer than the legal steps.

Limited liability has limits

Before the company is entered in the commercial register, anyone acting in its name is personally liable for those obligations under § 11(2) GmbH Act. Do not sign leases or large contracts between the notary appointment and registration.

Once registered, managing directors must file for insolvency without culpable delay, at the latest three weeks after the company becomes unable to pay its debts and six weeks after it becomes over-indebted, under § 15a of the Insolvency Code. Directors who miss that deadline can be personally liable. Any UG with €1 of capital can be technically over-indebted from the day it pays its formation costs, so put in a few thousand euros.

Upgrading a UG to a GmbH later

The step from UG to GmbH is a capital increase to at least €25,000, by fresh cash, by converting the accumulated reserve, or both. It is notarised and registered, after which the UG rules no longer apply. The company may keep “UG” in its name or switch to “GmbH”.

Investors care less about the form than about clean articles and a clear cap table. Your UG can raise its capital as part of the first funding round, since new shares are issued then anyway. Our guide on how to find angel investors covers what else they check.

Which one to choose

For most founders of a digital product, a UG with a few thousand euros of capital is enough to start, with custom articles as soon as there is more than one shareholder. Go straight to a GmbH if you are contributing assets or selling to large corporates from day one. If you are on Germany’s start-up grant for the unemployed, note that you must count as self-employed for social security purposes, which for a shareholder-director generally means holding at least 50 percent or a genuine blocking minority; the details are in our guide to the Gründungszuschuss.

If the idea is still untested, hold off on incorporating. Venture studios that take equity, such as OnlineBuilders, generally come in once there is a company with a clean structure, so it pays to get that part right rather than fast.

Next step: decide whether you are founding alone and whether any assets go in. Solo with cash only: UG with the model protocol. Team: book a notary for custom articles and agree the draft with every shareholder beforehand.

Questions people ask

Can a foreigner set up a UG or GmbH in Germany?

Yes. Nationality is not a requirement. You will need a German notary, a business bank account and an address for the registered seat in Germany. Opening the bank account is often the slowest step for non-residents.

Can I found a German company online?

Yes, through the Federal Chamber of Notaries' video procedure. You need an NFC-capable smartphone, the Notar app and an electronic ID: a German ID card, an EU eID card or, for non-EU nationals, an electronic residence permit with the online function enabled, usually plus a passport.

Do I have to speak German to found a GmbH?

No, but the deed is normally in German. If you do not understand it well enough, the notary must have it translated for you under § 16 of the Notarisation Act, and you can ask for a written translation to be attached.

Do a UG and a GmbH pay different taxes?

No. Both are corporations paying corporate income tax with solidarity surcharge plus municipal trade tax. The only practical difference is that the UG's reserve rule limits how much profit can be distributed.