Setting up a UG (haftungsbeschränkt): Procedure, costs and mandatory reserves

What is the UG (haftungsbeschränkt)?

The Unternehmergesellschaft (haftungsbeschränkt) was introduced in 2008 with the MoMiG and is governed by Section 5a of the GmbHG. From a legal perspective, it is not a separate legal form, but rather a variant of the GmbH: all provisions of the GmbHG generally apply to the UG as well, supplemented by the special rules in Section 5a.

The legislature thereby intended to make a capital company with a very low capital threshold possible. In return, Section 5a of the German Limited Liability Companies Act (GmbHG) contains three special provisions that distinguish the UG from the classic GmbH:

• Non-cash contributions are excluded; the share capital must be paid in full in cash prior to registration.
• A quarter of the annual net profit is to be allocated to a legal reserve.
• The company must bear the designation „Unternehmergesellschaft (haftungsbeschränkt)“ or „UG (haftungsbeschränkt)“.

Following registration in the commercial register, the partners are generally not personally liable for the company's liabilities – liability is limited to the company assets.

Requirements for establishment

Shareholder

A UG can be set up by a single person or by several shareholders together. There is no maximum number. Shareholders can be natural and legal persons, including those with their registered office abroad.

share capital

The share capital of a UG is between €1 and €24,999. From a share capital of €25,000, a GmbH is formed; the UG variant pursuant to Section 5a of the German Limited Liability Companies Act (GmbHG) is then no longer applicable. If there are several shareholders, each share must be in whole euros – the practical minimum capital therefore corresponds to the number of shareholders. Initial capital that covers the company's initial expenses and ongoing obligations makes sense; in practice, amounts between €500 and a few thousand euros are common.

Two UG-specific rules must be strictly observed:

• Full cash deposit before registration. Unlike a GmbH, a UG cannot be registered with just a quarter of the cash contribution. The entire subscribed share capital must be paid in before filing for entry in the commercial register (Section 5a (2) of the German Limited Liability Companies Act (GmbHG)).
• No non-cash contributions. Non-cash contributions are expressly excluded (Section 5a(2) sentence 2 of the German Limited Liability Companies Act (GmbHG)). Anyone wishing to contribute fixed assets or an existing business must use a GmbH instead. The seemingly obvious workaround – initially setting up a UG with cash and subsequently selling the items to it – carries the risk of a disguised non-cash contribution (Section 19(4) GmbHG) and should be reviewed by legal and tax professionals prior to incorporation.

Company name and legal form suffix

The company name must have distinctiveness and the power to distinguish itself (§ 18 HGB) and must differ clearly from existing company names at the same location (§ 30 HGB). The legal form suffix „Unternehmergesellschaft (haftungsbeschränkt)“ or the abbreviation „UG (haftungsbeschränkt)“ is mandatory (§ 5a para. 1 GmbHG); the shortened designation „UG“ without the suffix is impermissible. The IHK Köln offers a free preliminary check of the planned company to.

Registered office and domestic business address

The constituent meeting according to section 4a GmbHG is a German location specified in the articles of association. The domestic business address pursuant to section 8 paragraph 4 of the German Limited Liability Companies Act (GmbHG), it is the actual address at which the company must be reachable; it is registered separately with the commercial register. Both should be capable of receiving mail – if reachability is lacking, the court may serve documents publicly pursuant to section 15a of the German Commercial Code (HGB) without the company gaining knowledge thereof.

Process of setting up a UG

The UG is formed in five steps. Where possible, no contracts should be concluded in the name of the company prior to entry in the commercial register: anyone who acts during this pre-incorporation and pre-company phase may be held personally liable for the resulting obligations. Limited liability only applies once the company is entered in the commercial register (§ 11 GmbHG).

Step 1: Articles of association or standard protocol

According to § 3 GmbHG, the articles of association must contain at least the company name, registered office, object of the company, share capital, and the number and nominal amounts of the shares. For simple formations, § 2 para. 1a GmbHG provides the Model protocol For: a statutory pre-formatted document that combines the articles of association, appointment of the managing director and shareholder list in a single instrument. It is exclusively open for incorporations with a maximum of three shareholders, one managing director and solely cash contributions; individual arrangements are excluded. For the UG with very low share capital, the model protocol is frequently the most efficient choice.

Step 2: Notarisation

The memorandum and articles of association must be notarised (§ 2 para. 1 GmbHG). The notary reads out the contract, clarifies any queries and notarises the signatures.

Since 1 August 2022, notarisation has also been possible via video conference (Section 2 (3) GmbHG). A prerequisite is an electronic identity document suitable for the online notary procedure. For German identity cards with the eID function activated, this is unproblematic; for foreign identity documents, technical and identity law suitability should be clarified in advance with the notary's office.

Step 3: Full payment of the share capital

Following notarisation, the managing directors open a business bank account in the name of the company „i. G.“ (in formation). The entire subscribed share capital must be paid into this account – only then is the company eligible for registration (§ 5a para. 2 GmbHG).

Step 4: Application for registration in the commercial register

The managing directors apply for registration of the UG at the commercial register in notarised form (§§ 7, 8 GmbHG). The notary's office submits, in particular, the articles of association, the shareholder list and the application electronically to the local court (Amtsgericht). In the application, the managing directors assure that the contributions have been duly paid in and are at the free disposal of the management (§ 8 para. 2 GmbHG); the registry court may request additional proof for this assurance. Upon registration, the UG comes into existence as a legal entity (§ 11 para. 1 GmbHG); from this point in time, the limitation of liability applies.

Step 5: Business registration and tax registration

The business registration is carried out at the City of Cologne – Public Order Office. For corporations, a separate procedure is provided that also allows registration before entry in the commercial register; the decisive factor is the actual commencement of activity. At the same time, the tax registration questionnaire must be submitted electronically via ELSTER to be submitted to the tax office – within one month of commencing the activity (§ 138 para. 1b AO).

Duration and ongoing obligations after incorporation

With thorough preparation, there are two to four weeks between the initial notary appointment and entry in the commercial register. Following complete filing and prompt payment of costs, the Cologne Local Court typically processes straightforward cases within about a week. Time constraints frequently arise during the opening of a corporate bank account „in formation“ (i. G.); some institutions only accept applications following detailed identification checks.

Following registration, the same legal structure of obligations applies as with a GmbH:

• Bookkeeping according to the HGB: As a formal merchant (§ 6 HGB), the UG has a full bookkeeping obligation; a tax adviser should be involved early on.
• Annual accounts and filing: To be prepared in accordance with §§ 242 et seq. of the German Commercial Code (HGB) and, depending on size, disclosed in the Company Register. In practice, most UGs fall under the reliefs for micro-corporations pursuant to § 267a HGB.
• Invoices showing VAT: must contain either the tax number or the VAT identification number in accordance with Section 14(4) of the German VAT Act (UStG).
• Mandatory information on business letters: Company name, legal form, registered office, commercial register court, commercial register number and managing directors must appear on all business letters (§ 35a GmbHG). Emails in business communication are considered business letters.
• Legal notice: The specifications according to Section 5 of the DDG (formerly Section 5 of the TMG) apply to the website.
• Transparency register The beneficial owners must be reported without delay and kept up to dateSection 20 of the Money Laundering Act).
• Taxes: The UG is subject to corporation tax (currently 15 %) plus the solidarity surcharge, as well as trade tax at the rate set by the local authority where the business premises are situated – currently 475 % in Cologne.

The requirement to form reserves pursuant to section 5a subsection 3 of the German Limited Liability Companies Act (GmbHG)

Anyone who sets up a UG assumes a statutory obligation to build up reserves for the duration of the UG phase. It is the central instrument with which the legislature compensates for the low capital threshold.

When adopting the annual financial statements, one quarter of the net profit for the year, reduced by any loss carryforward from the previous year, must be allocated to a legal reserve (§ 5a para. 3 GmbHG). This reserve is earmarked and may only be used for:

• a capital increase from company funds (section 5a subsection 3 number 1 GmbHG),
• the offsetting of an annual loss, insofar as it is not covered by profit brought forward from the previous year (No. 2), or
• the offset of a loss carryforward, to the extent that it is not covered by an annual net profit (No. 3).

Free use of the reserve – for example for distributions – is excluded. The balance sheet character of this restriction must be noted: the legal reserve is a restricted equity item, not a blocked bank account. Normal operational investments from the company's unencumbered assets remain unaffected; the restriction applies exclusively to the reserve itself and its permissible use. Economically, the formation of reserves gradually strengthens the company's equity base, while the shareholders are only permitted to withdraw a portion of the profit.

The obligation to maintain reserves ends not upon reaching a specific reserve level. It only ends with the entry of a formal capital increase to at least €25,000 in the commercial register (section 5a (5) of the German Limited Liability Companies Act (GmbHG)). As long as no such capital increase has been entered, the obligation to form reserves remains in place – even if the company has arithmetically accumulated more than enough reserves for an increase for some time.

How and when does a UG become a GmbH?

Unlike the colloquial expression „from €25,000 in reserves, the UG automatically becomes a GmbH“ suggests, there is no automatic mechanism. The transition requires an active step in three stages:

1. Resolution to increase share capital. The shareholders' meeting resolves to increase the share capital to at least €25,000. The resolution must be notarised.
2. Raising of the additional capital. Frequently, the capital increase is carried out from company funds – that is, by converting the accumulated statutory reserve into share capital (§ 57c GmbHG in conjunction with § 5a para. 3 no. 1 GmbHG). A capital increase against contributions by the shareholders is also possible.
3. Company registration. The capital increase only becomes effective upon registration. From this point on, the obligation to form reserves no longer applies (§ 5a para. 5 GmbHG).

Even after the increase, the company may retain the designation „UG (haftungsbeschränkt)“ or change its name to „GmbH“. Changing the company name requires an additional resolution to amend the articles of association, to be notarised, followed by entry in the commercial register.

When is the UG the right choice?

Whether a UG is suitable depends primarily on capital requirements, equity participation structures and planned financing. The following criteria provide an initial guide:

The UG is worth considering if …

• you want to start with a cash deposit of less than €12,500, but want limited liability.
• you want to first test a venture on the market without personally being liable for its liabilities.
• Your business without major capital investment starts – such as consultancy, software, small online retail.

The GmbH is usually the better choice if...

• You are able to subscribe to the minimum share capital of the GmbH (€25,000) and make the minimum contribution for a cash formation – at least €12,500 in total and at least one quarter per cash contribution share prior to registration (§ 7 para. 2 GmbHG). You save yourself the reserve requirement and appear more credible in the market.
• you wish to make non-cash contributions. These are excluded for a UG (§ 5a para. 2 sentence 2 GmbHG).
• you expect institutional investors for whom the designation „UG (haftungsbeschränkt)“ serves as a signal of low capitalisation.
• You intend to change to €25,000 of share capital in the foreseeable future. Two notary appointments (formation + capital increase) incur more costs than a single GmbH formation.

You can find a comparison with sole traders, partnerships (GbR), limited partnerships (KG) and private limited companies (GmbH) in our article Legal forms compared.

Setting up a UG in Cologne: Costs and responsible bodies

The total costs depend on the share capital, the chosen type of contract and the scope of legal assistance. For a typical cash formation using a standard template, the mandatory items can be broken down as follows:

Note on the business value: For the notarisation of the partnership agreement of a corporate entity, Section 107(1) of the Court and Notary Costs Act (GNotKG) stipulates a minimum business value of €30,000. This minimum value does not apply to formations using a standard protocol in accordance with Section 2(1a) of the Limited Liability Companies Act (GmbHG) (Section 107(1) sentence 2 in conjunction with Section 105(6) sentence 1 no. 1 GNotKG); the business value is then the actual share capital. This explains the significantly lower notarisation fees for formations using a standard protocol. Bank account management, tax advisory services and ongoing bookkeeping costs must be calculated separately.

Responsible bodies for setting up a UG in Cologne:

• Company name preliminary check: IHK Cologne (free of charge).
• Notarial attestation: every notary's office in Cologne.
• Commercial Register: Local Court of Cologne – Commercial Register.
• Business registration: City of Cologne, Public Order Office.
• Tax registration: competent tax office Cologne, electronically via ELSTER.

Common mistakes when setting up a UG

„UG“ without the addition „haftungsbeschränkt“

The legal form suffix is mandatory (§ 5a para. 1 GmbHG). Anyone who uses only „UG“ in business transactions – on invoices, quotations or in the imprint – may expose themselves to liability for apparent legal status. Check all templates and communication channels immediately after registration.

2. Share capital too low without a liquidity buffer

A share capital of one or a few euros is legally possible, but offers no financial buffer. Even minor ongoing liabilities—notary fees, registry court fees, account maintenance, initial invoices—can lead to payment difficulties. The capitalisation should be aligned with the actual financing requirements.

3. Plan non-cash contributions

Non-cash contributions are excluded when setting up a UG (entrepreneurial company) (§ 5a para. 2 sentence 2 GmbHG). Anyone wishing to contribute vehicles, machinery or an existing business should opt for the standard GmbH instead. The seemingly obvious workaround – initially incorporating with cash and subsequently selling the items from the shareholder to the UG – can be classed as a disguised non-cash contribution pursuant to § 19 para. 4 GmbHG, with significant liability and tax consequences. Such arrangements should be reviewed by legal and tax professionals prior to incorporation.

4. Requirement to form reserves overlooked in bookkeeping

The reserve must be created when the annual financial statements are adopted. Anyone who adopts the annual financial statements without taking account of Section 5a (3) of the GmbHG and fails to create the reserve risks flawed annual financial statements – with potential liability consequences for the managing director.

5. Address without guaranteed delivery

The domestic business address (§ 8 para. 4 GmbHG) must be genuinely reachable. If service of process is not possible, the court orders service by public announcement pursuant to § 15a HGB – deadlines then run against the company without its knowledge. Virtual office addresses are permissible if mail is actually processed and forwarded; empty letterbox addresses are risky.

Tax registration delayed

The questionnaire for tax registration must be submitted actively via ELSTER, generally within one month of commencing the activity (§ 138 para. 1b AO). Anyone who waits for the tax office to get in touch will miss the deadline.

Underestimating crisis obligations

If there is an impending inability to pay, the management of a UG must immediately convene a shareholders' meeting (§ 5a para. 4 GmbHG). This explicit special rule does not apply to a standard GmbH; however, a shareholders' meeting must also be convened there if it appears necessary in the interest of the company (§ 49 para. 2 GmbHG) – and at the latest in the event of a loss of half of the share capital (§ 49 para. 3 GmbHG). If insolvency or over-indebtedness has actually occurred, the insolvency law filing obligations of the Section 15a of the Insolvency Act (InsO).

Frequently asked questions about setting up a UG