The German UG lets founders start below the GmbH capital minimum, but section 5a GmbHG attaches strict conditions: cash-only contributions, full payment before registration and a statutory reserve. Official references: section 5a GmbHG (German official text) and the official English translation of the GmbHG.
What makes UG share capital different from a GmbH’s?
The UG (haftungsbeschränkt) is not a separate company type but a GmbH formed with share capital below the statutory GmbH minimum of 25,000 euros set out in section 5 of the German Limited Liability Companies Act. In exchange for the lower entry ticket, section 5a GmbHG imposes special conditions: the company must carry the UG suffix in its name, capital must be paid in cash, and part of every annual surplus is locked into a statutory reserve until the company grows its capital to the GmbH level. Understanding these conditions before the notary appointment prevents the most common early mistakes; our UG formation guide covers the wider process.
Why cash only, and why full payment before registration?
Section 5a(2) GmbHG states that contributions in kind are not possible: a UG cannot be funded with a car, equipment or IP instead of money. The same subsection requires that the application to register the company may not be filed until the full amount of the share capital has been deposited. In practice this means the chosen capital must be transferred to the company in cash before the commercial-register filing — there is no GmbH-style option of paying in only half at the start. The official text is available in German at gesetze-im-internet.de.
How much capital should founders actually choose?
Legally the capital only has to stay below the 25,000-euro GmbH threshold and cover at least one one-euro share, but the legal minimum is rarely the commercial answer. The capital is what the company starts life with: it must absorb formation costs, the first months of running expenses and any supplier deposits. A capital chosen too low can be consumed immediately, pushing the company towards over-indebtedness discussions in its first year. Founders comparing the low-capital start against a straight GmbH formation should weigh the trade-offs we set out in UG vs GmbH for foreign founders.
How does the 25% statutory reserve work?
Section 5a(3) GmbHG requires the UG’s balance sheet to include a statutory reserve into which one quarter of the annual surplus — reduced by any loss carried forward from the previous year — must be placed. The reserve is not a bank account but a balance-sheet position: it limits what can be distributed to shareholders. As long as the company remains a UG, every profitable year feeds the reserve, which is precisely the mechanism the legislator designed to make small-capital companies accumulate substance over time.
What may the reserve be used for?
The uses are exhaustively listed in section 5a(3): the reserve may be applied for a capital increase from company funds under section 57c GmbHG — converting reserves into share capital — or to offset an annual deficit not covered by profit carried forward, or to offset a loss carryforward not covered by the annual surplus. It may not be paid out as a dividend. For growing companies the section 57c route is the natural exit: the accumulated reserve becomes share capital and carries the company towards the GmbH threshold without fresh founder money.
When do the UG special rules fall away?
Section 5a(5) GmbHG provides that once the company increases its share capital so that it reaches or exceeds the GmbH minimum, subsections 1 to 4 no longer apply: the cash-only rule, the reserve obligation and the naming constraint end. The company may keep using the UG name or rebrand as a GmbH. The increase can be funded with new contributions or, after enough profitable years, from the statutory reserve itself via section 57c. Note that in-kind contributions only become possible for capital measures once the company has left the UG regime.
Which founder decisions should be minuted from day one?
Four decisions deserve a written shareholder resolution early. First, the capital amount and why it covers the first operating phase. Second, the profit policy: since a quarter of each surplus is reserved, plan distributions on the remaining three quarters at most. Third, the conversion plan: define the trigger — reserve level or financing round — at which the company will increase capital to the GmbH minimum. Fourth, banking and proof of payment: keep the deposit records that the notary and registry court expect, because the registration cannot be filed before the capital is fully paid in.
FAQ
Can I contribute equipment or IP as UG share capital?
No. Section 5a(2) GmbHG excludes contributions in kind; UG capital must be paid in cash. In-kind contributions only become available once the company raises its capital to the GmbH minimum and leaves the UG regime.
Does the reserve obligation ever end?
It applies for as long as the company is a UG. After a capital increase to at least 25,000 euros, section 5a(5) switches off the special rules, including the reserve obligation.
Is a UG obliged to convert into a GmbH?
No. The law sets no deadline; a UG can remain a UG indefinitely. Conversion pressure is commercial, and the statutory reserve steadily builds the capital needed for the section 57c route.
Does Corpenza form the company itself?
Corpenza coordinates the German formation — notary, bank account, registrations and the accounting setup that tracks the statutory reserve; the notarial acts are performed by the German notary.
To size the capital, set up the accounting for the statutory reserve and run the formation end to end, speak with Corpenza company formation and accounting services — contact Corpenza.
This is general information, not legal or tax advice. Statutory rules are those of the German Limited Liability Companies Act (GmbHG); confirm the current text and your specific case with a licensed German adviser.
