Partnerships in Germany: General & Limited Partnerships

The limited partnership, regulated in §§ 161 ff. HGB, is a form of partnership with limited liability. The company consists of at least two partners: a limited partner (limited liability) and a general partner with unlimited liability. Its purpose is to operate a commercial enterprise under a joint company name.

In a KG, the general partners play a more active role in the company’s management. They generally make the day-to-day decisions regarding the company’s direction, while the limited partner primarily acts as an investor in the company. As a rule, the general partners take over the management of the company. Overall, the partners of a partnership have more control over the company’s objectives than they would in a corporation. Depending on the type of limited partnership, the partner’s share of the company’s profits is also higher.

Contract: The starting point for forming a limited partnership is the partnership agreement – a written agreement that outlines the role of each partner and defines which partners act as general partners and which are limited partners. Even though partnership agreements are not usually subject to specific formal requirements, they still need to be entered into the commercial register. Nevertheless, it is advisable to choose the written form for the articles of association. The reason for this is to protect against hasty declarations. However, the written form also serves to ensure clarity and the preservation of evidence. Notarisation of the contract is not mandatory. However, the application for entry into the commercial register must be made with a notarised signature.

The following points should be specified in the articles of association:

• the company name,
• the company’s registered office,
• the domestic business address,
• the company’s purpose,
• the shareholders and the company capital,
• management and representation,
• participation in profit and loss,
• withdrawal rights,
• the duration of the contract,
• termination or continuation of the company in the event of termination or the death of a shareholder,
• exclusion from the shareholders,
• assignment of a share,
• liquidation.

Capital requirements: There is no minimum capital requirement for forming a KG. However, the limited partners must contribute.

Liability: The KG allows some partners limited liability, which serves as an incentive for more significant investments in the company. However, the general partner has unlimited liability.

Taxes: A KG is not subject to corporate income tax as such. However, if the company is a corporation (GmbH & Co. KG/UG & Co. KG), the tax liability for the partnership is part of the corporation tax paid by the partner company. Otherwise, the tax liability is calculated as part of the income tax liability for natural persons.

Bookkeeping and records: The bookkeeping requirements for limited partnerships are comparatively low compared to those for corporations. Nevertheless, it must be ensured that the records are kept. At the end of the year, the profit and loss statement and the balance sheet must be submitted to the commercial register.

The general partner of the limited partnership can also be a legal entity – for example, a GmbH or UG. Depending on the case, a GmbH & Co. KG or a UG & Co. KG is formed. These are not separate legal forms. It is merely made clear that the personally and fully liable partner is a GmbH or UG. Since the general partner of the KG usually manages the company, this is the case with the representation of the GmbH & Co. KG, i.e. the managing director of the GmbH, see § 35 GmbhG. Due to the complex corporate structure, there is a greater need for advice. Operating two corporate forms also incurs comparatively high costs, and more formalities must be clarified. The fact that the annual financial statements of the GmbH and the KG must be disclosed means that there is a higher publication requirement. Despite everything, it is a partnership, resulting in no access to the capital market.

Since modernising the law on partnerships, this form of company – in addition to the PartG (partnership company) – has also been available to members of the liberal professions. In this article, the company model is generally referred to as GmbH & Co. KG, while the same rules also apply to UG & Co. KG.

The formation of this company follows the rules of the KG; however, the GmbH must have already been formed for these purposes.

• Articles of association: The articles of association define the tasks of the individual shareholders within the organisation and the purpose of the company. The points to be regulated are the same as those for the KG.
• Tax issues: A GmbH & Co. KG is eligible for trade tax relief. This model and the distribution of profits and losses offer further tax advantages. As a company shareholder, the GmbH is taxed on its profit, which is offset against the company’s corporate income tax.
• Bookkeeping: The accounting requirements for a GmbH & Co. KG are not as strict as those for a GmbH. However, it is worth noting that this company must prepare double-entry bookkeeping, keep its financial records for up to ten years, and publish its financial statements to ensure the transparency of its operations.
• Share capital: No specific share capital is required to set up this business model. However, the situation is different for the GmbH.
• Registration: The company must be notarised and registered with the relevant authorities such as the tax office, the trade office and the commercial register. The GmbH & Co. KG is a commercial partnership and is, therefore, subject to the provisions of the German Commercial Code (HGB).

The general partnership (Offene Handelsgesellschaft, OHG) is a straightforward, collaborative business structure with unlimited liability. Designed for two or more partners who wish to conduct commercial activities jointly, the OHG combines flexibility, mutual control, and ease of establishment, making it an appealing option for entrepreneurs in Germany, particularly those within the same industry.

While the OHG does not possess an entirely separate legal personality from its partners, it enjoys unique legal features. For instance, the partnership, not the individual partners, can initiate or defend legal actions. This structure also offers operational flexibility, relatively low setup costs, and no minimum capital requirements. However, its unlimited liability entails significant financial risk, making it essential to carefully consider whether an OHG is the right fit for your business or if a limited liability model such as a GmbH or UG might be more appropriate.

Articles of association: An OHG is also formed with articles of association. These are not subject to formal requirements but should be drawn up in writing for legal certainty. The OHG does not require any articles of association or extensive bureaucracy. The costs of forming an OHG are also significantly lower than those of other company forms. Furthermore, no share capital is required. The contract of a general partnership should regulate the following points:

• Type of business activity,
• Agreement on joint external representation,
• Company name,
• Termination and the withdrawal of a partner,
• Withdrawals,
• Contributed items,
• If applicable, deviations from the sole power of representation of each partner,
• Conciliation clause.

Liability: In the event of financial difficulties, recourse can be made to the partners’ assets because with this form of company, liability is unlimited. Even after the dissolution of the OHG, the partners themselves can still be held liable for any remaining liabilities. Similarly, a new partner is also liable for existing debts. Former partners are still liable for existing liabilities for up to five years after leaving the company. In this respect, a strong relationship of trust between the partners is advisable.

Taxes: The taxes involved are the partners’ income tax. Your company is not recognised as a company subject to corporate income tax rates.

Bookkeeping: The OHG is obliged to keep books and prepare annual accounts. The scope of the annual accounts and the disclosure requirements depend on the company’s size.

Registration: The company must be registered in the commercial register before or immediately after the partners start business activities. The start of the business must also be reported to the trade office.

Dissolving the partnership: Dissolving a general partnership is relatively simple, requiring only an agreement between the partners to dissolve the company. However, as mentioned earlier, the partners must be aware that simply dissolving the company does not prevent them from settling their debts.

In addition to the companies regulated by the German Commercial Code (HGB), there are also civil-law partnerships (GbR) (§§ 705 – 740 BGB). This form of partnership is more flexible than the OHG, as it can also pursue charitable, artistic and other non-commercial purposes. The law differentiates between GbRs with and without legal capacity, whereby the latter is also not capable of holding assets, per § 740 BGB. This form of company is suitable for start-ups and freelancers who want to work together and are aiming for a project that is not exclusively about financial gain.

Articles of association: The contract can be concluded without any formal requirements. However, for reasons of legal certainty, the written form is recommended. A written partnership agreement sets out the objectives of the company, the responsibilities of the individual partners and the rules of the company concerning voting procedures, distribution of shares and management of profits/losses. Once these points have been discussed, the partners involved go to the relevant trade office in the municipality, and each fills out a registration form. These are forwarded to the tax office, which will then contact the shareholders regarding tax registration.

It is important to note that a partnership is limited in its choice of company name. The name must include the name of at least one of the partners and can also include information about the company’s purpose.

The following points should be included in the articles of association of a GbR:

• the name of the company,
• the registered office of the company,
• the business purpose,
• the shareholders,
• the management,
• the rights of representation (e.g. sole right of representation),
• rules for adopting resolutions (particularly important if there are four or more shareholders),
• provisions on liability among the shareholders (concerns only the internal relationship),
• profit appropriation,
• private withdrawals,
• distribution of profits and losses (e.g. according to capital shares or per capita),
• information obligations,
• prohibition of competition for partners,
• sale or assignment of company shares,
• capital contributions in the form of land or real estate,
• withdrawal of partners (e.g. through resignation or death),
• rules for dissolving the company,
• other individual agreements.

Conversion of GbR into OHG: After the company law reform of 1 January 2024, the previous automatic conversion of a civil-law partnership (GbR) into a general partnership (OHG) when certain thresholds are reached, such as a turnover of over €250,000 or an employment of more than five employees, will no longer be explicitly required by law. Instead, the MoPeG allows for the voluntary entry of the GbR in the new company register (eGbR), which gives it legal capacity. However, this entry may be mandatory under certain circumstances, such as if the GbR must be entered in the commercial register or land registry, for example, when acquiring real estate or investing in other companies. In the future, conversion to an OHG will depend less on turnover or personnel figures and more on whether the GbR actually engages in commercial trade, thus fulfilling the requirements for an OHG.

Liability: The GbR is a company with unlimited liability and can pose a risk to the partners. They are jointly and severally liable for all their personal assets. This means the partners are generally personally and unrestrictedly liable for all of the company’s liabilities. If the company experiences legal or financial difficulties, the partners’ private assets – and not just those invested in the company – can be used. In principle, “you’re in this together”: third-party claims are not directed first against the GbR and then against the partners, but the partners are directly liable with all of their private assets.

Taxes: The GbR itself is not liable for tax. The profits withdrawn by the partners as a private withdrawal from the capital of the GbR count as taxable income. The individual partners pay tax on these at their individual tax rate as part of their income tax return.

Bookkeeping: A GbR is only required to state at the end of the financial year whether it has made a profit or incurred a loss. A commercial balance sheet must only be drawn up if the profit exceeds €60,000 or the turnover exceeds €600,000 yearly.

Share capital: There are no formal requirements regarding the minimum amount.