Partnerships in Germany: General & Limited Partnerships

The KG (“die Kommanditgesellschaft”) is a form of partnership with an element of limited liability. In this business, the partnership has a minimum of two partners, with limited partners (Kommanditist) and general partners with unlimited liability (Komplementär).

Under this form of partnership, the partners can be natural or legal persons, and this is what gives rise to another form of business where a GmbH or a UG can take the role of the Komplementär (general/unlimited liability partner) in the form of the GmbH & Co. KG or UG & Co. KG. In a KG, the Komplementär have a more active role in the company’s management. These partners generally make the daily decisions about the partnership’s direction, whereas the Kommanditist acts primarily as an investor in the company.

To form a KG, the partnership agreement must outline the list of shareholders and distribute the limited liability partner’s roles and the unlimited liability partner. They must also present the partnership’s name, the enterprise’s purpose, and its planned duration, among other aspects. KG company formation can be a complex business, as many bureaucratic requirements must be addressed.

Allow our team of German corporate lawyers to guide you through the necessities.

The requirements in setting up a KG partnership are much less demanding than those in setting up a limited company. The starting point is the Partnership Agreement. The Partnership Agreement is a  written agreement that outlines the partners’ role and establishes which partners are the general partners (with unlimited liability) and the limited partners (with limited liability).

The agreement should also outline the partnership’s aims, the distribution of the partnership’s profits, and how the KG will contend with changing shareholders/partners within the partnership.

Registration: Following the partnership agreement, the partnership needs to be registered. A notary should then oversee the partnership agreement before the KG is registered with the trade office, the tax office and the registrar.

Capital Requirements: Like other partnership arrangements, no set amount of capital is required to start a KG. It is recommended to have enough finances to adequately support the partnership in the early stages of business to establish the business entirely.

Ease of Establishment: In common with other forms of partnerships, the KG is relatively straightforward to establish. In establishing a KG, the partners should draft a partnership agreement that lays out the purpose of the partnership, the business aims, and the designation of the general partner and the limited partner. The requirements within a partnership agreement are less demanding than those on a limited company’s articles of association.

Limited Liability Element: Since the KG allows some partners to have limited liability serves as encouragement for more significant investment in the partnership.

Greater Level of Control: The partners have more control over the firm’s aims under a partnership arrangement than in a limited company set. The share of the company’s profits is also likely to be increased depending on the KG’s nature.

Shareholder Turnover: With the right plan in place in the company’s partnership agreement, there should be little disruption in shareholders’/limited partners’ changes.

Flexibility: With the general partners in charge of the company’s management, there is greater flexibility in how a KG is run compared to a limited company. The general partner makes the operating decisions as to how business is conducted. Of course, they also run the risk since they have unlimited liability.

Bookkeeping and Records: The bookkeeping requirements for KGs are not as high as those for GmbHs and AGs, but like all companies, they need to ensure that they keep their records. At the end of the year, it is a requirement that they submit their profit-and-loss account and balance sheet to the Trade Register.

Taxes: A KG is not liable for corporation tax in its own right; however, if the partner of the company is a limited company (Gmbh & Co. KG/UG & Co. KG), the tax liability for the partnership will be part of the corporation tax paid by the partner company. Otherwise, the tax liability will be calculated as part of their income tax requirements for natural persons.

Unlimited Liability of the General Partner: It is worth keeping in mind that the General Partner faces a risk when operating under this model. Should the partnership face legal or financial issues, their personal assets (not just those invested in the company) can be at risk.

Purpose: A KG partnership is a partnership with a commercial purpose instead of a more general-purpose (such as those registered under the GbR/Civil Law Partnership). This means it is subject to the HGB (German Commercial Code) requirements and subject to commercial registration.

This business model is proving to be a popular form of business in Germany. It combines the limited liability aspects of the limited company with the features of the partnership model.

Under this model, the limited partner and the general partner present in the KG model is still applicable with one difference; a limited company takes the role of the general partner. This results in the partner with unlimited liability being the directors of a limited company. Their personal assets are not at risk, as is usually the case in a partnership arrangement.

In this piece, the company model will generally be referred to as a GmbH & Co. KG, but the same rules apply to the UG & Co. KG business model. Here are some advantages and issues to be aware of when considering this model of business:

Establishing a Gmbh & Co. KG can be more straightforward than creating a GmbH or other forms of limited companies. It follows the rules of KG and other forms of partnership company formation in Germany. The starting point is the partnership agreement.

Partnership Agreement: The partnership agreement outlines the roles of the different partners within the organisation and the purpose of the enterprise. In the case of GmbH & Co. KGs, the directors of the GmbH take the role of the general partner. The partnership agreement requires less onerous establishment necessities than is the case for limited liability companies generally.

Regarding share capital, it should be noted that, unlike liability companies, there is no requirement to have a set amount of share capital to establish this business model. The only need for sharing capital is that the requirements for a GmbH have been made available to set the parent company up in the first place.

Registration: The business must be notarised and registered with the relevant bodies, such as the Finanzamt (tax office), the local trade office, and the businesses’ registrar. KG companies are commercial and thus subject to requirements under the HGB (German Commercial Code).

Ease of Establishment: The company formation requirements to set up this business model are less complex than those involved in setting up a limited company.

Changes of Shareholder: Should a change in shareholder arise, it is generally easier to accommodate such a change under this business model than the paperwork requirements for a standard limited liability company.

Tax Benefits: A GmbH & Co. KG model has trade tax allowances. There are other tax benefits under this model and how profits and losses are distributed. As enterprise partners, the GmbH has its tax calculated on its profits, which is charged to the company’s corporation tax. Such enterprises’ tax returns are scrutinised to a far lower degree than for a limited liability company.

Control: The control of this partnership in terms of its business decisions is made by the managing director, which is, in this case, the GmbH. However, the GmbH needs representation; in this case, it is the managing director of the GmbH. In its decision-making, such an enterprise follows the rules of partnership. Thus, far more freedom is granted to the managing partner than under a limited liability company arrangement.

Administration Issues: Ensuring that this form of the company operates in tandem with the original GmbH can be complicated and costly. Organising two forms of companies operating with different tax, bureaucratic and other requirements can cause issues if the parent company is not big enough for the extra administration issues. This issue depends on the nature of the company and is based on an individual case basis. It is worth receiving assistance and advice on the legal and other issues involved when deciding on this business model.

Accountability: The accountability requirements for a GmbH & Co. KG are not as strong as those placed on a standard limited company. However, it is worth noting that this partnership must prepare double-sided accounts, keep its financial records for up to ten years, and publish its accounts to show transparency in its business dealings.

Investment: Banks and other groups may be less willing to invest in such a company’s operations due to the awareness that the partner with unlimited liability is a limited liability company.

Our team of dedicated German corporate lawyers will ensure your GmbH & Co. KG model is correctly established. From there, we will support your company on an ongoing basis.

Another form of partnership under German Law is the GbR – Gesellschaft bürgerlichen Rechts or Civil Law Partnership. The legal regulation of partnerships can be found under Title 16 of the German Civil Code (§§705 – 740 BGB).

This form of partnership is more flexible than the OHG (General Commercial Partnership) as it can also be concerned with charitable, artistic and other non-commercial aims. It is also not regulated by the German Commercial Code (HGB) but rather by the BGB.

This form of partnership is suitable for start-up companies and freelancers who wish to work together and want to work together on a project where the aim is not strictly financial profit.

Capital Requirements: There are no formal requirements regarding a set amount to start the partnership. However, it is worth considering that loan schemes and grants are available in some cases when it comes to creating a new company. Even if there are no formal requirements, ensure the partnership has enough finances to keep it going through the first few months.

From there, the most crucial establishing document is the partnership agreement.

Partnership Agreement: Partnership Agreements can be made orally but become difficult to enforce without written evidence. A written partnership agreement specifies the aims of the partnership, the individual partners’ responsibilities, and the partnership rules regarding voting procedures, distribution of shares, and management of profits/losses made.

It is recommended to receive legal advice on how to draft such an agreement to make it clear and binding. Regarding registration, in contrast to the OHG, the GbR does not need to be registered with the company registrar. However, it does need to be registered with the Finanzamt (tax office).

Flexibility: The GbR partnership is more flexible than the OHG because the German Civil Code regulates it – BGB – and not the stricter German Commercial Code – HGB. The GbR also does not need to be registered with the commercial registrar but can do so voluntarily. The GbR purpose does not need to be focused primarily on making a profit and can instead be concerned with other aims.

Division of Costs: This is a general advantage of partnerships for entrepreneurs and freelancers and applies to OHGs. By establishing a partnership, the costs of establishing and running the business are divided between the partners. This reduces the financial burden on anyone entrepreneur.

Expertise/Division of Labour: By establishing a partnership, the partners can also focus more on the aspects of the business they specialise in. Under an e.K., the entrepreneur is solely responsible for the company’s workings, but there is less of a requirement to oversee every aspect of the firm in a partnership.

Capital Requirements: Establishing a GbR is relatively straightforward as, in contrast to other forms of companies in Germany, there is no set requirement for the amount of capital needed.

Ease of Establishment: As seen above, the requirements for setting up a GbR are pretty straightforward. In comparison to limited liability companies, the conditions are much reduced.

Unlimited Liability: GbR partnerships are unlimited liability companies and can form a risk to the partners. It is worth noting that should one partner (Partner A) find themselves in legal/financial difficulties, then Partner B can also be found to have to answer for those difficulties. The partners are not separated when it comes to unlimited liability. If there is a legal or financial difficulty within the firm, the partners’ private assets – and not just what has been invested in the company – can be sought after.

OHG: Should the GbR partnership become more commercial in nature, it may be obliged to become an OHG partnership. There is no set requirement when this comes into effect, but generally, it is held when the partnership has a turnover of €250,000 per annum and five or more employees are working for the partnership.

Name choice: A partnership is restricted in its choice of business name, as the company should include the name of at least one of the partners. The business name can also include information about the purpose of the company.

Tax: The shareholders pay tax on behalf of the company under their own income tax declarations. If a partner is a limited company, the tax paid is in their corporation tax. The partnership itself pays local business tax and may have to pay VAT depending on whether it is a mercantile business.

The general commercial partnership is another form of unlimited liability company. This type of partnership is strictly for commercial activity and is thus more limited than the Civil Law Partnership.

The OHG (offene Handelsgesellschaft) involves two or more partners coming together for commercial activity. The partnership is then registered with the commercial registrar. Again, should the partnership face financial difficulties, the partners themselves can be targeted regarding liability.

Advantages: Similarly to the e.K./sole trader, the benefits here arise in issues such as the ease of establishing this form of company, the level of independence under which the partnership operates, and the profits are those of the partners’ much outside interference.

It is worth noting that the OHG is a more reputable form of the enterprise regarding commercial activities than the Civil Law Partnership. This means obtaining financial support from banks and outside parties is easier.

Independence: The partners are the owners of this enterprise and do not have to satisfy a board of management’s requirements.

Ease of Establishment: In terms of bureaucracy, an OHG can be established with a Partnership Agreement instead of issuing Articles of Association and other paperwork forms. The cost of establishing an OHG is also significantly reduced compared to other forms of companies. There is also no requirement for an amount in share capital.

Reputation: OHGs have a more substantial reputation than both e.K. and GbR forms of unlimited liability enterprises when obtaining additional finance.

Legal Entity: Although not entirely a separate legal entity from its partners, the OHG does have specific legal attributes. For example, cases can be taken by and against the partnership itself instead of its individual partners.

Public Disclosure: The OHG is not required to publish their accounts publicly.

The issues to be aware of are those generally associated with unlimited liability companies. The partnership may have certain aspects of a legal identity, but it does not grant the partners any protection regarding liability.

The liability issue can affect the individual partners even after the partnership as an entity has been dissolved. It can also impact the partners to the degree that exceeds what is stated in the Partnership Agreement.

For example, suppose the Partnership Agreement states that Partner A is responsible for 60% of the enterprise and Partner B is responsible for 40%. In that case, Partner B can still be held accountable to Partner A declaring bankruptcy due to the inability to pay off liabilities.

Unlimited Liability: The partners’ assets can be targeted in the event of financial trouble.

Taxes: The taxes involved are those of the partners’ income tax. Their enterprise is not recognised as one to which corporate tax rates apply.

Records and Financial Statements: The OHG must keep records and up-to-date financial statements in profit-and-loss accounts. These must be made available to the registrar at the end of the financial year.

Dissolution of Partnership: It is pretty easy to dissolve an OHG as it requires agreement between the partners to dissolve the enterprise. However, as stated above, the partners need to be aware that the company’s mere dissolution does not prevent them from paying debts owed.

Turnover Requirements: This partnership is formed for strictly commercial issues instead of the more flexible GbR (Civil Law Partnership). If a GbR partnership reaches a specific turnover limit or demonstrates itself to be commercial in its nature, it is obliged to register as an OHG. This requirement is generally held when the turnover is over €250,000 and when it employs five or more people.

An OHG is a respectable manner in which two or more entrepreneurs in the same work line can cooperate to pool their resources and talents.

There is a degree more control and ease of establishment than a limited company, but the issue of unlimited liability indicates the risk involved with such an enterprise. It is worth considering whether a UG or a GmbH model would better suit the company.