German Limited Partnership with a GmbH as General Partner
German Limited Partnership with a GmbH as General PartnerUpdated on Tuesday 24th January 2023
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Local and foreign investors who wish to start a business in Germany can choose between several business forms, including corporations and partnerships. However, combining the traits of the two is possible through a special business form.
Read below to find out more about the limited partnership and company limited partnership, which allows investors to benefit from certain advantages without having to remain fully liable for the partnership they form.
The German GmbH & Co.KG presented by our lawyers in Germany
There are several forms of partnerships in Germany, one of them being the limited partnership (Kommanditgesellschaft, KG) with a limited liability company as the second associate being a partnership in which the general partner is a limited liability company (Gesellschaft mit beschränkter Haftung, GmbH). This type of partnership combined with a limited liability company is thereafter named a GmbH & Co.KG
In this special business form, the limited liability company acts as the general partner, thus, by definition, bearing all liability and being fully responsible for the GmbH & Co. KG’s debts and liabilities. The limited partnership with a limited liability company as a general partner in Germany can have one or more limited partners who will be liable for the company’s debts and liabilities only to the extent to their capital contributions.
The main advantages presented by this business form are listed below:
- Liability reduction: this type of German company is appropriate for enterprisers wanting to limit their liability while benefiting from the flexibility of a non-incorporated company.
- Business size advantages: GmbH & Co. KGs are usually employed for medium-sized companies and family businesses;
- Incorporation: forming such a type of business entity is not overly complicated and our team advises those interested to reach out to one of our agents in order to receive specialized assistance;
- Capital: the law does not impose a specific minimum capital for this business form; of course, when opening a GmbH in Germany, there is a requirement for a minimum capital of 25,000 euros, however, the company selected to act as partner can already be incorporated at the time this partnership is formed, thus rendering the capital costs nonexistent for this partnership.
How to set up a GmbH & Co. KG in Germany
The German limited partnership with a limited liability company as a general partner is a hybrid form of company which is established by concluding a partnership agreement between the general partner and the limited ones. It is advisable to conclude this agreement in writing before a German public notary. Our lawyers in Germany also provide notary services.
Although it is typical for the company to already be incorporated at the time the partnership is concluded, investors can choose to also open the company roughly at the same time or, as an alternative, convert an existing GmbH into an GmbH & Co. KG, if this is suitable for the common business purposes with their partner.
It is important to note that the partnership agreement will set forth the conditions in which the partnership will develop, as well as the duties of the parties. Carefully drafting this document is essential in order to avoid future disputes that may arise between the two partners. The partnership agreement will explicitly state the conditions, as well as the level of liability for the two involved partners.
Just like the German limited partnership, the GmbH & Co. KG must be registered with the Companies Registry. The liability of the limited partner will become limited only after the registration with the German Trade Register. The application must be submitted by all the partners.
The management of the GmbH & Co. KG
While it may seem that this type of partnership can be subject to more complex management requirements, the rules governing partnerships in Germany apply in this case and, as lawfully stated, the general partner is the one who manages the partnership.
This means that the company, the GmbH is the one who will manage the partnership, with the other partner (the limited partnership) not engaging in management operations. This applies regardless of the size of the partnership between the two business forms.
The taxation of GmbH & Co. KG in Germany
The taxation of the limited partnership with a limited liability company as a general partner in Germany is similar to the taxation of all other forms of partnerships. The profits of the GmbH & Co. KG will taxed individually for each partner. Every partner in the company will be required to report and pay the taxes on their share profits through their personal income tax returns in Germany. The income of the limited liability company could, however, be subject to the trade tax.
The following taxes are relevant for this business form:
- Corporate income tax: the GmbH is subject to the 15% corporate income tax rate to which a solidarity surcharge applies;
- Income tax: the limited partner is subject to the individual income tax rate which is a progressive one, between 14% and 24%, to which the solidarity tax applies;
- Value-added tax: at the standard 19% rate or the reduced 7% rate; some types of goods and services are 0-rated;
- Others: included here are the local business tax and other taxes that may apply to companies in Germany, as the general partner is a GmbH (such as the applicable social security contributions); our lawyers in Germany can give you more details.
Companies follow the German commercial GAAP/IFRS for accounting and are required to prepare annual financial statements. The accounting standards requirements for the limited partnership are lighter compared to those for the GmbH.
The key takeaway for the GmbH&Co. KG in Germany is that it allows investors to avoid the unlimited liability that arises when typically setting up a partnership. While it is true that the partner GmbH has unlimited liability within the partnership and for all of its purposes and business activities, the members of the GmbH have limited liability, essentially becoming liable only to the extent of their investment in the GmbH that acts as the fully liable partner.
The important risk reduction provided by the GmbH&Co. KG in Germany for the acting general partner is the main reason why this business form is attractive for those who can share their business goals.
The accounting and reporting requirements when one of the partners is a GmbH can be subject to important issues and differences. Our team of German accountants can help investors understand the manner in which their partnership will be subject to accounting compliance and reporting. You can reach out to us if you have before you set up a partnership with a corporation as one of the partners.
If you need assistance in setting up any type of partnership you can request the services of our law firm in Germany. You can also contact us for more details on the taxation of partnerships.