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German Partnerships

German Partnerships are available as oHG (offene Handelsgesellschaft – general partnership) and KG (Kommanditgesellschaft – limited partnership). The only major difference between the two forms is the liability of its partners. While all partners of an oHG face unlimited liability for the partnership’s business debts, a limited partner of a KG is only liable up to its subscribed and registered contribution. This is the reason why foreign investors usually choose a KG when they set up a partnership structure for their investment in Germany.

General

Partnerships have a quasi legal entity status, i.e. can enter into contractual relationships, own assets and incur liabilities in their own name and on their own behalf.

The major reason for investors to use the partnership instead of a corporate structure are:

  • the greater flexibility in tailoring the internal affairs to the individual needs of the partners;
  • fewer publication requirements (no bylaws or partnership agreement must be filed with the commercial register);
  • easier way to dissolve a partnership and distribute its capital to the partners;
  • direct management by the (general) partners;
  • a different income tax treatment (partnerships are disregarded entities and transparent for income tax purposes); and, finally,
  • an advantageous gift and inheritance tax, interesting for a family owned business facing a generation shift within the family.

Against this background, partnership structures are commonly used for smaller and family owned businesses. For tax reasons, however, the partnership structure might also be an interesting vehicle for setting up an international holding company in Germany.

Setting up German partnerships

To set up a partnership, at least two partners are required. Possible partners (general as well as limited partners) of German partnerships can be either individuals, German or foreign corporations or other partnerships. A limited partnership must have at least one general partner with unlimited liability and one or more limited partners who risk only the amount of their capital contribution to the partnership.

The formation of German partnerships requires the execution of a partnership agreement. While it is possible to have an oral partnership agreement, it is more common and preferable for it to be in writing. The partnership must then be registered with the relevant Commercial Register.

To achieve the liability protection for the limited partners, the subscribed liability contribution must be properly registered to become legally effective. If the KG commences its business activities prior to its registration, all partners including the limited partners are, in principle, fully liable for any obligations arising from such pre-registration business. The liability of the limited partners will only become limited upon the registration of the KG with the Commercial Register.

Transfer of partnership interests

The transfer of any partnership interest (as limited or general partner) requires an agreement (written or oral) between the transferor and the transferee together with the consent of all other partners unless the partnership agreement provides otherwise. The partnership agreement may also impose certain restrictions relating to the transfer of a partnership interest. The change of partners must be registered with the Commercial Register.

Management and control of German partnerships

The partners may, in principle, freely agree upon their rights and obligations in the partnership agreement. However, limited partners are excluded by law from managing the partnership; it is only possible to grant limited power of attorney to limited partners (i.e. for certain types of transaction). The management responsibility is undertaken by all general partners of a partnership (oHG and KG). It is possible to restrict some general partners from managing the partnership. If the general partner is a corporation, the partnership is managed by the management of the corporation.

The limited partners are entitled to request a written copy of the financial statements of the KG as well as to inspect the records and accounts of the KG in order to verify that the financial statements are correct.

The partners determine the affairs of the partnership through partnership resolutions. Partnership resolutions must generally be passed unanimously. Although the partnership agreement may modify this principle, certain decisions relating to the fundamentals of the partnership exist which by law require the unanimous resolution of all partners. Majority decisions are therefore not always possible as with a GmbH or AG. The position of partners who acquire only a minority interest in a partnership is therefore slightly stronger than it would be in a GmbH or AG.

GmbH & Co. KG

One very popular way of achieving the advantages of a partnership structure (e.g. because of its advantageous tax treatment in some regards), but nonetheless shielding all partners from an unlimited liability risk as in a corporation, is to have a corporation with more or less no capital contribution as the sole general partner, a so-called GmbH & Co KG. The limited partner(s) also holds all shares in the GmbH. The result is that the limited partner is not only holding all interest in the KG directly and indirectly via the GmbH. Although being excluded from managing the KG as a limited partner, he, nevertheless, can control the KG via his controlling influence in the GmbH.

 

Author: Dr. Werner Mielke