General partnership (OHG) – The general partnership is a German legal form founded by two or more persons and managed by at least one partner. As the name suggests, it is primarily focused on commercial enterprise and is thus subject to the German Commercial Code (HGB) in the legal sense. Back to all: Legal forms.
General partnership: formation, advantages and disadvantages
In the following, you will find out everything you need to know about setting up a general partnership. How do you become a partner in a general partnership? What are the differences between incomplete and complete companies? What are the advantages? What are the disadvantages? How do I set up a company? What is a company? What taxes are there in Germany for an OHG? You will get an answer to all these questions and more – explained simply and quickly. Plus everything you need to know about taxes and real estate trading.
If you’re considering forming a general partnership, the first thing you need to know about is the formation process: Who can form what exactly, when, and to how many… what are the differences and similarities between the various forms of business law? It is equally important to know the advantages and disadvantages of a general partnership: From profit distribution to saving taxes – an overview of the seven most important founding criteria for you.
What are the founding criteria?
Number of shareholders
Management
Foundation
Company name
Funding
Liability
Profit distribution
Learn everything important about it here! In addition, you will find all German types of companies and legal forms, as well as tips on how to start a company, including the special case of real estate GmbH, family foundation & Co.
Partnership OHG: Management according to HGB
In the entrepreneurial world, there are many different forms of business you can choose from. They are roughly divided into two categories, namely sole proprietorship and companies, which in turn are divided into incomplete companies – these include dormant companies and BGB companies – and complete companies – partnerships, corporations and some more.
The general partnership – OHG for short – is one of the so-called complete companies and, in contrast to the incomplete companies, is not subject to the German Civil Code (BGB) but to the German Commercial Code (HGB). As a partnership, the general partnership is an uncomplicated form of corporate law, as it can be founded informally and a minimum of only two founding members is required.
Limited Liability Company and Company Limited Partnership(GmbH & Co KG)
Limited Liability Company and Compagnie General Partnership(GmbH & Co OHG)
Formation process of the OHG: From the number of shareholders to the distribution of profits
You would like to found a general partnership? No problem! The formation process of a general partnership is quite simple: Firstly, you need at least one other person to be able to form a general partnership. Alternatively, you are already a co-founder of a partnership under civil law (GbR) and you have decided to convert the incomplete partnership into a general partnership. Secondly, an informal partnership agreement is sufficient insofar as no real estate is contributed to the partnership.
OHG formation from 2 persons: Tax ID, commercial register, company name
The formation of a general partnership requires at least two natural – or legal – persons. A maximum number of permissible partners is not specified by law. The internal relationship determines the beginning of the company as the date contractually agreed between the partners. In the external relationship, however, the formation of the general partnership is dated on the first activity on behalf of the company, i.e. at the latest with the binding entry in the commercial register. The registration costs you on average about 200 to 300 Euros and is usually carried out by a notary. You will receive a tax identification number – tax ID for short – from your local tax office in advance. The registration of the OHG is carried out by the trade office for a processing fee of approximately 10 to 65 Euros. Only in the case of contributed real estate are further costs incurred for the notarial certification of the partnership agreement.
As you are registered in the commercial register as a partner in a general partnership (OHG), you can officially operate your business, unlike a partner in a civil law partnership (GbR) or a sole trader. This means that your business has a company, i.e. an official name, which you can freely design together with the other partners. It doesn’t matter whether it’s a personal company, a real company, a fancy company or a mixed company… As long as the name is in the sense of the prohibition of misleading and has the suffix “OHG”, almost anything is allowed.
Individual management, agreements & procuration
Although it is possible to manage a general partnership jointly with some or all of the partners by agreement, all partners usually have sole management authority and generally make their decisions alone. This power of sole management applies to all normal business activities such as purchasing and selling, hiring personnel, accepting bills of exchange, and more.
The sole power of representation also applies to legal transactions. This means that each shareholder may perform legal acts on behalf of the general partnership in full and without restriction. Deviations – such as joint representation – are contractually possible, provided that all partners agree to this. Only in the case of extraordinary legal transactions do you have to consult with your co-partners. This is the case, for example, when taking on a silent partner, but the purchase or sale of real estate also requires the prior consent of all partners. Furthermore, the managing partners may only jointly appoint a proxy – each of them is individually entitled to revoke the proxy.
Since the sole power of management and the sole power of representation give the individual partners a great deal of freedom to make decisions, each partner may at any time personally obtain information about the affairs of the company, inspect the commercial books or draw up a balance sheet from the company papers. This ensures that none of the partners acts behind the backs of the others and that disagreements are addressed personally.
Financing, Liability & Profit Distribution
The financing is entirely at your discretion, so you can theoretically do without any start-up capital. However, it is advisable to have certain reserves and to draw up a financing plan in order to be financially prepared in case of unpleasant surprises. The company risk is borne jointly by all partners and they are liable for both business and private matters. If something goes wrong and the general partnership defaults on payments and gets into financial difficulties, you must – even in the case of wrong decisions by your co-partner(s) – take full responsibility with your private assets.
In contrast to the GbR, the distribution of profits in the case of a general partnership does not take place in equal parts, but in dependence on the value of the contribution made. According to the legal regulations, each partner receives 4 percent of his capital share – contributions and withdrawals taken into account – and only the remaining surplus profit is actually distributed according to heads. Deviating regulations can be laid down in the shareholders’ agreement.
Shareholders’ rights: withdrawal of capital, control, termination & Co
The rights of the partners secure your position in the general partnership despite the joint liability risk: The individual business authority only applies within a certain, customary framework… the right of control means that you are informed about all matters… Contributions and withdrawals are fairly offset and even in case of losses you can secure a part of your capital contribution.
Overview of shareholders’ rights:
Individual management authority
In the case of normal operations
On revocation of procuration
Consent requirement
In the case of exceptional legal acts
In the event of the appointment of an authorised signatory
Sole power of representation
For all legal transactions
Right of control
For corporate matters
Reimbursement of expenses
In the case of expenditure from private funds
Capital withdrawal
4 % of your capital share (independent of losses)
Profit share
4% of your capital share
Additional profit according to heads
Right of termination
6 months’ notice to the end of a financial year
Liquidation share
According to your capital share
Duties of shareholders: non-competition clause, loss & liability
As a general partner, you can make your own decisions in many cases, similar to a sole proprietor, and are not dependent on the approval of your fellow partners in day-to-day business. However, there are some cases in which you cannot avoid the approval of the others. It is therefore important that you are familiar not only with your rights but also with your obligations as a partner: the obligations of the partners primarily safeguard the general partnership itself.
Duties of shareholders at a glance:
Capital contribution
Cash contribution
Real assets
Right values
Non-compete
Business in the same line of trade
Personal liability in similar companies
Loss share
By heads
Liability
Unrestricted
Directly
Solidarity
Advantages: No share capital, high credit rating, joint and several liability.
After presenting the typical characteristics of a general partnership, you have certainly already recognized the advantages that this legal form offers you: The formation is relatively uncomplicated and you do not need any start-up capital. You can be active in a team without losing your independence or having to operate with limited turnover and still have the support of your co-founder(s): You make all extraordinary decisions together, bear the liability risk jointly and thus obtain a good credit rating vis-à-vis banks and other financial institutions. The distribution of profits is a percentage of your capital share and only the excess profit is distributed according to heads. In this way, the larger depositors are fairly rewarded for their financing and the associated risk.
Fast and uncomplicated foundation
Flexible share capital
No turnover limit
High credit rating
Profit distribution according to capital share and additional profit according to heads
Liability risk in the team
Disadvantages: Full liability, registration requirement & HGB
The disadvantages that the formation of a general partnership can bring with it are also quickly identified: On the one hand, you do not have one hundred percent decision-making power and must agree with your partner staff in special cases. Nevertheless, in case of doubt, you must be fully and completely liable – even privately! – even if you were not responsible for the losses. Thirdly, as a general partnership you are obliged to register in the commercial register and are no longer subject only to the BGB. Last but not least: Since the success of a general partnership is largely tied to the teamwork and cooperation of the individual partners, internal disputes or serious breaches of trust can result in the dissolution of the company.
Consent requirement in special cases
Full liability (incl. private assets)
Obligation to register in the commercial register
Validity of the HGB
Endangering the continued existence of the company due to disagreements within the team
Evaluation: Acting & sticking in solidarity as a team
After comparing the advantages and disadvantages, it becomes clear: If you like to act in a small and familiar team in order to trade jointly and do not want to overcome any major bureaucratic hurdles, you can get started quickly and easily as a general partnership. Profits are shared fairly and losses are borne jointly, so that business with manageable risk is particularly suitable as an objective. In addition, an OHG makes sense for start-ups that do not have the necessary share capital for a corporation and/or would like to lift the turnover restriction of a GbR.
Real estate OHG: change of legal form, asset management & Co
You don’t think the idea of a general partnership is a bad idea at all, and now you’re wondering how to combine your partnership with real estate? From form change tricks and private contributions to corporations to real estate brokers and asset management companies. All essential information on real estate partnerships, real estate GbR and real estate KG for you in a nutshell.
Small tip: When acquiring and/or managing real estate, make sure that all details are clearly stated in the partnership agreement. Due to the principle of joint, unlimited and direct liability, you should also make sure that your managing partners are persons with comparable creditworthiness – otherwise there could be difficulties with financing and creditworthiness.
Variant 1: Save taxes through change of legal form trick
As an individual, you would like to contribute your property to a limited liability company (LLC) or other corporation, but the tax levies are too high for you? Then you should consider transferring your property to a partnership. The advantage: registered partnerships can be easily converted into corporations by means of a change of form and you can save the real estate transfer tax!
Change of legal form to a registered partnership
Of course, you can also first form a partnership under civil law (GbR) and convert your property into 100 percent GbR shares as a one hundred percent share. The next step would then be the change of legal form to a general partnership (OHG) with entry in the commercial register – this turns the GbR into a full company and, above all, into a registered partnership, which is the basic prerequisite for the conversion into a GmbH. Either way: You need another person for the foundation, who temporarily joins the company without any deductible.
Change of legal form to a corporation after 5 years
The change of legal form to a GmbH is again tax-free in terms of the identity of the legal entity, so that you remain exempt from real estate transfer tax and can still transfer your private property to a corporation. You only have to wait until the five-year lock-up period has expired, because otherwise taxes will still be due retroactively in accordance with the Real Estate Transfer Tax Act (GrEStG). If everything goes smoothly, you are still 100 percent owner and your co-founder can leave the GmbH without any problems.
Variant 2: Real estate agent with business licence
If you want to become a self-employed real estate agent, it’s not that easy. The profession of real estate agent is subject to the trade obligation and is not one of the liberal professions. This means that in order to be able to pursue this activity, you must first apply to the trade licensing office for permission and hope for a positive light. The official permit is required by law, for example to be able to assess your reliability in advance.
Real estate agent OHG, GbR & KG
Partnerships can also operate as real estate agents. However, without their own legal personality, OHGs, GbRs and KGs must obtain an official permit for each individual managing partner. In addition to the application form for permission, further documents must also be submitted. These include:
A police clearance certificate – available on request from the Residents’ Registration Office;
An extract from the Trade Central Register – available on request from the Ordnungsamt;
A tax clearance certificate – available on request from the tax office;
A certificate of no current insolvency proceedings – available on request from the local court;
A certificate of missing entries in the debtors’ register – available on request from the local court.
A certificate of competence can also be provided on a voluntary basis.
Variant 3: Asset-managing partnership
If you want to be active in the area of surplus income – i.e.: income from non-self-employed work, capital assets, renting and leasing or other income – an asset-managing partnership could be just right for you. Here you can typically either use the legal form of a GbR or fall back on trading companies regulated in the HGB such as the OHG or KG. Mixed forms such as the GmbH & Co KG are also conceivable in principle, but mean further regulations and requirements.
Participation, say & tax advantages
An asset-managing partnership makes sense if several real estate investors want to manage their real estate holdings jointly. The aspect of ensuring succession in the event of inheritance is also interesting here. The partnership agreement determines how much say the individual partners have – decisions are often made on the basis of shares, but even partners with a small shareholding can gain a dominant voting right – for example, if they have enormous expertise, professionalism or experience.
Tax advantage of such an arrangement? The capital-forming partnership is not the same as the tax object: each partner is taxed individually and all income taxes as well as taxes from inheritance, sale or gratuitous transfer of partnership shares must be reported by each partner individually for tax purposes.
Taxes for OHG shareholders: ESt, USt, GewSt & KSt
As a partner in a general partnership, you need to know about some types of tax, because when you set up your business, you receive income from your trade and must of course also pay tax on this income. Tax law stipulates that in addition to the income tax of each partner – or the corporate income tax of each legal entity – further sales tax contributions must be paid, insofar as the OHG does not only carry out tax-free sales. For commercial enterprises with an annual income of more than 24,500 Euros, trade tax is also due.
Conclusion: General partnership – for whom is it worthwhile?
If you are prepared to join forces with other trustworthy people in order to start your own business quickly and easily, you do not need enormous financial reserves and also pay relatively little tax on your profits. An OHG is therefore ideally suited to young entrepreneurs with an eye to the future who want to take their lives into their own hands, not just dream of self-fulfilment and do not want to wait until they have saved up the necessary start-up capital.
In real estate terms, a general partnership is particularly worthwhile for beginners who would prefer to invest their capital directly in property management or deal in real estate instead of setting up the share capital for a corporation. For BGB partners, a general partnership often means the next step towards business success – if only to reduce the liability risk. From a certain turnover size, however, you should consider converting your trading business into a GmbH or contributing it as a contribution in kind to an existing GmbH.
Limitation of liability, yes or no? OHG & GmbH & Co OHG in comparison
Some prospective business founders ask themselves whether the formation of a general partnership (OHG) really suits their future plans or perhaps a limited liability company & Compagnie Offene Handelsgesellschaft (GmbH & Co OHG) would be better. There are many similarities between the two partnerships – but one significant difference lies in the liability issue. In the conventional OHG, all partners share the full risk and are jointly and severally liable, i.e. for business as well as private purposes. With a GmbH and Co OHG it looks differently: Here, the personally liable partner is not a natural person, but a GmbH, i.e. a limited liability company. As a result, his private assets remain unaffected and the partner is only held liable in business terms.
You can find out more about the GmbH & Co OHG here:
Limited Liability Company & Compagnie General Partnership(GmbH & Co OHG)
Commercial enterprise instead of small business: OHG & GbR in comparison
Many prospective entrepreneurs are faced with the question of whether they want to set up a civil law partnership (GbR) or whether they would prefer a general partnership (OHG). The two legal forms of business are very similar in many respects – the background, i.e. the motivation for founding, is the easiest way to find out which legal form is better suited to your entrepreneurial goals. Do you want to run a small business and expect manageable turnover? Then you are on the safe side with the GbR. Do you explicitly want to run a commercial enterprise and do not want to limit your turnover? Then the OHG is a better fit!
You can find out more about civil law partnerships here:
Besides the general partnership (OHG), there are a few other alternative types of companies that could be interesting for you as a founder! You want to learn more about starting a business? Learn more about share capital, taxes and the advantages and disadvantages of the different types of companies.
Here you will find all the legal forms that can be chosen as a founder in Germany and a guide with a checklist:
Legal forms: List
Founding a company: Procedure, costs and overview
Legal forms: List
Legal forms – What types of company are there? If you want to start your first company, then choosing the ideal legal form is one of the first steps in the process of setting up a company. Whether it’s a special real estate company or a start-up, I’ve summarized all the types of companies in Germany for you here.
Starting a company: Procedure, costs and checklist
Founding a company (real estate) – You want to found your first company? Requirements for you as a founder, share capital, shareholder agreements, costs for the foundation, legal forms and checklists. This sounds complicated for beginners, but it is actually quite simple. The process of founding a company is usually relatively the same. I have summarized the foundation here once in simple steps, for you. Learn how to start your own business. After the great guide to all legal forms or types of companies, today a detailed look at the establishment of a (real estate) company for beginners.
