GmbH & Co KG – formation, financing, liability & Co

The limited partnership – in short: Kommandite or KG – is one of the so-called complete companies and, as a partnership, is subject to the German Commercial Code (HGB). The formation process for this legal form of company is quite uncomplicated, as it can be formed informally and requires a minimum of only two founding members. It can be formed by both natural persons and legal entities. A maximum number of permissible shareholders is not specified by law.

If all general partners of a KG consist of limited liability companies (GmbH), they form a so-called Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft – called GmbH & Co KG for short. Such a GmbH is sometimes also referred to as a general partner GmbH, but beware: the general partner GmbH is a corporation and part of the GmbH & Co KG, while the GmbH & Co KG by virtue of its legal form is always a partnership!

Other typical partnerships:

• Limited partnership (KG)
• General partnership (OHG)
• Limited Liability Company and Compagnie General Partnership(GmbH & Co OHG)

Foundation & Company Name

Two persons are required for the formation of a GmbH & Co KG: The GmbH as full partner – i.e. general partner – and a natural person as partial partner – called limited partner. If you are starting from scratch, you must first establish a limited liability company in preparation. To do this, you need the following in a nutshell: a natural person or legal entity as the founder of the company; a tax identification number (tax ID); the confirmation of registration from the trade office; the shareholders’ agreement aka articles of association together with notarial certification; 25,000 euros in share capital; and finally the entry in the commercial register.

You can find out how the process of setting up a GmbH works in detail here:

• Establishment of a limited liability company (GmbH)

You have successfuly founded your GmbH? The limited partner is ready to go? Then the next step is to set up a limited liability company (Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft). Since the GmbH & Co KG is a separate company, you again need a tax ID and must register the company with the trade office. The establishment of articles of association is also mandatory and of course your company needs a suitable company name including the company suffix “GmbH & Co KG”.

Management & power of representation

As a general partner, the GmbH basically has power of representation in the external relationship. However, since a GmbH is a legal entity, the management authority is entrusted to a natural person. This may be a shareholder of the general partner GmbH or the position may be assigned externally to a so-called third-party managing director. In this case, there is often talk of a third party board of directors or external board of directors.

Alternatively, limited partners may also act as managing directors, provided they are expressly appointed to this body. Since limited partners are generally excluded from management, their management authority in this case is, however, limited to the right of objection in the case of extraordinary transactions.

Profit distribution & loss sharing

With regard to the distribution of profits and the sharing of losses, either the statutory principles come into play or corresponding specifications have been anchored in the articles of association. Profits are generally distributed at 4 percent of the capital share plus additional profit “in reasonable proportion”. Losses are also shared appropriately.

It is possible to completely exclude the general partner GmbH from the distribution of profits by means of a declaration in the shareholders’ agreement, whereby higher profits can be distributed to the investors. Insofar as the GmbH has inherent management authority, it can be paid an appropriate remuneration to compensate for its role as managing director, whereby a managing director’s remuneration cannot be deducted in total as a business expense for tax purposes. However, the remuneration is paid irrespective of the profits generated and thereby has the effect, if applicable, that the entire company can save taxes.

General partner, partial partner & tax liability

Usually, the general partners of a limited partnership are liable without limitation and jointly and severally – i.e. with their business assets plus private assets. If, on the other hand, the general partner of a KG appears in the form of a limited liability company (GmbH), he is liable as a legal entity only to the extent of the GmbH’s capital contribution. Limited partners are liable – as in the case of a conventional KG – only to the extent of the mandatory sum that they paid in as a limited partner’s contribution when the GmbH & Co KG was founded.

Like all other legal forms of companies, the Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft is generally liable to pay taxes. First and foremost, they are subject to trade tax and – in the case of taxable turnover – turnover tax. A GmbH & Co KG is generally exempt from income tax and corporation tax… However, profit income is still subject to taxation: corporation tax is applied to the profit share of the general partner GmbH, whereas limited partners must pay income tax on their profit.

• Trade tax (GewSt)
• Value added tax (VAT)
• Income tax (ESt)
• Corporate income tax (KSt)

Tip. All taxes for companies in one list:

• Taxes in Germany

GmbH & Co KG – For whom is it worthwhile?

A significant advantage of a GmbH & Co KG is undoubtedly the limitation of liability to the business assets of the general partner GmbH. This means that founders do not directly risk the existence of their company if an investment turns out to be disadvantageous, and they can quickly increase their equity capital through the flexible and simple admission of new limited partners. They can confidently outsource the organisational effort and the management to an outside body or make deviating succession arrangements in order to maintain the GmbH & Co KG.

So who is the GmbH & Co KG suitable for? This legal form is worthwhile for start-ups who would like to set up their business as a partnership without having to forego the special liability restrictions of a GmbH. A GmbH & Co KG is also conceivable as an asset-managing company and for family businesses.

Alternatives to the GmbH & Co KG: Legal forms in Germany

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.

• Legal forms: List

Company types in detail:

• Sole proprietorship
• Registered businessman / registered businesswoman (e. K.)
• Civil law partnership (GbR)
• General partnership (OHG)
• Limited partnership (KG)
• Entrepreneurial company (UG)
• GmbH: Limited liability company
• Real estate GmbH / Asset management GmbH
• Stock corporation (AG)
• Real estate stock corporation (REIT-AG)
• Societas Europaea (SE)
• Foundation / Family Foundation

Does it make sense to form a GmbH for real estate?

Privat kaufen & vermieten oder als GmbH?

The formation of a GmbH is a legal form of company that is very common in Germany. It offers many advantages, especially for companies operating in the real estate sector. Certain steps must be taken when setting up a GmbH, including

Articles of association: Formation of the GmbH

The formation of a GmbH requires a partnership agreement that sets out the basic rules and structure of the company. In the real estate business, this agreement may contain specific clauses on the management and sale of real estate.

Minimum capital: 25,000 euros

In Germany, a minimum capital of EUR 25,000 is required to establish a GmbH. This capital must be contributed to the company when it is founded. However, the minimum deposit at the time of formation is only 12,5000 euros.

Notarization and entry in the commercial register

The articles of association and the founding documents must be notarized. The GmbH must be entered in the commercial register before it can legally exist.

Advantages and disadvantages of a GmbH in the real estate business

The advantages and disadvantages of a GmbH explained quickly and simply.

3 advantages at a glance

1. Limited liability
2. Seriousness
3. Tax advantages

The main advantage of a GmbH is the limited liability, which means that the personal assets of the shareholders are protected in the event of debts or liability claims. A GmbH often conveys a higher degree of respectability and trust, which can be an advantage in the real estate market. In addition, GmbHs can benefit from tax advantages, e.g. in the depreciation of real estate or the offsetting of losses.

3 “Disadvantages” at a glance

1. Costs
2. Complexity
3. Profit distribution

The formation and administration of a GmbH can be cost-intensive, including notary fees, capital contribution and annual accounting costs. The GmbH structure requires more formalities and bureaucracy compared to other types of companies. The distribution of profits in a GmbH can be complex and is subject to certain regulations.

An alternative to the GmbH is the UG. Here the minimum capital is only €1 for formation. However, with the notary, commercial register, etc., €1,000 should be paid in, otherwise the UG is effectively bankrupt after paying the formation costs.

Alternatives to the GmbH?

Discover other legal forms you can opt for here:

• Legal forms in Germany

Taxes for a limited liability company in the real estate business

GmbHs are subject to corporation tax and must pay tax on their profits. In the real estate business, however, there are certain tax aspects that should be taken into account:

1. Trade tax
2. Speculation tax
3. Depreciation and amortization
4. Loss offsetting

Real estate companies are often subject to trade tax, which is levied on the profits made. Value added tax may be payable on rentals. However, there are VAT exemption options that should be considered. Speculation tax also applies to the sale of real estate within 10 years. GmbHs can claim depreciation on their properties to reduce the tax burden.

Losses from real estate investments can also be offset against profits in later years to reduce the tax burden.

GmbH formation for real estate

Forming a limited liability company for real estate can be a smart decision, especially when you consider the benefits of limited liability and tax options.

GmbHs protect you in comparison to private letting through limited liability. As a limited company, taxes are also significantly lower than for private rentals. There are many advantages to setting up such a legal company. Just like the real estate holding company.

Immobilien GmbH: Asset-managing GmbH

Immobilien GmbH is not an official legal form in Germany, but it is the name given to GmbHs that focus on buying, renting and selling real estate. In principle 1:1 to the GmbH. Read more here:

• Real Estate Ltd.

Family foundation in comparison

Taxes in Germany and tax optimization are what many people do with their own family foundation. Setting up a foundation, or more specifically a family foundation, has many advantages, from tax-free capital gains after speculation tax to a low 15% tax rate on rental income. More about the model:

• Establish a family foundation