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

Limited Partnership: Formation, Advantages and Disadvantages

A limited partnership is typically more expensive, and many investors contribute. These are generally less involved in day-to-day business, leaving this to the general partner who makes most decisions on behalf of investors.

Definition and Basics: Limited Partnerhip in Real Estate

In a limited partnership, many investors pool their capital. One, so-called general partner, has full liability, meaning that he is fully responsible for any losses, and other partners are merely liable up to the amount of capital which they have contributed.

• Many investors pooling resources

What is a RELP?

A limited partnership specialized in real estate, and therefore operating real estate is often called a RELP. This is nothing more than a handy acronym of the words Real Estate Limited Partnership.

RELP = Real Estate Limited Partnership

What kind of Company is Ltd.? – Ltd. Company Meaning

Ltd. indicates the type of company, namely a limited partnership. Therefore, a limited partnership is easily identified when a company ends with the word Ltd. This is just an abbreviation, and just indicates the limited partnership.

• That the company is formed as a limited partnership

Forming a Limited Partnership: Easy Guide of Process, Individual Steps

Limited partnerships are one of the less complicated forms of limited partnerships. To begin, you must choose a location. This may seem like a strange question, but you can freely choose the state where you want to register. Delaware for example makes it much easier to form a business, and generally is more lenient and flexible. Next, you can search registries to find if the name you have chosen is already taken. After, you will form a partnership agreement, which should include a variety of legal points to give you safety in the case of the company not succeeding as wished. Lastly, you register!

Process summarized:

1. Choose Location (state) to Register
2. Find Name
3. Form Partnership Agreement/Operating Agreement
4. Register

Documents:

• Operating Agreement

Advantages: Taxes and Attracting Capital

The possibly strongest point speaking for a limited partnership in real estate is that you are less liable. In case of legal proceedings it will be the company, not the individual being prosecuted. There may also be advantages in the form of planning and gift opportunities. As with an LLC, you are also able to prevent double taxation. Of course, another major point is that the general manager has more capital than he would usually, meaning that he has better opportunities. Meanwhile partners can make passive profit, with little risk, as the general partner carries liability.

• Less Liability
• Avoiding Double Taxation
• More Opportunities

Disadvantages: Sharing Profits, Conflict

Any company includes multiple members, and will therefore by definition have interpersonal conflict. This is of course often a good thing, forcing members to think about their decisions more carefully, but it can also lead to breakdown and stagnation. Especially in the case of poorly written partnership agreements, relationships can break down. A second disadvantage is of course the need to share profits. This is because the work was also shared, but for the general partner, this can at times be frustrating.

• Interpersonal Conflict
• Bad Partnership Agreements
• Sharing Profit

Real Estate Limited Partnership: Contributions, Conflict

A limited partnership for investing in real estate is a common method. There are a few issues to take into consideration though. Including everyday processes and the way the company functions.

Can a Limited Partner Contribute Property?

This is a common question. With multiple investors coming from real estate, it is not uncommon that a member would be willing to contribute a piece of real estate which they own. In legal code, a limited partner can contribute capital in the form of money or property.

• Yes, limited partners can contribute Property

What do Limited Partners do?

In a sense, apart from contributions in the form of capital, limited partners have no role in the company. They own shares, and depending on the worth of the partnership, these can increase. Yet they have no tasks or contributions to make on the daily basis. Of course, they are part of some decisions, but these are often avoided, as these partners then also incur liability.

• Contribute Capital

How do Limited Partnerships Work?

This video gives a hdny quick overview on how this type of company works, explaining top to bottom everything you need to know, when trying to get informed about limited partnerships.

Taxes: When to Pay, How to Save

Every year, at specific timepoints, all partners will receive a share of the profits of the limited partnership. These individuals are responsible themselves to report this income on their tax sheet when the time comes. The company will offer all partners a K-1 which details their income from the partnership.

1. Who Pays Taxes in a Limited Partnership
2. Tax advantages of a Limited Partnership
3. How to Pay Taxes in a Limited Partnership

Who Pays Taxes in a Limited Partnership?

Limited partnerships are not forced to pay invome tax, instead, the individuals pay the taxes on their share of the profit as income on their tax return.

• Every partner according to their share

Tax Advantages of a Limited Partnership

As with an LLC, the taxation of a limited partnership means that individual partners will not suffer under double taxation. Partners will tax their income fully, but as opposed to other forms of companies, this incomee will only be taxed once, thanks to the pass-through.

• Avoid Double Taxation

How to Pay Taxes in a Limited Partnership

A limited partnerships is filed jointly using the Form 1065 with the IRS. This should be filed with all other tax returns. Because members are paid at multiple points throughout the year, they will often use the K-1 to know what they have to pay.

• Use 1065 Form

Limited Partnership Summary: Less Risk

A limited partnership will leave you with less risk than you would usually have to bring. That means that real estate investors that prefer a hands-off approach will often take this route to maintain a passive income. Real estate investing requires a lot of information and staying up to date, which is why investors like to delegate this work to a general partner who takes up more liability.