A kind of hybrid between a partnership and a corporation, a limited liability company and limited partnership (Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft - GmbH & Co. KG) is a special form of KG, in which the general partner is a GmbH. Thus, the fully liable partner of a GmbH & Co. KG is a limited liability corporation. As the other partners of the KG have only limited liability, this business structure enables entrepreneurs to form companies in which no partner has unlimited liability. This legal form is not suitable for freelancers.
Key features of a GmbH & Co. KG
- Establishment: Article of association; entry into commercial register
- Capital: None required (although 25.000 euros are required to establish the GmbH first)
- Governance: Usually by managing director of the GmbH, but third-party organisation possible
- Liability: Unlimited liability of the general partner (GmbH); limited partners only liable up to the amount of their liability
- Taxation: GmbH general partner must pay corporation tax; limited partners are liable for income tax; company pays trade tax, VAT and income tax
How to establish a GmbH & Co. KG in Germany
No specific start-up capital is prescribed for the foundation of a GmbH & Co. KG (although entrepreneurs may wish to apply for start-up grants or loans to help with initial costs). Typically, the GmbH must already exist before the GmbH & Co. KG can be founded; either an existing GmbH is converted into a GmbH & Co. KG or a new GmbH is created especially for this purpose.
The GmbH provides no deposit, while the limited partners provide cash or noncash contributions, as laid out in the article of association. This partnership contract should be set out in writing in order to avoid any future disputes. It should contain the following information:
- Names and addresses of the shareholders
- Purpose of the GmbH & Co. KG
- Termination of the company
- Names and types (general partner, limited partner) of the shareholders
- Deposits of the shareholders
- Liabilities of the limited partners
- Management including exemption
- Company meeting, voting rights, veto rights of the shareholders
- Distribution of profit and loss
- Regulations after the departure of a shareholder
- Settlement scheme for outgoing shareholders
- Dissolution of the GmbH & Co. KG
After the contract has been signed and the GmbH & Co. KG founded, it must be immediately entered into the commercial register by a notary, who authenticates the requests of the founders and submits it to the district court. After this, the founders will need to take several more steps to complete the establishment of the new business, including registering with the tax office, trade office and the Chamber of Commerce.
Liability of a GmbH & Co. KG in Germany
The general partner of the GmbH & Co. KG (in this case, the GmbH rather than a natural person) has direct, unlimited liability with its entire assets. However, as the shareholders of the GmbH have limited liability, their liability for the GmbH & Co. KG is also limited. On the other hand, the limited partners of the GmbH & Co. KG are liable only for the amount registered in the commercial register.
Tax liability of GmbH & Co. KGs
A GmbH & Co. KG is liable to pay business taxes including trade tax (for which it is entitled to a tax free limit of 24.500 euros), as well as income tax and VAT to the tax office. Since it is a partnership, income tax is calculated on the profit of the limited partners and must be paid directly by them.
Managing a GmbH & Co. KG
Regardless the size and the proportion of its liability contribution, the general partner (i.e. the GmbH) is entitled to solely manage the GmbH & Co. KG. Governance therefore usually falls to the managing director of the GmbH, who might not be a shareholder of the GmbH & Co. KG.
This arrangement is one of the main advantages of the GmbH & Co. KG legal form, as it not possible under other business structures such as GbR, OHG or KG, where the principle of self-organisation applies (i.e. only a fully liable partner can conduct business). The KG limited partners are excluded from management of the business.
GmbH & Co. KG accounting in Germany
As the GmbH & Co. KG is subject to commercial law, it is obliged to prepare double-entry bookkeeping and annual accounts, and to preserve business records for at least 10 years. Additionally, because it has no natural persons as fully liable partners, a GmbH & Co. KG must publish its annual financial statements.
What’s the difference between a GmbH & Co. KG and a KG?
Essentially, the main difference is that one of the partners in a KG has unlimited liability, whereas in a GmbH & Co. KG the role of the general partner is taken over by a GmbH whose shareholders have limited liability. However, it may not be within everyone’s means to establish a GmbH (which requires start-up capital of at least 50.000 euros). In this case, you may be able to set up a provisional limited liability company (UG) to take on the role of general partner.