Like an OHG, a limited partnership or Kommanditgesellschaft (KG) is a partnership business structure in which two or more entrepreneurs or companies team up to run a trade under a common company. However, the KG differs significantly in the fact that there is always at least one fully liable partner (the general partner or Komplementär) and at least one limited partner (Kommanditist) who provides investment but does not participate in the management of the company. Like an OHG, a KG is also entered in the commercial register.
Key features of a KG
- Establishment: Article of association; registration in commercial register
- Capital: None required
- Governance: Only by the general partner(s); limited partners are excluded from management
- Liability: Unlimited liability with private and business assets for general partner; limited partner’s liability limited
- Taxation: Shareholders liable for income or corporation tax plus solidarity surcharge; company is liable for trade tax (not freelancers), VAT and income tax
How to establish a limited partnership in Germany
Although no minimum capital is needed to establish a limited partnership, you need to make sure you have adequate funds to carry your business through until it becomes profitable. To ensure this, you might wish to take out a business loan or grant.
If you have sufficient capital, the only step that needs to be taken to found a KG is the signing of a shareholders’ contract. This contract is not mandatory, but it is strongly recommended to avoid potential disputes in the future. The following points should be included:
- Name and addresses of shareholders
- Purpose of the KG
- Names and types (e.g. general partner, limited partner) of the shareholders
- Deposits and liabilities of the individual shareholders
- 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 KG
This article of association needs to be authenticated by a notary and entered by them into the commercial register in order to officially found the company. The partners then need to follow the standard steps required for setting up a business, including registering with the trade office, tax office and Chamber of Commerce.
KGs & liability
Under the KG legal form, the general partner is always directly and personally liable for all business debts with his private assets. The limited partner(s) are, as the name suggests, limited in their liability, to the amount recorded in the commercial register (known as the limited partner contribution or conditional deposit)
Tax liability of limited partnerships in Germany
Usually, KGs are liable to pay business taxes such as trade tax, income tax and VAT to the German tax office. Income tax is calculated on the profit of the shareholders and must be paid directly by them, so it does not arise at company level. The general partner can offset losses of the KG with any other sources of income in their annual tax return. If the KG qualifies as a small business (determined by the tax office) it may be exempt from trade tax.
Management of KGs
While the KG’s general partner is obliged to conduct the business of the KG, the limited partners are excluded from management. They can only object to extraordinary transactions such as taking out considerable loans or real estate purchases.
How to do KG accounting
Since a KG is in the commercial register and thus subject to German commercial law, it is obliged to do double-entry bookkeeping, publish annual accounts and preserve records for at least 10 years.
KG or GmbH & Co. KG?
If you wish to limit the personal liability of all partners, a good alternative might be a GmbH & Co. KG. This is a special form of the KG where the general partner is a GmbH, meaning that no natural person assumes unlimited liability. Another alternative would be to form a limited liability corporation such as a UG.