Kommanditgesellschaft – KG (Limited Partnership)
I. Definitions and essential features
I. A. Definitions:
A trade exists in the case of an independent externally identifiable, legal activity which is oriented towards sustainability and the realisation of profits and is not a liberal profession (e.g. physician, lawyer, tax advisor, etc.) and there is no exploitation of natural resources (agriculture etc.).
In Germany there is freedom of trade. Whoever wishes to exercise a trade has the fundamental right to do so.
An enterprise which carries on a trade may be organised in different ways. Every enterprise which carries on a trade must comply with the provisions of the Industrial Code (GewO) as amended on 1 January 1987. Furthermore, the KG as an enterprise, which has already reached a certain size, comes under the organisational regulations of the Commercial Code (HGB) regardless of whether it carries on a trade in the narrower traditional sense.
According to the Commercial Code (HGB) enterprises which carry on typical trading activities (previously: basic trading activities) are considered as a trade: e.g. wholesale and retail trade, the manufacturing industries, banks and insurances, the transport industries, commercial agents etc. Persons who carry on a craft or other trade are also deemed to be merchants.
KGs are obliged, like all merchants, to have their enterprise entered in the commercial register. Enterprises which carry on a business operation in terms of type and scope, which do not have to have commercial facilities, do not have to be entered in the commercial register. They are only obliged to apply for the registration of a trade with the competent trade supervision office. As opposed to a merchant, these enterprises of a smaller size are referred to as small traders or simply traders. These enterprises, which carry on an operation that in terms of type and size need not have commercial facilities, may have themselves entered (on a voluntary basis) in the commercial register and are then considered as merchants with all ensuing rights and obligations.
If several persons are owners of a small trading enterprise, this enterprise structure is referred to as a civil law partnership (GbR).
The following explanations refer exclusively to a trading enterprise which has organised itself in the form of a KG.
KG
The KG is a partnership whose object is the carrying on of a trade under a joint business name in which at least one partner has unrestricted liability. For the other partners liability vis a vis the creditors of the partnership is limited to the amount of a specific capital contribution.
The legal provisions governing the KG are included in §§ 161-177 a German Commercial Code (HGB). In addition, the provisions governing the oHG (§§ 105-160 HGB) and the provisions governing the civil law partnership (GbR) (§§ 705-740 BGB) apply. The KG must be entered in the commercial register.
Special case: GmbH & Co. KG
This is a sub-type of the KG. The designation GmbH & Co. results from the fact that, instead of one or more natural persons, a GmbH (private limited company) is the personally liable partner of the KG. The GmbH & Co. KG is governed by the legal provisions for the KG. The particularities of this legal forum are, therefore, covered under this chapter (KG) as well.
Like the oHG the KG is a typical legal forum for small and medium-sized enterprises. Given the capital resource structure it is also appropriate for larger enterprises. It is particularly popular in the mixed form of a GmbH & Co. KG in which the advantages of the corporation (restriction of liability) can be combined with those of a partnership.
The GmbH & Co. KG offers the option of excluding, in the case of a partnership, full personal liability of all natural persons involved and nonetheless be treated and taxed essentially as a partnership.
I. B. Essential features
Legal form
The KG is a partnership. Like the oHG, the KG is a partnership but with a capitalist dimension. The setting up of the partnership is not dependent on a specific minimum capital.
Unlike the personally liable partners, limited partners do not normally work within the partnership.
The membership relations between a partnership and a corporation are the characteristic feature of the GmbH & Co. KG.
Constitution, bodies
The KG has no own legal personality different from the partners themselves. Nonetheless, it is similar to a legal entity insofar as it can institute proceedings before a court and can be sued. It can acquire rights and enter into obligations, acquire property and other rights in rem in respect of real property. Each personally liable partner (general partner) is entitled to manage and represent the partnership alone. The limited partners have no power to externally represent the limited partnership.
Legal status of the partners, liability
The personally liable partners (general partners) are merchants. The limited partners are not, however, merchants.
For debts of the partnership the KG is liable with the partnership assets (joint property). In addition, the general partners are personally liable. It is not possible to restrict the liability of the general partners to the partnership assets.
A limited partner is only liable to partnership debtors with his contribution. If the latter has been made, any additional liability of the limited partner is excluded. However, the restriction of the limited partners liability only applies from the entry in the commercial register. He is liable without restriction if the partnership has already started conducting its business before and the creditor was not aware of the limited partner status.
Since the GmbH is only liable by virtue of the statutory provisions with its own assets, this also leads to a restriction of liability of the GmbH & Co. KG.
In their capacity as self-employed persons, the partners of a KG are not normally subject to social security contributions (pension insurance, health insurance and unemployment insurance). Voluntary continued insurance in the statutory health insurance is possible for former employees. Furthermore, there is the possibility to apply for compulsory or voluntary insurance under the statutory pension insurance. In some sectors an entrepreneur is subject to insurance in the statutory accident insurance (employer's liability insurance associations) if he does not employ any employees.
II. The setting up of a KG
II. A. Most important requirements
Partners
The KG is set up through a partnership agreement of at least two partners. One partner is liable without restriction (general partner). The liability of the other partner is limited to his contribution (limited partner). The partners of a KG may be natural persons and legal entities (for instance in the GmbH & Co. KG), including foreign ones.
Any change in respect of partners is only possible with the consent of all partners, unless otherwise provided for by the partnership agreement.
The partners of the general partner GmbH and limited partners may be identical persons. It is also possible for the sole partner of a one-man general partner GmbH to be the sole limited partner.
Capital
A minimum capital is not necessary. The limited partner makes a fixed contribution, the amount of which is not prescribed.
Object
The KG is a trading partnership, which means that according to the definition of the German Commercial Code (HGB) its object is the carrying on of a trade. Apart from a typical, traditional trade (wholesale trade, retail trade) a KG may also pursue other activities like any other merchant entered in the commercial register in the form of a trade (in particular also industry, craft and other services).
If the operations of a partnership require commercial facilities because of their type and scope, the enterprise is always considered as a trade regardless of whether it has been entered in the commercial register or not. When assessing whether an enterprise is commercially run the emphasis is placed more particularly on annual sales revenues, number and type of business transactions, borrowing, business premises, number of employed, type of accounting, etc.
Partnerships which, in terms of type and scope, carry on a business that has no commercial facilities can have themselves entered in the commercial register on a voluntary basis and are then considered as merchants with all ensuing rights and obligations.
Business name
The business name is the name of a company with which it appears in the legal and business transactions. The business name of the KG may be the family name of a personally liable partner, imaginary or technical additions as long as it is a distinguishing feature and hence a name function. It may also be composed of a combination of these elements. The legal form ("limited partnership") must always be stated. It may also be abbreviated as: "KG".
In the case of a GmbH & Co. KG an addition referring to this special formation must always be included ("GmbH & Co. KG" or "personally liable KG").
The name components must not, however, lead to fraudulent misrepresentation of the type and scope of the business or the situation of the business owner. The name must be clearly different from other business names already entered in the commercial register in the same place and/or in the same municipality.
Only an enterprise entered in the commercial register may have a business name which may be sold, passed on by inheritance and leased together with the business operation.
II. B. Provisions concerning form and disclosure
Partnership agreement
The partnership agreement should cover the following: object, business name, type and scope of the contributions of the partners, management and representation power, profit and loss distribution, termination of the partnership and resignation of partners.
The partnership agreement must include an agreement on the limited liability of each limited partner and the amount of such liability by fixing a specific sum. The latter may but need not be identical with the contribution to be made internally.
There are no formal provisions for the conclusion of the partnership agreement. It is, however, recommended to enter into a written agreement. Unless otherwise agreed, the German Commercial Code (HGB) applies.
Capital resources
The partnership assets are, like in the case of an oHG, the joint property of all partners including limited partners. Every partner participates with a capital share whose amount can be seen from the balance sheet and which corresponds to a certain amount of money.
The contribution can be made in cash, contributions in kind or the provision of services. The payment procedures can be freely agreed.
Appointment of bodies
Apart from the partners there are no special bodies exercising management functions.
Fulfilment of disclosure provisions
The KG must be entered in the commercial register through a notary. It will only be deemed to exist upon entry.
The application for entry in the commercial register must be submitted by all partners. It must specify the name, first names, occupation and place of residence of the partners, the business name of the partnership and the place of the registered office as well as the date of commencement. Registration must be made in a publicly certified form (by a notary). The partners entitled to represent the partnership must sign the business name together with the signature of their name.
In the case of the limited partnership the designation of the limited partners and the amount of each contribution must be shown.
Founders who are not known to the notary must prove their identity by presenting valid ID documents. If a person appearing does not act on his own behalf but for another person, a written power of attorney and/or a subsequent consent in a notarised form are required. If the signature under a power of attorney is certified by a foreign notary a legalisation (or Apostille) is needed depending on the country of origin. Legalisation can be issued by a consul of the Federal Republic of Germany.
If a legal entity is one of the founders, the existence of the legal entity must be evidenced through a certified extract from the commercial register (in the case of foreign enterprises: corresponding official registration documents).
The entries in the commercial register are announced by publication in the Bundesanzeiger and at least one other newspaper.
III. Functioning of the KG
III. A. The management of the KG
Executive bodies
Internal management
The management is only carried out by the general partners. If a GmbH is a general partner (GmbH & Co. KG), its managing director will act for it. The limited partner is excluded from management. The approval of the limited partner is only necessary in the event of unusual business transactions. The partnership agreement may, however, provide for a different regulation.
As for the rest, the empowerment to conduct the business alone as provided for by law applies. For unusual business transactions a resolution of the partners is necessary.
Resolutions of partners must, as a matter of principle, be adopted unanimously. The procedure is informal. Deviating provisions may be agreed upon.
External representation
The external representation is carried out through the personally liable partner (body representation). As a matter of principle, each general partner is empowered to represent the KG alone. Deviating regulations are possible. The limited partner has no power of representation.
In the GmbH & Co. KG the partnership is, as a rule, represented by the general partner GmbH. The latter is represented by its managing director.
Non-partners may be granted a power of representation by way of a Prokura (power to represent the company). The granting of Prokura must be entered in the commercial register.
Business papers
The business papers must include the following information: partnership name, legal form, place of establishment, local court of the commercial register, commercial register number.
In the case of a partnership in which no personally liable partner is a natural person, the business names of the partners as well as their registration dates must be stated.
III. B. Controlling and financial statements
Controlling and right of information of partners
General partners can obtain information personally and inspect accounting records and papers as well as prepare a balance sheet and financial statements. This applies, even if they are excluded from management. Limited partners only have restricted controlling rights. They may demand a copy of the financial statements and verify their accuracy.
Accounting and financial statements
KG:
The KG is not obliged to have audits carried out by external auditors, except for banks or companies which are subject to the law on accounting for certain companies and groups.
As a commercial enterprise the KG is obliged to keep account records and to show its transactions and assets in accordance with generally accepted accounting principles therein. At the end of each business year a balance sheet (annual balance sheet) as well as a profit and loss account must be prepared (in German and in euro).
An audit of the financial statements is not prescribed.
The disclosure or publication of the financial statements are not prescribed either,apart from banks or enterprises which are subject to the law on the accounting of certain companies and groups.
Special case: GmbH & Co. KG
The GmbH & Co. KG is obliged to keep accounting records in its capacity as a trading partnership. At the end of each business year it is obliged to prepare a balance sheet (annual balance sheet) and a profit and loss account (in German language and in Euro).
Furthermore, these financial statements must be supplemented by adding notes. The financial statements must comply with the generally accepted accounting principles and give a true and fair view of the assets, financial and earnings position of the partnership.
The audit of the financial statements is compulsory for large as well as medium-sized GmbH & Co. KGs.
Small GmbH & Co. KGs are obliged to submit summary balance sheets (§ 266, para 1 HGB) with abridged notes (§ 288 HGB) to the commercial register (disclosure of balance sheets). Medium-sized companies must provide the commercial register with a summary balance sheet, a summary profit and loss account (§ 276 HGB), abridged notes (§ 288 HGB), a management report, an auditor's certificate and a report of the Supervisory Board. Large companies are obliged to submit the entire, unabridged financial statements, the auditor's certificate and the report of the Supervisory Board to the commercial register; publication in the Bundesanzeiger.
Small corporations are corporations which do not exceed at least two of the three characteristics:
Balance sheet total of EUR 4,015,000; net sales revenues of EUR 8,030,000, average annual headcount of 50.
Medium-sized corporations are corporations which exceed at least two of the afore-mentioned characteristics and do not exceed at least two of the following three characteristics:
Balance sheet total of EUR 16,060,000, net sales revenues of EUR 32,120,000, headcount of 250.
Large corporations are corporations which exceed at least two of the three last mentioned characteristics.
The audits must be carried out by auditors and firms of auditors; the financial statements and management reports of medium-sized companies must be prepared by certified accountants and firms of accountants.
The auditors have an extensive right to information and inspection of books, stocks of securities and goods etc. They are bound by absolute secrecy. They must prepare an unbiased written audit report about their audit. If no objections are to be made, the auditors have to issue a certificate.
With his certificate the auditor makes a general assessment of accounting and the financial statements of the enterprise vis a vis the enterprise and the partners as well as with an effect for third parties. He confirms the conformity of accounting with the statutory provisions.
IV. Taxes
The KG is a partnership. Partnerships are not subject to income or corporation tax. Profit is established rather in a uniform and separate manner and directly attributed to the partners. On the level of the partners the profit shares are subject to income tax or corporation tax depending on their legal form.
Ansprechpartner
Frauke Hennig
Recht und Steuern
