Offene Handelsgesellschaft - oHG (General 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 oHG 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.

oHGs 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).

Following entry in the commercial register, a GbR becomes an oHG.

The following explanations refer exclusively to a trading enterprise which has organised itself in the form of an oHG.

The oHG is an enterprise whose operation is oriented towards a trade under a common enterprise name in which all partners are liable without restriction vis a vis its creditors.

The law governing the oHG is defined in §§ 105-160 German Commercial Code (HGB). In addition, the provisions governing the basic form of every partnership, the civil law partnership (GbR) (§§ 705-740 BGB), apply. In terms of enterprise form the oHG can also be interpreted as a special form of the GbR for the trade.

The oHG is particularly well suited for partners with the same rights and obligations who as a rule act themselves for the enterprise. It requires a high degree of mutual trust. Because of the unrestricted liability it enjoys high creditworthiness.

The oHG is particularly well suited for small and medium-sized enterprises.

I. B. Essential features

Legal form

The oHG is a partnership. Unlike a corporation the focus is not on capital contributions but on the personal commitment of the partners. As a rule, they contribute their own working capacity which results in a certain personal relationship with the enterprise. The setting up of the partnership is not dependent on a certain minimum capital.

Constitution, bodies

The oHG has no own legal personality which would be different from the partners themselves. Nonetheless, it is similar to a legal entity insofar as it may 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 partner is entitled to manage and represent the partnership alone. It is, however, also possible to reach a different agreement.

Legal status of the partners, liability

The partners themselves are fully qualified merchants. For debts of the partnership the oHG is liable with the partnership assets (joint property). In addition, all partners are personally liable, including their private assets. A restriction of liability to the partnership assets is not possible. Each partner is fully liable vis a vis third parties. He may, however, assert compensation claims against the other partners in accordance with the partnership agreement after claims have been asserted against him by third parties.

In their capacity as self-employed persons, the partners of an oHG 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 an oHG

II. A. Most important requirements

Partners

The oHG is set up through a partnership agreement of at least two partners. The partners of an oHG can be natural persons and legal entities (e.g. in case of a GmbH & Co. oHG), including foreign ones. Furthermore, other trading partnerships may participate as partners. Any change in respect of partners requires the consent of all partners unless otherwise provided for in the agreement.

Capital

The amount of capital can be freely agreed upon. A minimum capital is not necessary.

Object

The oHG 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) an oHG 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. A GbR becomes an oHG after registration.

Business name

The business name is the name of an enterprise which it uses in legal and business transactions. The name of the oHG may include the family name of a partner, imaginary or technical additions as long as it is a distinguishing feature and hence a name function. It may also be formed as a combination of all these elements. The legal form ("offene Handelsgesellschaft" – general partnership) must always be stated. It may also be abbreviated as: "oHG".

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: object, business name, type and scope of contributions by partners, management and representation powers, profit and loss distribution, termination of the partnership and resignation of partners.

There are no formal provisions regarding the conclusion of the partnership agreement. It is, however, recommended that the partners enter into a written agreement. Unless otherwise agreed upon, the German Commercial Code (HGB) applies.

> Standard agreement

Capital

All partners are jointly entitled to the partnership assets. Each partner has an interest in the oHG in the amount of his capital share; this amount is shown in the balance sheet and represents 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 upon.

Appointment of bodies

Apart from the partners there are no particular bodies which exercise management functions.

Compliance with disclosure provisions

The oHG must apply for entry in the commercial register through a notary. The partnership agreement does not have to be submitted to the commercial register.

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.

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 oHG

III. A. The management of the oHG

Executive bodies

Internal management

The management is exercised jointly (principle of self-management without a third party). There is an empowerment to manage the company alone. The partnership agreement may also include different provisions and exclude, for instance, individual partners from management as a whole or in part. The empowerment to manage the partnership alone provided for by law applies only to acts in the ordinary course of business of this oHG. Unusual transactions require a resolution by the partners.

Resolutions by the partners must, as a matter of principle, be adopted unanimously. The procedure is informal.

External representation

External representation vis a vis third parties is carried out by the partners themselves (executive representation). As a matter of principle, each partner is entitled to represent the partnership alone. The partnership agreement may, however, provide for deviations from § 126 para 3 HGB. The power of representation can be restricted to one of several branch establishments. A corresponding entry in the commercial register is needed for the restriction of the power of representation to be effective.

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 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 information right of the partners

Each partner is entitled to obtain personal information or to inspect the accounting records and papers as well as to prepare a balance sheet and financial statements. This applies even if he is excluded from management.

Accounting and financial statements

As a commercial enterprise the oHG 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).

The auditing of the financial statements and 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.

IV. Taxes

The oHG 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.

More detailed information can be obtained from our brochure on accounting and taxes for founders.