Limited commercial partnership (KG)
I. Terminology and essential features
I. A. Terminology
A trade exists in the case of an independent legal activity recognisable to the outside designed for lastingness and achievement of a profit which is not a freelance profession (e.g. doctors, lawyers, tax counsellors etc.) and is not primary production (agriculture etc.).
In Germany, we have freedom of trade. Everyone who wishes to exercise a trade has the right to do so as a matter of principle.
An enterprise running a trade can be organised in various ways. Each enterprise running a trade must observe the regulations of the Trade Regulations Act (GewO). In addition, a KG as an enterprise which has already reached a certain order of magnitude is covered by the organisation law regulations of the German Commercial Code (HGB), regardless of whether it is running a commercial trade in the conventional meaning.
According to the German Commercial Code (HGB), enterprises exercising the typical trading activities are deemed trading companies (formerly: basic commercial trades): e.g. wholesale and retail trade, the manufacturing trade, the bank and insurance sector, transport trade, trade representatives etc.. But people running a craft or any other kind of industrial enterprises are also deemed merchants.
Like all merchants, a GK is obliged to have its enterprises entered in the Register of Commerce. Enterprises running a business operation according to its nature and scope, which need not be set up in a commercial manner, need not be entered in the Register of Commerce. On the other hand, they are only obliged to register a trade with the responsible trades office. As a distinction from a merchant, these enterprises of a smaller order of magnitude are referred to as petty traders or also simply traders. These enterprises running a business operation according to its nature and scope, which need not be set up in a commercial manner, can have themselves entered in the Register of Commerce (voluntarily) and are thus deemed merchants with all rights and duties.
If a plurality of persons are the proprietors of an enterprise running a petty trade, this corporate structure is referred to as a civil law partnership (GbR).
The following explanations relate exclusively to an enterprise running a trade which has organised itself in the form of a KG.
A KG is a company, the purpose of which is aimed at operation of a commercial trade under a joint corporate name, in which at least one partner is liable without limitations. With other partners, the liability towards the corporate creditors is limited to the amount of a certain asset contribution.
The law of KGs has been regulated in §§ 161-177 a German Commercial Code (HGB). As a supplement, the directives on oHGs (§§ 105-160 HGB) and the directives on corporations (GbR) (§§ 705-740 BGB) are applicable. A KG must be entered in the Register of Commerce.
Special case: GmbH & Co. KG (limited commercial partnership with a limited liability company as a partner)
This is a sub-form of the KG. The designation GmbH & Co. results from the fact that instead of one or more natural entity/entities, a limited liability company is the personally liable partner in the KG. The law of KGs is to be applied to a GmbH & Co. KG. The special points about this combination of legal forms is therefore also treated in this chapter (KG).
Like an oHG, the KG is deemed a typical corporate form for medium-sized enterprises. With a view to the provision with capital, it is also suited for larger enterprises. It is particularly popular in the mixed form “GmbH & Co. KG”, in which the benefits of a capital company (limitation of liability) can be combined with those of a partnership of persons.
The GmbH & Co. KG provides the possibility of excluding the full personal liability of all the natural entities involved in a partnership and nevertheless essentially being treated as taxed as a partnership.
I. B. Essential features
A KG is a partnership. Like an oHG, a KG is a business partnership, albeit with a capital element. Formation of the business partnership is not dependent on a certain minimum capital.
Unlike the personally liable partners, the limited partners normally do not work in the company.
The nature of a GmbH & Co. KG is characterised by the membership combination of a business partnership and a capital company.
Constitution, executive organs
The KG does not possess its own legal personality distinct from the partners themselves. Nevertheless, it is similar to a legal entity in that it can sue and be sued before a court of law. It can acquire rights and enter into liabilities, acquire possession and other in rem rights to real estates. Each personally liable partner has the authorisation to manage and to represent alone. The limited partners have no representation power to the outside.
Legal relationships of the partners, liability
The personally liable partners (general partners) are merchants. On the other hand, the limited partners are not merchants.
A KG is liable for corporate debts with the corporate assets (joint assets). In addition, the general partners are personally liable. A limitation of the general partners’ liability to the corporate assets is not possible.
A limited partner is only liable to corporate debtors with his contribution. If it has been paid, a further liability of the limited partner has been ruled out. The limitation of liability of the limited partner does however only exist from entry into the Register of Commerce. He is liable without limitation if the company has already started business and the creditor did not know of the capacity as limited partner.
As the GmbH is only liable with its own assets by law, this likewise results in a limitation of liability of the GmbH & Co. KG.
Normally, the partners in a KG as freelancers are not subject to social insurance (pension insurance, health insurance and unemployment insurance). Voluntary further insurance in statutory health insurance is possible for former salaried employees. There is also the possibility of applying for compulsory insurance or voluntary insurance in statutory pension insurance schemes. Voluntary insurance of the members of the Board of Directors in statutory accident insurance (employers’ accident insurance scheme) is also possible. In some branches, an entrepreneur is also subject to insurance in statutory accident insurance (employers’ accident insurance scheme) if he does not have any employees.
II. Forming a KG
II. A. Most important requirements
A KG originates through a partnership agreement of at least two partners. One partner is liable without limitation (general partner). The other’s liability is limited to his contribution (limited partner). Partners in a KG can be natural and legal entities (e.g. with a “GmbH & Co. KG”), also foreign ones.
A change of partners is only possible with the consent of all partners unless the agreement determines otherwise.
Partners of the LLC as general partner and limited partners can be identical persons. It is also possible that the sole partner of a one-man LLC as general partner is the sole limited partner.
A minimum capital is not necessary. The limited partner pays a fixed, but arbitrary amount.
The KG is a trading company, i.e. according to the definition in the German Commercial Code (HGB) its purpose of business is aimed at operating trading business. Apart from a typical, traditional trade business (wholesale, retail trade), a KG can, like any other merchant entered in the Register of Commerce, pursue all the other purposes admissible in the form of a trade (in particular and also industry, crafts and miscellaneous services).
If a company’s business operation demands a business operation set up in a commercial way with a view to its nature and scope, the enterprise is always deemed a trading company, regardless of whether it has been entered in the Register of Commerce or not. For the assessment of whether an enterprise is managed commercially, the annual turnover, nature and scope of the business processes, taking of loans, business premises, number of employees, nature of accountancy etc. are of particular importance.
Enterprises running a business operation by its nature and scope which does not have to be set up in a commercial way can have themselves entered in the Register of Commerce voluntarily and are thus deemed merchants with all rights and duties.
The corporate name is the name of an enterprise with which it appears in legal and business dealings. The corporate name of the KG can contain the surname of a personally liable partner, fantasy additions or factual additions, as long as it possesses a distinctive power and thus the function of a name. It can also be formed as a combination of these elements. The legal form “limited commercial partnership” (German: "Kommanditgesellschaft ") must always be stated. It can also be abbreviated as KG.
In the event of a GmbH & Co. KG, a suffix notifying this specific formation (GmbH & Co. KG or personally liable KG) must always be contained.
However, the components of the corporate name may not be suited to causing deceit about the nature or the scope of the business or the situation of the proprietor. The corporate name must be clearly distinct from other corporate names already entered in the Register of Commerce at the same location or in the same borough.
Only an enterprise entered in the Register of Commerce can bear a corporate name which can be sold, inherited and leased together with the business operation.
II. B. Formal and publication directives
The partnership agreement should regulate the following: object, corporate name, nature and scope of the partners’ contributions, management and representation power, allocation of profits and losses, ending of the company and departure of partners.
The limited liability of each limited partner and the amount of this liability must have been agreed in the partnership agreement by setting of a certain amount. It can, but does not necessarily have to be identical with the contribution to be made in the internal relationship.
No form has been prescribed for the conclusion of the partnership agreement. However, conclusion of a written agreement is to be recommended. If nothing else has been agreed, the German Commercial Code (HGB) applies.
Provision with capital
As with an oHG, the corporate assets jointly accrue to all partners, including the limited partners. Each partner has a holding with his share of the capital, the amount of which can be seen from the balance sheet and is a specific amount of money.
The contribution can entail cash, contributions in kind or the rendering of services. The modalities of the payment can be freely agreed.
Appointment of the executive organs
Alongside the partners, no specific executive organs exercising the management exist.
Fulfilment of publication directives
The KG is to be notified to the Register of Commerce for entry via a Notary Public. It only originates upon entry.
The application to the Register of Commerce is to be done by all partners. It must contain the surname, first name(s), profession and residence of the partners, the company’s corporate name and the location of its headquarters as well as the time of the start. The application is made electronically (by a Notary Public) in a publicly certified form. The partners entitled to representation must sign the corporate signature alongside the signatures of their names.
For a limited commercial partnership, the designation of the limited partners and the amount of the contribution of each single one is also to be stated.
Founders not known to the Notary Public must prove their identity by valid identity papers. In the event of a person appearing not acting on his own, but on a third party’s behalf: written power of attorney or a subsequent approval in a notarially certified form is necessary. If the signature under a power of attorney is certified by a foreign Notary Public, a legalisation (or apostille) is necessary, depending on the country of origin. The former can be granted by a Consul of the Federal Republic of Germany.
If a legal entity is one of the founders, its existence must be proven by a certified extract from the Register of Commerce (for foreign enterprises: corresponding official registration documents).
The entries in the Register of Commerce are made known by publication in the Federal Gazette and at least one other newspaper.
III. Mode of function of a KG
III. A. Management of the KG
Acting executive organs
Management to the inside
Management is only attended to by the general partners. If an LLC is a general partner (GmbH & Co. KG), its managing director acts on its behalf. The limited partner has been excluded from management. Approval of the limited partner is merely necessary in out-of-the-ordinary transactions. However, deviating regulation can be contained in the partnership agreement.
Apart from this, the single management power applies by law. For out-of-the-ordinary transactions, a resolution passed by the partners shall however be necessary.
Partners’ resolutions are to be passed unanimously as a matter of principle. The procedure has no formal directives. Deviating regulations are possible.
Representation to the outside
Representation to the outside is done by the personally liable partner (interlocking representation). As a matter of principle, each general partner is entitled to representation alone. Deviating regulations are possible. The limited partner has no representation powers.
In a GmbH & Co. KG, the company is represented by the LLC as general partner as a rule. The latter for its part is represented by its managing director.
Non-partners can be granted a representation power with a limited commercial power of attorney. Granting of such a power must be entered in the Register of Commerce.
The following information is to be given on the letterheads: corporate name, legal form, location of the branch establishment, Local Court of the Register of Commerce, number of the Register of Commerce.
In a company in which no personally liable partner is a natural entity, the corporate names of the partners and their dates of entry are additionally to be stated.
III. B. Control and annual financial statements
Control and information right of the partners
General partners can inform themselves personally and have insight into trade books and papers as well as a balance sheet and annual financial statements. This applies even if they have been excluded from management. Limited partners only have limited control rights. They can demand a copy of the annual financial statements and examine their correctness.
Accountancy and annual financial statements
A KG is not obliged to have audits of the statements done by chartered accountants, except for loan institutes or companies covered by the Act concerning Accounting of Certain Enterprises and Groups of Companies.
As a commercial enterprise, the KG is obliged to keep trading books and to make their trade business and their asset situation visible in them according to the principles of proper accountancy. At the close of each and every fiscal year, a balance sheet (annual balance sheet) and a profit and loss account are to be produced (in the German language and in Euro).
Auditing of the annual financial statements has not been prescribed.
Disclosure or publishing of the annual financial statements has not been prescribed, except for loan institutes or companies covered by the Act concerning Accounting of Certain Enterprises and Groups of Companies.
Specifically: GmbH & Co. KG
The GmbH & Co. KG as a trading company is obliged to keep trading books. It is obliged to produce a balance sheet (annual balance sheet) and a profit and loss account (in the German language and in Euro) at the close of each and every fiscal year.
In addition, these annual financial statements are to be extended by notes with explanations. The annual financial statements are to observe the principles of proper accounting and give a picture of the asset, finance and profit situation corresponding to the facts.
Auditing of the annual financial statements is mandatory for large and medium-sized GmbH & Co. KG’s.
Small GmbH & Co. KG’s are obliged to submit summarised balance sheets (§ 266 sub-section 1 HGB) with curtailed notes (§ 288 HGB) to the Register of Commerce (disclosure of balance sheets). Medium-sized companies must submit a summarised balance sheet, a summarised profit and loss account (§ 276 HGB), curtailed notes (§ 288 HGB) and a management report as well as the audit certificate and the report by the Supervisory Board to the Register of Commerce. Large companies are obliged to submit the complete annual financial statements without curtailment as well as the audit certificate and the report by the Supervisory Board to the Register of Commerce; publication in the Electronic Federal Gazette.
Small capital companies are those which do not exceed at least two of the three following features:
4,840,000 Euro balance sheet total; 9,680,000 Euro annual net turnover, on an annual average 50 employees.
Medium-sized capital companies are those which exceed at least two of the three above features and do not exceed at least two of the three following features:
19,250,000 Euro balance sheet total, 38,500,000 Euro annual net turnover, 250 employees.
Large capital companies are those which exceed at least two of the three latter named features.
Auditors and auditing companies are responsible for auditing the statements and chartered accountants and chartered accounts’ companies for the annual financial statements and management reports of medium-sized companies.
The auditors have an extensive right to information and insight into books, cash in hand, stocks of securities and goods etc.. They are obliged to unconditional confidentiality. They are to make a neutral written audit report on their auditing. If no objections are to be raised, the auditors are to give an audit certificate.
With his audit certificate, the auditor gives his overall assessment of accountancy and annual financial statements of the company to the company and the shareholders and also with an effect to the outside. He certifies the correspondence of the accountancy with the statutory directives.
The KG is a partnership. Partnerships themselves are not subject to income tax or corporation tax. Instead, the profits are established separately in a standardised way and directly ascribed to the partners. The partners’ shares of the profits are subject to income tax or also corporation tax, depending on their legal form.
Further information can be found in our brochure Accounting and Taxes – Information for People Setting Up a Business.