Civil law partnership – definition

Civil law partnership GbR

Civil law partnership – what is a GbR simply explained? As soon as you join forces with one or more partners, a civil-law partnership immediately comes into being. This legal form belongs to the category of partnerships.

  • It is commonly known by the abbreviation GbR.
  • The civil-law partnership can also be called a BGB partnership.
  • GdbR is another common name for the corporate legal form GbR.

We will introduce you to the GbR, a simple and flexible form of company, and show you which requirements you must observe, especially when setting up a civil-law partnership.

Liability, formation, tax obligations, distribution of profits: We have compiled the most important information on the GbR for you.

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Table of contents

  1. Civil law partnership – simply explained
  2. Formation of a civil law partnership
  3. Liability – what rules apply?
  4. Taxes: Duties of a GbR
  5. Advantages of a civil-law partnership
  6. GbR: the disadvantages of this legal form
  7. Summary of a civil law partnership

Civil law partnership – simply explained

Civil law partnership Definition: A GbR is a group of people who work together for a common goal.

The GbR can be founded quickly, inexpensively and without start-up capital, as it only requires at least two partners. The private assets of all GbR partners are subject to joint and several liability. For “simple” trading companies, the GbR is an ideal legal form. The formation of a GbR does not require any further formalities.

The GbR can at least be formed “automatically” when two or more persons join together and publicly act for a common business objective.

Many founders do not know this.

The fact that the founding team has previously set up a GbR is of no further significance as long as they are only concerned with preparing their prospective business start-up.

The first encounter with customers, suppliers or business partners, on the other hand, can lead to obligations and questions of liability that have not been considered.

In most cases, each founder is then personally liable for the debts or omissions of the other founders.

Characteristics & features of the GbR

The GbR “automatically” becomes a general partnership if the company carries on a commercial business. If the type and scope of the company requires a business operation set up in a commercial manner, the company is to be qualified as a commercial enterprise (§ 1 (2) HGB).

Further characteristics of a civil law partnership are:

  • There is no minimum capital requirement.
  • The GbR is a partnership, i.e. each of the partners is personally liable for all the partnership’s debts, e.g. tax debts. Internally, they can make their own arrangements within the framework of their partnership agreement.
  • Simple commercial relationships are well suited to the GbR, for example: Small traders, joint practices, freelancers, working partnerships.
  • If the partners can agree verbally, no further formalities are required. However, a formal agreement is preferable.

When does it make sense to establish a GbR?

Typical of the legal form of a civil law partnership is the excellent cooperation between the company owners. This is why liberal professions such as lawyers, doctors and architects choose GbRs for their joint practices and branches.

The civil law partnership is also suitable for simple commercial joint ventures, such as micro-enterprises.

It is also well suited for projects with equal partners that are short- or medium-term in nature. In the pre-founding phase of growth-oriented start-ups, the GbR is typically a frequently used temporary legal form before the owners convert it to an Unternehmergesellschaft haftungsbeschränkt or GmbH.

What are the formation costs?

A civil law partnership can be formed without a deposit. In addition to cash, your GbR can also be financed by contributing real estate or assets.

A GbR contract and the registration of a trade only incur additional formation costs in the form of anticipated legal fees.

There are no fees for registering the GbR with the local court, as it cannot be entered in the commercial register.

Forming a civil law partnership

At least two partners are required to form a GbR or a BGB partnership. The parties agree to the GbR partnership agreement orally or in writing. The Chambers of Industry and Commerce and the Chambers of Crafts, for example, provide templates for written GbR contracts on their websites.

However, these templates are only intended as a starting point. A lawyer or notary can help you adapt the GbR contract to your specific needs.

Specify how much money each partner is allowed to take from the share capital each month, which decisions must be made jointly and which each must make alone, etc. By setting clear guidelines in your partnership agreement, you can save yourself disagreements or legal disputes later on.

Information on the division of partners

Sections 705 to 740 of the German Civil Code (BGB) provide the legal basis for the so-called BGB partnership, or GbR. At least two persons are required to form a civil law partnership.

At least one GbR partner must be a natural person. The other GbR partners, on the other hand, can also be legal persons, e.g. another company.

The BGB partnership comes into being as soon as the partners agree to work together towards a goal. The GbR is not entered in the commercial register.

An important factor to consider when setting up a GbR is the company’s field of activity.

  • Each GbR partner must be registered as a trade in order to be able to carry out a commercial activity.
  • Registration as a freelancer with the trade office is not required, but a tax number for the GbR must be applied for at the tax office.

What is necessary for the formation of a civil law partnership?

A civil law partnership can be formed with very few formalities. No formal partnership agreement is required to form a GbR.

However, it is recommended to sign a GbR contract.

This enables the GbR to regulate important issues, such as:

  1. how decisions are made,
  2. who can speak for the GbR to the outside world,
  3. distribution of profits and losses,
  4. how the partners are compensated and much more.

In order for a civil law partnership to carry out its activities, it must be registered with the local trade or supervisory authority. It is common for companies to be registered by the trade offices and, if applicable, the tax office, which will then contact you immediately.

As a self-employed civil law partnership, you only need to apply for a tax identification number and obtain the necessary permits for your GbR. The regulations for doctors, lawyers and self-employed coaches, for example, vary depending on the profession.

Obligation to register

When registering a trade, a GbR is not registered. However, the trade office must be informed of any commercial activity.

The “questionnaire for tax registration” must be completed and submitted to the tax office within one month of opening or commencing the activity. The same applies to self-employed entrepreneurs.

Organisation within the civil law partnership

No special legal forms are required for the formation of a civil law partnership. Each partner has the possibility to manage the civil law partnership and represent it externally if they so wish. However, with a GbR partnership agreement you can determine who receives certain competences as a partner.

As a GbR you cannot be entered in the commercial register as a merchant. You can no longer act as a GbR if you have an entry in the commercial register. Therefore, another legal form, such as a general partnership or a limited partnership, is required.

Criteria for company name – business name

Since your GbR is not registered in the commercial register, there are fewer formal criteria that your “company name” or “business name” must meet.

As long as the name of your GbR is not misleading and has a unique character, you are free to choose it. Thus, you can give your GbR a name that reflects the industry or special features of your business. A freely invented name is also permissible.

The name of your GbR can also include your name – as is often the case. However, this is not legally necessary.

The names of your partners, the address of the registered office and the designation “GbR” must always be included in business transactions. In other words: Your business letters, the imprint of your website, invoices and financing applications must mark these details very clearly.

Organisational structure and participation

All partners share responsibility for managing and promoting the organisation. Accounting, communication and process control are just a few examples of what falls under the term “management”.

It also involves negotiating contracts with other parties, e.g. purchase, service or supply contracts outside the organisation. Before legal transactions can be concluded with external parties, the consent of all shareholders is required.

It is possible to limit or divide management and representation in a company agreement.

Mandatory information in the GbR shareholders’ agreement

In principle, the following principles should be laid down in a BGB contract:

  1. The non-competition clauses of the GbR partners
  2. Mission and vision of the company
  3. Responsibilities with regard to information
  4. The principal place of business of the company
  5. The securities of the GbR to be sold
  6. The right to control
  7. The right to be directed and represented
  8. The use of profits
  9. The right of GbR partners to withdraw, e.g. through death
  10. Liability issues
  11. Private distributions of profits and losses and withdrawals are subject to rules.

A partnership can be founded in the legal form of the BGB without the need for further formalities. An informal partnership agreement often sets out the mutual obligations of the GbR partners and makes provisions for their withdrawal from the BGB partnership.

The partnership agreement must be in writing if real estate or land is part of the company’s assets.

GbR shareholders: rights, duties and responsibilities

The partners have the following rights and responsibilities.

  1. As a rule, claims arising from the partnership cannot be transferred between the partners.
  2. Business activities carried out by one or more managing partners.
  3. Payment of partnership dues and responsibility to each other for diligence in business dealings.
  4. Creditors have the right to attach the assets of the company, including the assets of the partners.
  5. Profits and losses are allocated on a per capita basis unless otherwise provided = profit sharing by the partner.
  6. As long as the partnership is subject to civil law, all partners are equal owners of the partnership’s assets. No partner may sell or otherwise transfer his share of the partnership assets – deviating agreements are possible.

Dissolution of a civil law partnership

Dissolution and termination, death or bankruptcy of a partner are usually the main reasons for the termination of a partnership. A civil partnership can be dissolved at any time if there is good cause, but this is not always the case.

Unless the partnership agreement states that the civil partnership continues in the event of the death or bankruptcy of one of the partners, these events only lead to the withdrawal of the partner concerned.

In the event of dissolution of the partnership, the assets of the partnership shall be liquidated, but the partnership shall continue to exist as long as the purpose of the liquidation so requires, e.g. winding up of open transactions.

Can a GbR be converted into another legal form?

In order to convert the legal form of a GbR into a GmbH, UG haftungsbeschränkt or another legal entity, the Reorganisation Tax Act must be observed. Otherwise, there is a risk that you will have to pay significantly more tax. Consult a notary and/or tax advisor for further details.

Liability – what rules apply to the GbR?

The GbR is a partnership. Therefore, the assets of the partnership and the private assets of the partners are liable for obligations arising from contracts concluded in the name of the partnership. If only one of the partners is liable, he or she can demand pro rata reimbursement from the other partners.

The shareholders’ agreement may contain provisions for deviating agreements. There is no effect on other persons. In the absence of a written agreement, the same standard of liability applies to all partners.

Only if this has been separately agreed with the contracting partner can a limitation of the obligation towards third parties be made. There is no possibility to limit liability on a broad basis.

A limitation of liability is typically difficult. The BGH has consistently rejected efforts to impose a limitation of liability on the partners or the terms of the partnership agreement.

It is conceivable that a BGB partner can be held liable for the debts of the company even after he has left the company. However, these must be asserted against him within five years after they arose.

Taxes: Obligations of a civil-law partnership

In order to operate a business, it must pay business taxes. Trade tax does not apply to a GbR as a self-employed person.

Tax must be paid on the income of the individual partners. The amount of income tax is determined by dividing the profit equally among the partners.

For deliveries and services, the GbR must pay either 19 per cent turnover tax or the reduced tax rate of 7 per cent.

Advantages of a partnership under civil law

The GbR is the simplest form of partnership and makes it easy for individuals to set up their own business and form a corporation. The main advantage of a GbR is that it requires no minimum share capital.

While the BGB partners have a high degree of co-determination, the bureaucratic burden is low because there is no obligation to keep accounts and balance sheets in the GbR legal form.

The disadvantages of this legal form

The greatest risk of a GbR is usually the liability of the participants with their private assets in addition to the company assets. If, for example, a co-partner makes a mistake, the other partners can be held liable for it.

If the volume of business or the business methods of your GbR become too demanding, there is a risk that you will be held liable. In this case, it is best to use alternative legal instruments that allow you to limit your liability.

It is a good idea to create a business strategy for your GbR. This action thread can serve as a guide for all actors involved in the project.

Summary – Civil law partnership

Shareholders have both advantages and disadvantages to consider when using the BGB legal form. A BGB partnership can be established quickly and easily, sometimes even without the need for a partnership agreement.

Although the partners of the GbR run a considerable risk due to the unlimited and joint and several liability, they should be aware of this risk before the formation.

The lawyers of the Herfurtner law firm will advise you on this and other company forms throughout the German-speaking area. On our website you will also find further information on other legal forms in Germany and at EU level. Feel free to contact our lawyers for legal advice.

Lawyer Wolfgang Herfurtner Germany

Wolfgang Herfurtner | Lawyer | Managing Director | Shareholder

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