GmbH & Co. KG – what is it? How can I set up a GmbH & Co. KG and what do I need to bear in mind? On this page we give you an overview of this common legal form. In addition to an explanation of terms, we also address topics such as:
- minimum capital required,
- formation costs,
- questions about liability and responsibilities,
- duties of the managing directors and
- the subject of taxes.
Do you have legal questions about GmbH & Co. KG or other legal forms and company formations? Contact our lawyers at the Herfurtner law firm. We can advise you in all German-speaking countries.
Table of contents
- GmbH & Co. KG – meaning
- Composition – parties involved
2.1 General partner: definition
2.2 Limited partner: definition - Minimum capital and formation costs
- GmbH & Co. Forming a KG: what to look out for?
4.1 Purpose and benefits
4.2 Contractual regulations
4.3 Commercial register and trade office – double registration - Managing director of the GmbH & Co. KG
- Internal & external tasks
- Liability, responsibilities, risk distribution
- GmbH & Co. KG – taxation
- Advantages, disadvantages, naming
9.1 GmbH & Co. KG – the advantages
9.2 Disadvantages of this legal form
9.3 GmbH & Co. KG: Who is it suitable for?
Limited liability company & Co. KG – significance
GmbH & Co. KG is an abbreviation and stands for Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft. It is a joint venture, similar to a limited partnership (KG).
The main difference is that in this case the general partner is a limited liability company and not a natural person. In contrast, the natural person who contributes the company’s capital is the limited partner (partial partner).
This means that the general partners, i.e. the people behind the GmbH, are exposed to a lower liability risk. Anyone who founds this type of company can therefore benefit from the advantages of raising the capital of a KG and at the same time achieve the limitation of liability that is characteristic of a GmbH & Co.
As a result, two companies must be founded: a GmbH and a GmbH & Co. KG, both of which must be registered as commercial companies in order to be legally active. Another option is to establish a UG & Co. KG, in which an entrepreneurial company acts as the general partner.
Composition – parties involved
The terms “general partner” and “limited partner”, which refer to the different types of partners, are important in connection with the legal form.
General partner: definition
A general partner is a type of investor.
He is the general partner with unlimited liability of a limited partnership (KG). A stock corporation with limited liability serves as the general partner of a GmbH & Co. KG. This has the advantage that, in contrast to a general partnership, no natural person is directly liable for the debts of a legal entity such as a GmbH.
The entire business assets of the GmbH are liable for the debts.
Limited partner: definition
Similar to the general partner, the limited partner is also a type of investor.
As a shareholder in a limited partnership (KG), a limited partner is only liable up to the amount of his liability in the commercial register.
Minimum capital and formation costs
As the general partner is a GmbH, the formation of a GmbH & Co. KG requires a capital contribution of 25,000 euros. Alternatively, a UG can assume the role of general partner in a UG & Co. KG by contributing at least one euro of capital.
Both the limited partner and the general partner GmbH agree the amount of the contribution in the partnership agreement before concluding it. In particular, it is important to know the amount of the limited partnership’s equity that will be entered in the commercial register.
Consultation costs with a lawyer or tax expert are due here if the articles of association are to be tailored to the general partner GmbH and the GmbH & Co. Registration and commercial register entry costs must also be paid.
Founding a GmbH & Co. KG: What you need to bear in mind
Every company must have a personally liable partner in addition to the other partners.
The first step is the formation of a GmbH by the shareholders.
The GmbH & Co. KG can be founded if it is entered in the commercial register.
The basic features of the company are defined in the articles of association or partnership agreement. The liability of the limited partners is completely eliminated if it is also entered in the commercial register.
Even before entry in the commercial register, the partnership has legal capacity, but the limited partners are also liable with their private assets up to this point.
As already mentioned, the minimum amount is €25,000. It is also possible to contribute assets in kind.
Purpose and benefits of the legal form
A GmbH & Co. KG can have two purposes:
- either to operate a company or
- to manage its own assets.
Contractual regulations
In their articles of association, the partners determine the legal basis on which the GmbH & Co. KG is based. The provisions of the German Commercial Code, such as voting processes among the partners or the distribution of profits, can also be amended here.
Commercial register and trade office – double registration required
As already mentioned, the general partner GmbH must be founded before the GmbH & Co. KG can be founded. It must fulfill all GmbH formation requirements, including the required share capital, even if it only acts as the general partner.
A partnership agreement applies to both the GmbH and the GmbH & Co. KG. In addition, a notary must enter both companies in the commercial register, the GmbH in section B and the GmbH & Co. KG in section A.
In order to be legally recognized in Germany, both companies must be registered with the local trade office – in the chosen legal form, which is only intended for merchants: GmbH & Co. KG.
As a rule, the trade offices report the changes to the tax office and the Chamber of Industry and Commerce (IHK) or Chamber of Crafts (HWK). These then independently contact the potential members to conclude a membership agreement.
The articles of association should be drawn up with the help of a lawyer or notary. A tax expert should be consulted on the financial implications of the contracts concluded.
Managing directors of the GmbH & Co. KG
The management of this type of company is under the control of the GmbH. Whereas the GmbH is not a natural person and therefore cannot act as managing director of the company.
Consequently, the managing director of the GmbH is also the managing director of the GmbH & Co. KG. However, it should be noted that the management of the GmbH does not necessarily have to be filled by one of its owners, but can also be taken over by an outsider.
The GmbH & Co. KG in the internal relationship and in external representation
The GmbH and its limited partners have – as in the KG – different tasks. The general partner GmbH represents and manages the KG externally through its managing director. The managing director of the general partner GmbH can be elected from outside the company.
However, it is also possible for one or more limited partners to manage the general partner GmbH as a whole as managing director.
It is not permitted for limited partners who are not managing directors of the general partner GmbH to manage or represent the GmbH & Co. However, the limited partner has a right of control in any case. For example, the annual financial statements must be submitted to him. The limited partner also has the right to object to extensive or risky transactions.
If only one general partner manages the company, the partnership agreement should stipulate that the general partner is exempt from the management restrictions of Section 181 BGB. These laws regulate the practice of insider trading, which is a form of self-dealing (i.e. transactions concluded with oneself).
If the managing director of the general partner GmbH concludes a rental agreement with this GmbH or with the GmbH & Co. KG, this is an example of self-contracting.
Managing directors of such a legal form must have knowledge of commercial accounting. As commercial companies, both the general partner GmbH and the GmbH & Co. KG must prepare annual financial statements and profit and loss accounts in the form of double-entry bookkeeping.
In addition, there is the need for tax audits and publicity. They are obliged to have their annual financial statements audited annually by an auditor and to publish the results in the Federal Gazette.
Shared and limited liability: clear distribution of risk between shareholders
Since a GmbH can function as a limited liability company, the limitation of the general partner’s responsibility is an advantage of this structure. In this case, the shareholders of the GmbH are not personally responsible.
This is the main difference between an LP and a KG, in which the general partner is personally liable for all debts and obligations of the company and himself.
There are no significant differences between the KG and other types of contract. This means that in the event of failure, the general partner GmbH is only liable up to the amount of its contribution, while the limited partners are only liable with their shares in the GmbH & Co.
There is a mandatory entry in the commercial register for the amount of the limited partner’s contribution.
The general partner GmbH limits the liability of its managing director, but certain lenders and suppliers do not recognize this limitation and demand that the managing director of the general partner GmbH is liable with his personal assets. The managing director of a GmbH is personally liable if he fails to distinguish between business and private assets.
Taxes: KG and partners share costs
It should be noted that both the general partner GmbH and the GmbH & Co KG are independent legal entities with separate tax obligations.
The GmbH & Co. KG, like any other KG, is liable for VAT on the goods and services it purchases.
Depending on the type of delivery or service, this amounts to 19% or 7% of the total amount. As the GmbH & Co. KG can only be founded by traders, trade tax is also due.
Wage tax is paid by the employer if it employs staff. The same rules apply to the general partner GmbH as to the general partners.
Each partner is responsible for paying their own share of tax on their separate share of profits. As a legal entity, the general partner GmbH is liable for corporation tax.
GmbH & Co. KG Taxation
- For employees: Wage tax
- Trade tax
- Tax on gifts and estates (inheritance tax)
- Limited partner: income tax
- General partner/GmbH: tax on company profits (corporation tax)
- Under certain circumstances, the limited partner in his function as managing director: VAT
- If a property is acquired for an OHG or KG, with restrictions: Real estate transfer tax; If it is acquired for a special division: Special limited partner balance sheet
Advantages, disadvantages and naming
In addition to being entered in the commercial register, the GmbH & Co. KG appears in business dealings as a corporation. Personal names, the object of the company or even an invented name can be used in the composition of the name. Founders also have the option of using a mixture of these elements.
Another rule is that the name of your organization should be clear and precise.
In addition, the company names of the general partner GmbH and the GmbH & Co. KG can have different company names. It is a bigger problem if they all have the same name. In this case, founders of two companies with identical names should use different suffixes.
Examples are Hans Schmidt Betriebs-GmbH and Hans Schmidt GmbH & Co. KG, which are the general partner GmbHs (company name of the GmbH & Co. KG).
Advantages of the GmbH & Co. KG
One of the advantages is the fact that the GmbH acts as the general partner of the KG. As already mentioned, the GmbH is liable with the entire company assets, but not with the private assets of the partners. This is because the GmbH is a corporation. This significantly reduces the liability concerns for the business partners.
Clear risk distribution and less personal responsibility are advantages of the GmbH & Co. KG.
As the investor’s rights of objection are partially restricted, the general partners of the GmbH & Co. KG have the advantage that they can manage the company in their own interests, even though they receive money from the limited partners.
Because the general partner is a GmbH and not a natural person as in the case of a KG, the general partner’s liability is limited to the GmbH’s assets. This means that the partners of the general partner GmbH are not liable individually, but the company as a whole.
Limited partners can hold capital in the GmbH & Co. KG in the same way as in the legal form of a KG, without bearing any risk beyond the amount of their contribution or actively participating in the company’s activities.
GmbH & Co. KG: the disadvantages
High formation and accounting costs are disadvantages of the GmbH & Co. KG. In any case, the formation and management of a GmbH & Co. KG is always more difficult than with a conventional GmbH or KG. This doubles the effort and costs involved in setting up two companies.
As documents have to be kept for both companies, the administrative effort increases considerably. The connection between a GmbH or KG and the other company is more transparent for outsiders.
For whom is the legal form GmbH & Co. KG particularly suitable?
KG and GmbH & Co. KG are suitable for individual shareholders who only want to invest money in a commercial enterprise but do not want to actively participate in the company.
By taking a detour via the general partner GmbH, the GmbH & Co. KG enables the general partners to limit their risk.