Company under civil law (GbR)

The abbreviation GbR stands for Gesellschaft bürgerlichen Rechts. A civil law partnership is the simplest form of company and is a type of partnership. A GbR is formed when two or more natural or legal persons join together and pursue a common purpose.

Legal basis

As already mentioned, a GbR is formed by the merger of two or more persons who pursue a common purpose. This is set out in § 705 BGB. In principle, this can involve natural or legal persons. However, if a legal entity establishes a GbR as a partner, at least one other natural person must be specified as a further partner. As stipulated in Section 705 BGB, a GbR is formed when two or more legal entities undertake as partners to achieve a common purpose. This is recorded in a BGB partnership agreement. The partnership agreement can be concluded verbally, in writing or by implication. The written form is therefore not a must, but is nevertheless recommended. Any agreements between the partners can be recorded here, for example which decisions are made jointly, how high private withdrawals may be, etc.

Start-up capital

There is no minimum capital requirement for the formation of a GbR, but you should still have a certain amount of capital to start your business activities when you form the GbR. It is therefore advisable to have a certain amount of starting capital and to pay this into the GbR. The amount of the partners' contributions is also set out in the articles of association.

Liability

Due to the fact that the GbR is one of the legal forms of a partnership, personal joint and several liability comes into play here. This means that the partners of the GbR are also liable for any liabilities of the company with their private assets. In this case, the liability of the individual partners is either in equal shares or a proportionate liability ratio has already been stipulated in the partnership agreement, in which case this applies. A limitation of liability of the GbR is only possible if this has been contractually agreed with third parties. A general limitation of liability is not possible here.

Formation of a GbR

If you intend to form a GbR, it is first important to find one or more founding partners. It is not possible to set up a GbR as a sole founder. We have summarized the most important founding steps for you here.

1) Articles of association

The first step in forming a GbR is the articles of association. It is not absolutely necessary to record this in written form; a verbal contract is just as good. However, it is advisable to draw up a joint written agreement, as otherwise the standard provisions of the German Civil Code (BGB) apply, e.g. that all partners must agree on decisions. Without a separate contract, many individual regulations cannot be recorded, so it is advisable to draw up a partnership agreement. This should contain the following points:

1. Registered office of the GbR
2. Purpose and aim of the GbR
3. Management and power of representation of the GbR partners
4. Passing of resolutions
5. Liability risks
6. Use of profits
7. Private withdrawal of the partners
8. Distribution of profit and loss
9. Duty to provide information and control rights
10. Non-competition covenants for shareholders
11. Sale or assignment of shares
12. Provisions for the termination or death of a partner
13. Possible regulations on the termination of the GbR

2) Trade office

Once the articles of association have been drawn up, the GbR is registered with the trade office.

3) Business account

The next step is to open a business account for your GbR. Although this is not a must, it is always a good idea to process all payments via the GbR.

4) Register with the tax office

However, registration with the tax office is necessary. To do this, you must complete the tax registration questionnaire and will receive your tax number as part of this.

5) IHK or HWK registration

You must also register with the Chamber of Industry and Commerce or the Chamber of Crafts. This is mandatory for all tradespeople.

6) Employment agency

Registration with the employment agency is only necessary if you intend to hire employees. You will then receive your own company number.

7) Employer's liability insurance association

It is also necessary to register with the employers' liability insurance association; this should be done within one week of setting up.

Entry in the commercial register?

Unlike many other legal forms, the GbR is not entered in the commercial register. Entry in the commercial register is only required if you operate a commercial business in accordance with § 1 Paragraph 2 HGB. If this is the case, the GbR automatically becomes an OHG and can be entered in the commercial register.

Naming the GbR

In principle, there are no legal regulations regarding the naming of the GbR. Nevertheless, offices, authorities and the Chamber of Industry and Commerce require that the founders are named with their first name and surname in the company name. If there are several founders, it is also possible to name only the surnames of the founders, but these should not be "common names". Valid GbR names would therefore be:

Petra Meier and Hans Götz, GbR

Hertel and Widmaier, GbR

The organs of a GbR

In principle, a distinction must be made between the internal and external relationship of a GbR. While the internal relationship regulates the relationship between the partners (i.e. within the company), the external relationship relates to the behavior of the GbR towards third parties (e.g. when concluding contracts).

The internal relationship is usually regulated in the articles of association. If this is not the case, all partners are jointly responsible for all decisions and must decide jointly and unanimously.

Management and representation

Unless otherwise stipulated in the partnership agreement, the management of a GbR is generally the joint responsibility of all partners. However, deviating regulations can be agreed in the articles of association, e.g. which transactions each partner may carry out independently or what must be decided jointly. The management of the GbR includes all activities that serve the business purpose. This includes, for example, bookkeeping or monitoring work processes. In addition to joint management or individual arrangements, it is also possible to transfer management to third parties, e.g. to an employee. This person then becomes the managing director and may carry out all day-to-day business. However, basic transactions, e.g. those that change the business purpose or go beyond the business purpose, do not fall within his area of responsibility.

External representation of the company is also carried out jointly by all shareholders. This means that all shareholders must agree to the conclusion of contracts with third parties. However, this can also be stipulated otherwise in the shareholders' agreement, e.g. through an individual power of representation

Rights and obligations of the shareholders

The rights and obligations of the shareholders are governed either by the statutory provisions in Sections 705 et seq. of the German Civil Code (BGB) or by the provisions agreed in the articles of association.

1) Duty to contribute

One of the first duties of the shareholders is the obligation to pay contributions. The contributions of the individual shareholders serve the pursuit of the common business purpose and can be made in the form of money, personnel, services or raw materials. Another form of contribution is the provision of one's own labor. However, the most common contribution is often the cash contribution at the beginning of the formation. Unless otherwise stipulated in the articles of association, all shareholders are obliged to make equal contributions.

2) Duty of loyalty

Another important obligation is the so-called fiduciary duty. All partners undertake to protect the common interests of the GbR and to refrain from actions that are detrimental to the company or the other partners.

3) Voting rights

The shareholders' voting rights enable them to pass resolutions jointly. In accordance with Section 709 (1) BGB, company resolutions are passed unanimously, i.e. each partner has a voting right and must agree to joint decisions. However, this can often be inefficient for many shareholders, which is why deviating provisions in the articles of association are advisable.

4) Right to joint management

As already mentioned, all shareholders are entitled and authorized to jointly manage the company. The consent of the individual shareholders is required for each transaction. In order to establish a leaner process here too, it is advisable to transfer the management of the company to individual shareholders.

5) Right of control

The right of control authorizes the shareholders of a GbR to inform themselves about the activities of the management in accordance with § 716 Para. 1 BGB. To this end, the shareholders have the right to inspect the business books.

6) Profit and loss participation

The profits and losses of a GbR are distributed to its partners at the end of the financial year. In accordance with § 722 Para. 1 BGB, profits and losses are distributed equally unless otherwise stipulated in the articles of association. Often, for example, a pro rata distribution of profits and losses is determined here, which is based on the amount of contributions made by the various partners.

Change of shareholder

Admission of a new shareholder

In principle, only all other shareholders must agree to the admission of a new shareholder. The new shareholder is admitted to the GbR by means of an admission agreement between the existing shareholders and the new shareholder.

Withdrawal of a partner

In general, the GbR is dissolved in the event of the insolvency, death or termination of a partner. However, this can be recorded elsewhere in the articles of association so that the GbR continues to exist despite the aforementioned reasons for dissolution and only one partner leaves.

If a partner leaves, their share of the company's assets is distributed among the remaining partners. In return, they are obliged to release the withdrawing shareholder from the joint debts and return to him the items that he has given to the company for use.

In addition, the departing partner is entitled to a settlement equal to the amount to which he would have been entitled if the GbR had been dissolved.

Subsequent liability of a shareholder

According to § 128 S. 1 HGB, however, the withdrawing partner is still liable for the liabilities of the GbR even after his withdrawal from the company. However, this subsequent liability is limited to five years in accordance with § 736 Para. 2 BGB in conjunction with § 160 HGB. § 160 HGB is limited to five years.

Taxes

Income tax

First of all, it is important to note that, unlike corporations, a GbR is subject to income tax. The partners of the GbR must pay income tax on any profits they make. This includes income tax as well as the solidarity surcharge and church tax.

Corporation tax

Also unlike corporations, GbRs do not have to pay corporation tax.

Trade tax

In addition to income tax, which applies to the partners, the GbR must also pay trade tax as a partnership and trader. Freelancers are exempt from this rule. This applies above the tax-free amount of € 24,500 profit, below which no trade tax is payable.

The trade tax is then initially calculated from the trade income. For this purpose, financing expenses and interest paid are added to the profit of the GbR, as well as reductions in the value of the GbR's property. The trade income is then multiplied by the tax assessment amount of 3.5% and the so-called "assessment rate". This varies from municipality to municipality, but averages around 400%. This then results in the trade tax to be paid by the GbR.

You can find a sample calculation here:

Profit

+ additions (financing expenses, interest)

-Reductions (1.2% of the assessed value of a property of the GbR)

= trade income

tax-free amount

=Reduced trade income * tax base * assessment rate = trade tax

❗It is also good to know:

Trade tax can be credited against the shareholders' income tax, i.e. deducted from the income tax liability. In this case, the credit amounts to 3.8 times the trade tax assessment amount, up to a maximum of the trade tax actually payable.

Turnover tax

The turnover tax of a GbR must be paid to the tax office quarterly (for a turnover tax volume of € 7,500) and monthly if the amount is higher. VAT must be added to the net amounts of the products or services sold by the GbR. The end customer pays this as VAT of 19%. Normally, the entire 19% would have to be transferred to the tax office, but since a GbR operates as a business itself, it has the option of deducting the so-called input tax. This means that taxes that the GbR has paid on products or services that it has purchased itself can be deducted from the VAT.

The VAT to be paid to the tax office is then calculated as follows: VAT - input tax amounts = sales tax

It is also possible to apply the "small business regulation". This applies to companies whose turnover does not exceed €22,000 in the previous year and €50,000 in the current calendar year. If this is the case, the GbR does not have to charge VAT on its goods or services. The advantage is, of course, that the products are therefore cheaper and the expense of paying VAT to the tax office is eliminated. However, input tax deductions can then no longer be made.

Bookkeeping

In accordance with the German Commercial Code and the German Fiscal Code, GbRs as partnerships are required to keep accounts. Up to a turnover of € 600,000 and a profit of € 60,000 per year, bookkeeping may be carried out using a simple revenue and surplus account. Otherwise there is a balance sheet obligation.

Termination of the GbR

To terminate a GbR, it must first be dissolved and then wound up.

Dissolution

The dissolution of a GbR must be based on a triggering reason, which can result both from the law and from the articles of association. Reasons include the passage of time, insolvency, termination or the death of a partner.

1) Lapse of time

If a period for the expiry of the GbR was agreed at the beginning of the formation, the GbR is automatically dissolved after this period has expired. However, if the partners of the GbR continue the activity after the expiry of the time limit, the GbR is extended indefinitely in accordance with § 724 sentence 2 BGB.

2) Insolvency

If a GbR is insolvent, it is dissolved in accordance with § 728 BGB.

3) Termination

In accordance with § 723 BGB, a partnership that has not been entered into for a fixed term can be terminated at any time by any partner. If a company is formed for a fixed term, termination before the end of the term is only possible for good cause. Such a reason is, for example, if another shareholder has breached a material obligation under the partnership agreement intentionally or due to gross negligence or if the fulfillment of such an obligation becomes impossible.

Section 726 also applies here, which states that if a company has achieved its agreed purpose or its achievement has become impossible, the company ends.

4) Death

Another reason for the termination of the company is the death of a partner in accordance with § 727 BGB. However, this reason is often excluded by clauses in the articles of association. For example, it can be agreed that a GbR continues to exist even after the death of a partner. In addition, the claims of the deceased against the company and the inheritance of these claims must be regulated.

Dissolution

Once the GbR has been dissolved, the company is dissolved in accordance with Section 730 (1) BGB. In the course of this, the GbR is withdrawn from legal transactions. All partners receive back the assets they have given to the company, the creditors are satisfied and the partners are paid out the company assets. Unless the company's obligations exceed its assets, in which case the partners are obliged to make up the difference.

Advantages and disadvantages of the GbR

As already mentioned, the civil law partnership, or GbR for short, is one of the simplest forms of company. As a result, one of its greatest advantages is that it is inexpensive and straightforward to set up. Only at least two people who pursue a common purpose need to join together to form a GbR; no start-up capital is required. However, a GbR can only be founded with two or more people, so one disadvantage of the GbR is that it cannot be founded alone. Another major disadvantage is the personal joint and several liability. Due to the fact that the GbR is a partnership, liability is not limited and all partners are also liable with their private assets, unlike the GmbH. Further advantages are the simple bookkeeping obligation with the revenue surplus account up to a turnover of € 600,000 and a profit of € 60,000. This simplifies the process enormously. In addition, the GbR has the option of making use of the "small business regulation" if its turnover does not exceed €22,000 in the previous year and €50,000 in the current calendar year. In this case, the GbR is exempt from VAT. The GbR therefore has many advantages for small businesses with low turnover and profits, but the unlimited liability and inflexible transfer of company shares is a disadvantage. In addition, the GbR is not entered in the commercial register and therefore does not correspond to a commercial business, so it will be very difficult to obtain loans or other financial investments, as the expected profits of the GbR are also very low. If the GbR exceeds a turnover of €250,000, the company requires a commercially organized business operation in terms of type and scope and automatically becomes an OHG and must therefore be entered in the commercial register. Generally speaking, the small formation formats, quick formation and low formation costs are very advantageous, but as a start-up founder you should think carefully about whether a GbR is an option for you. As soon as you need investment, you should convert your GbR into a GmbH, as investors will not invest in a GbR. Such a conversion is expensive and time-consuming, so you should consider right from the start whether the legal form of a GmbH or mini-GmbH is more suitable for you. You can read more about the legal forms here:

Advantages of a GbR

• Simple formation, simply through the merger of two or more people who pursue a common purpose
• No notarization for the formation, no additional costs for a lawyer or notary
• No start-up capital required
• No accounting obligation, just a revenue-surplus statement
• less flexibility, as all business decisions are made jointly

Disadvantages of a GbR

• Unlimited liability of the partners
• Change of shareholders involves a great deal of effort
• Less flexibility, as all business decisions are made jointly
• Turnover limit of € 250,000 and profit limit of € 25,000. If the turnover or profits are higher, the GbR automatically becomes an OHG and must be entered in the commercial register.

GbR and other legal forms in comparison

Converting a GbR into an OHG

The conversion of a GbR into an OHG happens automatically, so to speak. As soon as the GbR, which was previously not commercially active, starts operating a commercial business in accordance with Section 1 (2) HGB, it becomes an OHG. This happens, for example, from an annual turnover of € 250,000, more than 5 employees and business assets of more than € 120,000. If these criteria are met, the company must be organized in a commercial manner in terms of type and scope. It is therefore now a commercial enterprise and the legal form of the GbR automatically becomes an OHG. At this point, there is also an obligation to be entered in the commercial register in accordance with § 106 Para. 1 HGB. The conversion of a GbR into a GmbH is somewhat more complicated.

Converting a GbR into a GmbH

In order to convert a GbR into a GmbH in the correct form, it is important to comply with the "Transformation Tax Act". As the founder of the GmbH, you must inform your notary that you are already operating as a GbR. The notary will then draw up and notarize a contribution agreement. As a result, all shares of the GbR are transferred to the GmbH and the GmbH thus receives the material and non-material assets of the GbR. This step is particularly important, because anyone who omits it may have to pay immense back taxes. Here is a brief example.

Assume 3 founders have a business idea and start to develop it and think about a business plan. After the initial idea-finding phase, they register their GmbH and look for an investor. Immediately after the GmbH is founded, the said investor invests a sum of € 200,000 and receives 20 % of the company shares. So far, all is well. But after a few years, the tax office will carry out an initial company audit and come across the investment sum. The contribution of €200,000 for 20% of the company shares then indicates a company valuation of €1 million, the value the company must have had before the GmbH was founded. At this point, it is important to know that as soon as several people develop an idea together and pursue a common purpose, a GbR already exists. However, if this is not mentioned and taken into account when the GmbH is founded, the founders will still have to pay tax years later. This is because the founders should have formally transferred the market value of the GbR (i.e. the estimated 1 million) to the GmbH, but if they failed to do so, the tax office assumes that they pocketed the money themselves. Even if this is not the case, this can result in high back tax payments.

This is why it is particularly important to contribute the GbR and its assets as a contribution when founding a GmbH.

❓FAQ-GbR

How much turnover can you make with a small business?

As a small business owner who wishes to make use of the so-called small business regulation, turnover for the previous year may not exceed €22,000. Turnover for the current calendar year must not exceed €50,000. As the turnover limit relates to an entire calendar year, founders who start their self-employment in a current year must extrapolate the expected turnover over 12 months.

If the "small business regulation" is then applied, the company is exempt from VAT at 19% and does not have to charge VAT on its goods or services. The advantage is, of course, that the products are therefore cheaper and the expense of paying VAT to the tax office is eliminated. However, input tax deductions can then no longer be made.

What are the advantages of a GbR?

The GbR is one of the simplest legal forms and is a type of partnership. It is inexpensive, simple and can even be formed informally. However, a written contract is advisable. This legal form is suitable for small companies that pursue a specific business purpose and whose turnover does not exceed €250,000. However, start-ups that intend to scale up quickly and obtain outside capital should rather refrain from this and consider founding a GmbH or UG.

What is a GbR?

A GbR is a partnership under civil law. This is formed when two or more people join together to pursue a common business purpose. A GbR does not require a written partnership agreement, although this is advisable. Within the legal forms, the GbR is a partnership, which means that the partners have personal joint and several liability. In addition, all partners in a GbR are jointly responsible for management and decisions, unless otherwise agreed.

How to calculate the amount of trade tax

The amount of trade tax for a GbR is calculated as follows:

Profit

+ additions (financing expenses, interest)

-Reductions (1.2% of the assessed value of a property owned by the GbR)

= trade income

-exempt amount

=Reduced trade income * tax base * assessment rate = trade tax

❗It is also good to know:

Trade tax can be credited against the shareholders' income tax, i.e. deducted from the income tax liability. In this case, the credit amounts to 3.8 times the trade tax assessment amount, up to a maximum of the trade tax actually payable.

Who is liable for the GbR?

As a GbR is a partnership, the liability of the company is not limited. All partners are therefore liable for the liabilities of the GbR with both the company assets and their private assets.

How is a GbR taxed?

The taxation of a GbR is divided into two parts. The first is trade tax, which is calculated by multiplying the trade income by the tax base and the assessment rate. The trade income is calculated from the profit of the GbR plus additions (e.g. financing expenses, interest) less deductions (e.g. 1.2% of the assessed value of a property owned by the GbR). The respective tax-free amount (for the GbR: €24,500) is then deducted from the trade income and the total trade income is multiplied by the tax rate of 3.5% and the municipal assessment rate (400% on average).

The second type of tax that must be paid for the GbR is income tax. This comes into play when the partners of the GbR distribute their profits to each other. The individual income tax rate of the partners is used here, which is made up of income tax, the solidarity surcharge and church tax. Compared to corporations, this can result in a higher tax burden, as individual income tax is often higher than corporation and trade tax.

What legal form do I have as a small business owner?

The term small business comes from the German Value Added Tax Act and refers to those entrepreneurs whose turnover in the previous year did not exceed €22,000 and will not exceed €50,000 in the current calendar year. As a result, they are exempt from VAT. However, the term "small business owner" does not refer to a specific legal form. Small businesses can be freelancers, sole traders, GbRs, UGs or GmbHs, depending solely on turnover. Be careful not to confuse this with the term small business. A small business is a company that does not require a commercially organized business operation and therefore does not have to be entered in the commercial register, nor does it have to comply with the obligations and laws of the commercial register, such as the obligation to keep accounts. Examples of small businesses include kiosks or ice cream parlors.