Limited partnership (KG)

The legal form of a limited partnership, or KG for short, is one of the legal forms of a partnership and consists of at least two people. One person is the so-called limited partner, the other the general partner.

Legal basis

The legal basis of the KG can be found in the commercial register in §§166 to 177a HGB in conjunction with §105 Para. 3 HGB. The two parties to the limited partnership differ primarily in terms of liability. The general partners of the company have unlimited liability, while the liability of the limited partners is limited to the company's assets.

Liability

As already mentioned, the general partner in a limited partnership has unlimited liability with both the business assets and his private assets. If a general partner leaves the company, he is still liable for the liabilities incurred up to that point for a period of 5 years after his departure. However, there is an exception to the liability of general partners if this is limited by the formation of a GmbH & Co. KG, more on this in the special forms of KG.

The second party of the KG, the limited partner, on the other hand, is only liable with his contribution to the company. Here it is particularly important to know that this limitation of liability only comes into effect upon entry in the commercial register. However, as with the general partner, this also applies for up to 5 years after the partner leaves the company for all liabilities incurred up to the time of leaving.

Share capital

As with other partnerships, no share capital is required when forming a KG. However, it is advisable to bring a certain amount of starting capital with you at the time of formation in order to cover the formation costs incurred as well as initial liabilities. In addition, the limited partner is also obliged to make a contribution to the company, although the amount is not fixed.

Formation of a KG

1) Draw up articles of association

At the beginning of the formation of a KG, the articles of association are drawn up. Although this does not require a specific form, it is still recommended that it be in writing so that there is proof of the agreements. Important points that should be recorded in the partnership agreement are

• Object and purpose of the KG
• List of partners and allocation of roles as general partner or limited partner
• Amount of the limited partners' contribution/liability amount
• Regulations on management and representation
• Participation in profit and loss
• Termination and withdrawal of partners
• Exclusion of partners
• Duration of the existence of the KG
• Transfer of company shares

2) Payment of contributions

The second step in the formation of a limited partnership is the opening of a company account and the payment of the limited partners' contributions.

3) Entry in the commercial register

The next important step is entry in the commercial register. This must be carried out by a notary and should include the following points:

• Names of the partners
• the company name
• the registered office of the company
• the company address
• the date of formation of the company
• the amount of the limited partner's contribution

It is important to note that the entry in the commercial register is declaratory, which means that the limited partnership comes into existence as soon as the articles of association are concluded and business commences, i.e. even before entry in the commercial register. Liability therefore arises even before this. Caution is required here, especially for the limited partners, as the limited partner still has unlimited and personal liability until entry in the commercial register, as stipulated in § 176 Para. 1 S. 1 HGB.

4) Registration with the trade office

The next step is to register with the trade office, which is also mandatory.

5) Registration with the tax office

In addition, the limited partnership must be registered with the responsible tax office; the questionnaire for tax registration must be completed for this purpose.

6) Registration with the IHK/HWK

Last but not least, you must register with the Chamber of Industry and Commerce or the Chamber of Crafts.

Formation costs

As with other partnerships, the costs of forming a KG are comparatively low. Only the entry in the commercial register and registration with the trade office are mandatory costs, which amount to approx. 200 €. In addition, there are of course the costs for the limited partners who contribute a certain amount to the KG, although no minimum amount is specified here.

The bodies of a limited partnership

As mentioned at the beginning, a limited partnership consists of at least one general partner and at least one limited partner. Both parties can be made up of both natural and legal persons. However, the tasks, rights and obligations of the two parties differ.

General partner

While the general partner has unlimited liability, he is also responsible for managing the company. They therefore represent the company externally and manage it. He is therefore also responsible for the balance sheet, but also receives a share of the profits.

It is important to note that the general partner is prohibited by law from competing. Accordingly, he may not pursue any activity outside the KG that is in the same line of business. This always requires the consent of the other partners. This is stipulated in § 112 Para. 1 and § 113 Para. 1 HGB. In general, the same statutory provisions apply to the management regulations within the KG as for the OHG. These are regulated in §§ 114-117, 161 Para. 2 HGB. If the KG has several general partners, each of these general partners is solely authorized to manage and represent the company. Management by third parties is out of the question for a KG.

Limited partner

The limited partner, on the other hand, makes a contribution to the KG at the beginning of the formation. The limited partner is only liable for the liabilities of the KG with this contribution, so his liability is limited. As a result, however, he is not entitled to manage the company. Furthermore, the limited partner has no right to object to the actions of the managing general partners. However, measures of the managing directors that go beyond the normal business operations of the KG are excluded from this (see § 164 sentence 1 HGB). The limited partner only has a right of control, e.g. over the annual financial statements, otherwise he is not actively involved in the management tasks of the KG. Limited partners can be both natural persons and legal entities.

Taxation

The taxation of a KG is divided into income or corporation tax, turnover tax and trade tax. The partners who are natural persons are subject to income tax, while those who are legal persons pay corporation tax.

Income tax

The partners of the KG must pay income tax on any profits they withdraw. This includes income tax as well as the solidarity surcharge and church tax.

Trade tax

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

The calculation of trade tax is then initially based on the trade income. 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 KG.

You can find a sample calculation here:

Profit

+additions

-reductions

= 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.

Turnover tax

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

Since the limited partnership is considered a commercial enterprise, it is subject to the principles of proper accounting under the German Commercial Code (HGB): Accordingly, a KG is obliged to keep double-entry accounts and prepare balance sheets. As a commercial enterprise, the KG also has a publicity obligation and must publish its annual financial statements.

Dissolution of the KG

A KG can be dissolved for various reasons, e.g:

• Dissolution by determination of the partners
• court decision
• Opening of insolvency proceedings
• Specified period of time has expired

Withdrawal of a partner

In addition to a complete dissolution of the KG, it is also possible for individual partners to leave the company:

• Death of a partner if he is a general partner; in the event of the death of a limited partner, the KG is continued with the heirs, provided no deviating provisions have been made in the partnership agreement
• Opening of insolvency proceedings
• Termination of the partner
• By resolution of the shareholders' meeting
• Occurrence of a reason for withdrawal agreed in the partnership agreement

Special forms of the KG

Advantages and disadvantages of the KG

The advantages and disadvantages of a KG are best illustrated by comparing the individual advantages and disadvantages of the two types of partners. We have drawn up such a comparison for you below.

Advantages and disadvantages for the general partner:

-personal and unlimited liability

+Decision-making authority

+Management of the company

+Increase in equity capital by limited partners (more favorable than borrowing)

Advantages and disadvantages for the limited partner

+ No active participation

+No liability with private assets

Hardly any co-determination

-Few control rights (only right to audit the annual financial statements)