When choosing the legal form for a company, considerations about the amount of income tax are of primary interest to shareholders. Clients often ask us what advantages and disadvantages a GmbH in particular has compared to a GmbH & Co. KG. After all, these are for good reason two of the most common forms of company in Germany. However, it depends on the framework conditions under whose signs a company operates. Here, however, the limitation of liability plays just as much a role as the amount of the levy for business tax or the distribution of the profit. The GmbH excels especially when the reinvestment of profits is in the foreground, especially in connection with a pure real estate GmbH. The GmbH & Co. KG, on the other hand, is advantageous if you benefit from a low personal tax rate. The approach to advertising costs is also of particular importance.

The aim of our contribution is to illustrate to you with a few examples which advantages and disadvantages a GmbH has to offer compared to a GmbH & Co. KG. These explanations are intended to give you an impression of what is important when choosing the legal form between these two alternatives. However, there are also some general remarks about the forms of enterprise we have highlighted.

SEGMENT002 1.1. The nature of a GmbH

1.1.1. Essential characteristics of a GmbH

A GmbH is a pure corporation in which there is at least one shareholder. However, from a legal point of view, the GmbH is considered an independent personality. It is therefore a so-called legal person. However, since a GmbH is unable to make independent decisions, it needs one or more managing directors in order to act legally and commercially.

Another essential feature of the GmbH is already embedded in its designation. Even the abbreviation indicates that the company has only limited liability. In other forms of society, this can also be predetermined quite differently. In any case, the GmbH is limited in liability to your company assets. And this amounts, due to legal provisions, at the foundation at least EUR 25,000. The shareholders are thus spared any claims that go beyond this. Thus, a personal liability of the shareholders for the debts of the company, as is for example provided by law at the OHG, is excluded at the GmbH.

The third important criterion of a GmbH concerns the management. While in other forms of company the shareholders may be involved in the management of the company, this is regulated differently at the GmbH. This is because the shareholders determine who as managing director assumes the responsibility of managing the company. This may be one of the partners, but a third party who is not involved in the company may also assume this role.

1.1.2. Basics for taxing the profit of a GmbH

Since the GmbH appears as an independent person, it must also pay its own taxes. These are to be paid as corporate tax, including solidarity surcharge, and business tax. Whether any remaining annual profit after tax is paid out to the shareholders or remains in the company, however, depends on the resolutions of the shareholders' meeting. If the shareholders actually decide to pay out any profits, then the shareholders must tax these dividends as capital gains as part of their income tax return.

1.2. Building a GmbH & Co. KG

1.2.1. Essential characteristics of a GmbH & Co. KG

GmbH & Co. KG is a construct consisting of at least two different investments. A distinction is made between a shareholder who assumes the unlimited liability risk as a full shareholder and another whose liability risk is limited to a certain sum. The latter is therefore also referred to as a shareholder or commander. This corresponds to the construction of a classic limited partnership.

For a GmbH & Co. KG, the full owner is a legal entity, namely a GmbH. The shareholder, on the other hand, is usually a natural person, who is usually also involved in the Complementary GmbH at the same time – often even 100%. In addition, the shareholding of Komplementär-GmbH in GmbH & Co. KG may be limited to 0 %. Thus, it merely assumes the function of a fuller. In this way, a share of the Komplementär-GmbH in the profit is excluded.

Even if the GmbH is a shareholder in the GmbH & Co. KG – and even as a general partner – the GmbH & Co. KG legally constitutes a partnership. And this also requires tax implications, which are of paramount importance in the choice of legal form.

1.2.2. Basics for taxing the profit of a GmbH & Co. KG

Since GmbH & Co. KG is not an independent legal entity but a partnership, the shareholders participating in it bear the taxes associated with it. Therefore, one also speaks of a transparent tax subject, because the tax liability penetrates the partnership until it meets an actually taxable person. Both legal and natural persons as shareholders of a GmbH & Co. KG are therefore obliged to pay the taxes associated with it. This includes both the business tax and taxes on the profit of the company. Thus, all profits automatically become relevant in the income tax of the shareholders. And this must of course also be taken into account when choosing the legal form.

Determining the criteria in our examples

2.1. Parameters for our examples and their application relevance in the choice of legal form

As a first general premise for the comparison between GmbH and GmbH & Co. KG, we propose that the respective company has only one unmarried shareholder who is taxable without restriction in Germany. In the case of GmbH & Co. KG, the shareholding in the GmbH is to amount to 0 %, so that the shareholder is the only other shareholder. We would like to exclude other special features or, if necessary, briefly explain them.

2.1.1. The business tax levy

In the case of trade tax, we are primarily guided by the level of the lifting rate, which is prescribed by most larger municipalities in Germany. This is usually 400 to 500 %, so we opt for a 450% lifting rate here. Although there are also municipalities that apply the lowest lifting rate permitted by law, namely 200%, lifting rates of more than 900% can also occur. The approach we have chosen thus leads to a realistic tax burden of 15% on business tax. Nevertheless, for comparison purposes, we will also go through a calculation example that uses the lowest lifting rate to show the difference and thus the potential tax savings when a company moves to a municipality that attracts such a low lifting rate.

2.1.2. The personal tax rate of a shareholder

Another important parameter is the personal tax rate of a shareholder. Unlike the fixed tax rate for capital gains tax of 25 %, which a shareholder of a limited liability company is subject to when taxing the dividends paid, the personal tax rate of a shareholder of a partnership is variable. Since it depends on the amount of taxable income, it can be between 0% and 42%, but in some cases up to 45%. When considering the taxation of profits generated by a GmbH & Co. KG, it is obvious if a personal tax rate of 42 % is realistically assumed. However, cases in which a lower tax rate applies also want to be considered in their effects.

2.1.3. Other indicators related to profit

For the sake of simplicity, we want to assume an annual profit before tax of EUR 100,000. In addition, in the case of the GmbH shareholder, this should also mean that he does not receive managing director salaries. This gives us the possibility that only the profit of the company becomes the object of our considerations, without any distortion of the comparative results by such special references being influenced. Of course, it is an advantage if a GmbH shareholder in his function as managing director receives in addition to the paid dividends also an ongoing compensation for his services to the company. After all, unlike a partnership or a sole proprietorship, the GmbH can book these salaries as an expense. Thus, the profit of the GmbH compared to a GmbH & Co. KG is lower, which leads to a lower tax burden. However, this would also affect the comparability between the two forms of enterprise.

Furthermore, we waive all other influences that could be subject to taxation in both corporate tax and income tax. For example, we do not collect church taxes. Of course, this is not usually a practical mirror from the everyday life of a tax consultant, but it serves the comparison and thus the understanding. It is therefore perfectly legitimate to allow these simplifications. The only exception to this requirement is the aspect of advertising costs.

2.1.4. The consideration of advertising costs

In the case of a GmbH shareholder, apart from the lump sum of EUR 801 for single people and EUR 1,602 for married people, there is normally no possibility of setting advertising costs. Unlike a shareholder of a GmbH & Co. KG. Since he taxes his profits paid to him as income from business operations, he forgoes the application of the savings lump sum to compensate for advertising costs and can therefore also set them at an actual level. If there are now significant advertising costs, the possibility of claiming them in the income tax return is a considerable advantage. Therefore, we will also show how best to use it and also mention some exemplary connections in which advertising costs of a significant amount can be present. In addition, we will later show how it is also possible for a GmbH shareholder to tax-reducing his actual advertising costs instead of the savings lump sum.

3.1.1. Taxation of the GmbH & Co. KG shareholder

At a GmbH & Co. KG, the shareholder pays the taxes on the profit generated by the company. Here, too, we have to calculate with a trade tax of EUR 15,000. In the case of income tax, EUR 42,000 is also due, which results in a solidarity surcharge of a further EUR 2,310. In total, this corresponds to a tax burden of EUR 59,310. However, it should be noted that in this case the business tax is 13,3 % of the income tax, so that the tax burden is in effect only EUR 46,010. The GmbH & Co. KG shareholder is therefore available EUR 53,990 after deduction of all taxes.

3.1.2. Taxation of the GmbH shareholder

3.1.2.1. Taxation by capital gains tax

At a GmbH, the tax burden is calculated on the one hand as corporate tax and on the other hand as business tax. The corporate tax is to be calculated at 15% on the profit of the GmbH and thus amounts to EUR 15,000. In addition, there is the solidarity surcharge of 5,5 % on the tax amount, which corresponds to a further levy of EUR 825. In addition, there is the trade tax, which accounts for 15 % at a 450% rate (3.5 % x 450% = 15 %). In our example, this corresponds to a trade tax of a further EUR 15,000. The GmbH shareholder can therefore expect a profit distribution of EUR 69,175. However, this amount is also subject to a tax rate of 25 % at the time of payment of the capital gains tax and a renewed solidarity allowance of 5,5 % thereon. Taking into account a simple savings lump sum of EUR 801, we thus arrive at a net profit of EUR 50,340.36, which is due to the shareholder.

3.1.2.2. Taxation by partial income procedure

However, there is also another, different possibility for taxing a GmbH shareholder. This alternative method is also known as the part income method. However, one of two possible conditions must be met. Either the shareholder holds at least 25 % of the shares of the GmbH or he holds at least 1 % of the shares, but at the same time is responsible for the company in a management position. As a rule, this means that he as managing director directs the fortunes of the company. In addition, further details are important when using the parts income procedure, which we compile for you in a separate article.

In any case, the application of the partial income procedure means that one moves away from the flat-rate approaches of the capital gains tax. Instead, it follows a special scheme which grants taxpayers a tax exemption of 40% of profits. Thus, of the EUR 69,175 that the company pays as a dividend, only EUR 41,505 are taxable. This amount is now subject to the personal tax rate of the shareholder, in our case the 42%. In short, the shareholder’s income tax is EUR 17.432,10. In addition, of course, there is the solidarity surcharge of 5.5% on the tax, which amounts to a further EUR 958.77. This brings us provisionally to a final result of EUR 50,784.13, which the shareholder is entitled to as net profit. In this context, the word 'provisional' refers to the fact that we have waived the possibility of applying advertising costs. The partial income procedure also gives the taxpayer the option of reducing profits by 60% of the actually verifiable advertising costs.

3.2. Example 2: Effect of a low lifting rate on taxation (lifting rate 200%)

3.2.1. Taxation of the shareholder of a GmbH & Co. KG

The impact of a lower tax rate on the net income of the shareholder of a GmbH & Co. KG is insignificant. The fact that the business tax is 13,3 % of the income tax is to a large extent eliminates the burden of this tax anyway. Thus, even the use of the lowest possible lifting rate does not provide any tax advantage.

3.2.2. Taxation of the GmbH shareholder by capital gains tax

The picture looks different, of course, at the GmbH shareholder. Because the GmbH as a corporation bears the trade tax and there is, in contrast to the income tax in the case of the corporation tax, no possibility to offset the paid trade tax, the amount of the levy is quite important. Therefore, we want to test this with a further exemplary calculation of the tax burden and the net dividend of the shareholder.

The 200% levy results in a business tax of 7% of the annual profit (3.5% x 200% = 7%). Therefore, only EUR 7,000 in trade taxes are incurred, so that the GmbH shareholder can expect a profit distribution of EUR 77,175. Of course, he has to pay capital gains tax after deduction of the savings lump sum. This amounts to EUR 19,093.50. In addition, however, there is the solidarity surcharge of 5.5% or EUR 1,050.14. Thus, its net income is EUR 56,230,36. And this is, after all, about EUR 6,000 cheaper than if the company had its seat in a municipality with a 450% lifting rate.

3.2.3. Taxation of the GmbH shareholder using the partial income procedure

The same calculation gives the following net result for the GmbH shareholder in the partial income procedure: The EUR 77,175 that he receives as a profit distribution from his company is 40 % tax-free. Therefore, the personal tax rate of 42 % is applied to the remaining EUR 46,305. This leads to an income tax of EUR 19.448.10 and a solidarity surcharge of EUR 1.069.65, so that an amount of EUR 56.657.25 is calculated as the net profit of the GmbH shareholder. On the one hand, this result is also more favourable than if a higher tax rate were applied, and on the other hand, it is also about as high as in the case of taxation by capital gains tax.

3.3 Tax impact of a low personal tax rate on the choice of legal form

From the previous examples, it can be seen that the influence of a low personal tax rate of less than 42% both for the shareholder of a GmbH & Co. KG and for the application of the partial income procedure is of great tax importance. On the other hand, he has no influence on the result of the GmbH shareholder if he taxes his taxes by capital gains tax, because the personal tax rate is without relevance in this variant. Since the personal tax rate can even be reduced to 0 % under favourable circumstances, there is even the possibility that the taxpayer does not have to pay private taxes. However, one must nevertheless distinguish between the shareholder of a GmbH & Co. KG and a GmbH shareholder who uses the parts income method. Because the GmbH shareholder in this case receives a profit distribution, which is the result of a profit already burdened by the GmbH by levies (corporation tax, solidarity surcharge and business tax).

3.4 Tax influence of the recognition of actual advertising costs in the part income process

Of course, the influence of taxable advertising costs on the net result of the GmbH shareholder depends primarily on their actual amount. However, the mere fact that the Income Tax Act allows for the recognition of 60 % of these advertising costs in the partial income procedure is a clear advantage for the capital gains tax. The prerequisite is, of course, that this 60% is above the savings lump sum of EUR 801, which is the case from a level of advertising costs of EUR 1,335.

But what expenses can a GmbH shareholder count as advertising costs in connection with his company? Great relevance is attached to any financing costs incurred by the shareholder in order, for example, to acquire or establish the GmbH. And this can already amount to a significant amount, which you have to pay initially as an expense, but can translate into the tax as a deduction into the positive opposite. Furthermore, the shareholder may also incur expenses at the annual shareholders’ meeting as advertising costs. In addition, as a third example, the fees that the shareholder spends on tax advice and support by a tax consultant who is preferably experienced in corporate tax law should also be mentioned.

4th quintessence on the choice of legal form

4.1. The advantages of the GmbH

4.1.1. Restoration of profits and use of loss carry-forwards

At the GmbH, the advantages lie in the possibility of saving profits. So if the shareholders decide to leave an annual profit in the GmbH instead of distributing it, this is initially without tax consequences for the shareholders. Only when a dividend is paid does this lead to taxation.

On the other hand, a profit carried forward in the company can be used for reinvestment. Conversely, any loss carry forward can be saved for offsetting against a subsequent profit. This can also give the GmbH a certain financial flexibility, which can hardly be implemented in this form at a partnership. But this has the price that the shareholders refrain from the regular distribution of dividends. However, you can compensate for this by drawing a salary as a managing director. The positive side effect is that the managing directors’ salaries even help to reduce the GmbH’s tax profit. If the financial independence of a company is to be the priority, then the GmbH is to be preferred when choosing the legal form.

4.1.2. Parts income procedure as an option to reduce the GmbH shareholder’s taxes

However, if the GmbH shareholders can expect considerable advertising costs and there is the possibility of using the parts income method, then a profit distribution may also be advantageous. This is especially true when the personal tax rate of the shareholders is lower than the top tax rate of 42 %. But to determine this, detailed calculations are required, which you should entrust to an experienced tax consultant.

4.2. The advantages of GmbH & Co. KG

First we want to solve a little puzzle. One may wonder why the net income of a GmbH shareholder and a shareholder of a partnership is so strikingly the same when applying the capital gains tax or the top tax rate. In fact, this is due to the will of the legislator, who thus wanted to ensure that the shareholders, regardless of the choice of legal form, are burdened as far as possible with a comparable level of taxation. This happens exactly when the personal tax rate is 42%.

However, if the personal tax rate is below this value, the shareholder of a GmbH & Co. KG benefits from his choice of legal form. This also applies if he can reduce his income from business with considerable advertising costs. If the taxation of profits at the shareholder level is to be kept as low as possible, it is advisable to take a closer look at GmbH & Co. KG when choosing the legal form.