In the conversion of a sole proprietorship, in addition to the classic GmbH, the GmbH & Co. KG is particularly suitable. There are up to 9 advantages for the GmbH & Co. KG. This includes a whole series of advantages that play their strengths in connection with real estate. But even with the possibility of saving trade tax or the use of a favorable personal tax rate, the GmbH & Co. KG can bring its advantages. However, it also offers further advantages in terms of asset protection. In the shielding of assets against liability risks, it is even superior to the GmbH in certain cases. And to avoid a division of operations, GmbH & Co. KG is also ideally suited.

Many entrepreneurs start small. This applies even to some companies that later gain worldwide importance. Anyone who thinks about Apple or Microsoft, for example, has already found suitable examples for this statement. Of course, this also applies to entrepreneurs in Germany. For example, ALDI has evolved from a small shop. And which form of company often initially serves as a basis? Answer: the sole proprietorship. Another example of this is the former drugstore chain Schlecker.

However, there are many reasons that make other legal forms appear sooner or later more advantageous than the sole proprietorship. This is why many entrepreneurs, after a few successful years, consider whether another legal form is better suited for their company. This is where we start with our design consultancy. Because we know what benefits are feasible in certain situations and for future goals. For this reason, we dedicate this contribution to the question of what advantages one of the alternatives in question offers. More specifically, this time it is about the GmbH & Co. KG, for which even up to 9 advantages speak.

Before we go into the consideration of the 9 advantages of GmbH & Co. KG, we want to briefly explain what a GmbH & Co. KG actually is. In short, we are dealing here with a partnership, more precisely with a limited partnership (KG).

A limited partnership usually has two or more partners. At least one of these partners is liable for the business of the limited partnership with his or her private assets. Basically, like a sole proprietor. Such partners are called complementaries. At the same time, other shareholders of a limited partnership are only liable to a limited extent with their contribution. These shareholders are called limited partners. If there are claims of third parties against the limited partnership, either the limited partnership pays the claim with its operating assets or the general manager.

A GmbH & Co. KG is now a special modification of a KG. Because here a GmbH assumes the role of the full-fledged general partner. As a limited partner, usually natural persons enter the KG. Very often it is even only a limited partner, who is also the sole shareholder of Komplementär-GmbH. Thus, through the detour of founding a general partner GmbH, one can also establish a partnership in the legal form of a limited partnership as an individual. Basically, this is already one of the many advantages of a GmbH & Co. KG, because other partnerships can only be founded with at least two natural persons.

Against this background, we now want to consider the 9 advantages that GmbH & Co. KG offers over a sole proprietorship. In addition, we also compare these characteristics with the other important alternative to GmbH & Co. KG as a conversion goal for the conversion of a sole proprietorship, namely with the GmbH.

Probably the most important advantage of a GmbH & Co. KG is that of a limitation of liability. You have to look at this from the context, because a limitation of liability is also known in other legal forms, especially at the GmbH. However, these alternatives are corporations. But if you definitely prefer a partnership, then the GmbH & Co. KG is actually unrivalled with regard to the advantage of limitation of liability.

But for what reason should one be fixated on a partnership at all? The answer here is usually in the area of taxes. Partners of a partnership pay taxes on the profits of their companies at the amount of their personal tax rate. In fact, this can be with relatively moderate profits at lower tax rates than with corporations. Although companies with share capital pay a uniform 15 % corporation tax and a comparable high business tax, if the remaining profit is distributed to the shareholders, a further 25 % capital gains tax and possibly other taxes (solidarity surcharge, church tax). Consequently, only about 50 % of the company’s initial profit remains as a pure return.

In the case of the partnership, a shareholder can receive significantly more profit by applying a personal tax rate that is lower than the top tax rate (currently 42%). Although this usually also applies business tax, it can be taken into account in the calculation of income tax to a large extent, so that it is essentially negligible. With corporations, we remember, this is quite different.

A partnership can therefore be worthwhile in relation to a GmbH under certain circumstances. However, anyone who wants to establish a limitation of liability as an advantage is dependent on GmbH & Co. Kg.

We have already addressed another important advantage of GmbH & Co. KG. Because trade tax is a factor that should be taken into account when choosing to convert a sole proprietorship. If only the GmbH is actually a capital company in question, one also takes the disadvantage that the crediting of trade tax in the taxation of capital companies is excluded. Indirectly, this exclusion is also detrimental to their shareholders. Partners of a partnership, on the other hand, can save most of the business tax.

In addition, GmbH & Co. KG offers another advantage with regard to trade tax. Because the trade tax can also be waived for another reason – and completely. Here, the extended property reduction is relevant, which can be requested for the GmbH & Co. KG if the company deals with real estate management. In recent years, this has become even easier due to legislative changes.

The next advantage of a GmbH & Co. KG is also related to real estate. If such a company has the purpose of renting real estate, then it can be sold tax-free after ten years under certain conditions. A prerequisite for this, however, is that the GmbH & Co. KG is commercially decorated.

The next advantage to GmbH & Co. KG is also about real estate. In fact, the real estate transfer tax can be saved on the sale of real estate from the assets of a GmbH & Co. KG under special circumstances. If you are a shareholder of several companies of this type and are considering such a sale of real estate, then this special case is exempt from real estate transfer tax. In contrast, a comparable sale between two GmbHs would in any case incur real estate transfer tax.

Similarly, but in practice even more important is the following advantage of a GmbH & Co. KG: If a shareholder wants to transfer a property from the private assets or a possibly still existing sole proprietorship to the GmbH & Co. KG, then this transaction remains exempt before the real estate transfer tax. In comparison, this process is subject to real estate tax at a GmbH.

The following advantage is also related to real estate. Assuming you want to bring your sole proprietorship into another legal form and now consider whether you should better choose a GmbH or a GmbH & Co. KG for it, then you should also pay attention to what happens to real estate that is in the sole proprietorship's business assets. If you decide now for the GmbH & Co. KG, then you can transfer the entire company except the real estate to the new legal form. The properties then return to your private assets. From there you can rent them to your new GmbH & Co. KG.

The advantage here is that you take the properties out of the liability case of GmbH & Co. KG in this way. If the GmbH & Co. KG should one day actually drift into insolvency and creditors have to be compensated, then there is no right to these properties now in your private assets. In this way, they are protected against entrepreneurial risks.

Such a conversion of the individual company into GmbH & Co. KG thus takes place by way of the transfer. As a rule, it can be carried out in a tax-neutral manner. The property is transferred to the so-called special business assets of the shareholders. However, you can also free other assets of the sole proprietorship in this way from the liability of the new GmbH & Co. KG. For example, trademark rights or other intangible assets also become special business assets.

The previous point is also relevant in another context. Suppose you have set up an office for your sole proprietorship in your family home and work for your company from there. If you now transfer your sole proprietorship to a GmbH and overlook the fact that the office is still used for the company, then this justifies a division of operations. Although this is not a disadvantage at this time, at some point a sale in one way or another occurs. At the latest then, the Treasury will demonstrate a tax de-engagement, whereby the essential operating basis can lead to an enormous taxation.

If you want to avoid this taxation, you have to take the office out of the single-family house and transfer it to the GmbH. Or else, you convert your sole proprietorship into a GmbH & Co. KG and assign the office to your special business assets, as described in the previous section. This avoids the unnaturally acting but tax-inevitable transfer of the office.

In practice, the advantage offered by GmbH & Co. KG in the conversion itself is also of interest. Compared to transferring a sole proprietorship to a GmbH, the effort that has to be made when transferring to a GmbH & Co. KG is considerably lower.

Well, the list of advantages of a GmbH & Co. KG over a GmbH is long and in detail quite considerable. Nevertheless, one must always look at the overall picture. In fact, many of the mentioned advantages of the GmbH & Co. KG are limited to special situations that are primarily related to real estate. If this does not have any particular relevance in your specific situation, then the GmbH as an alternative gains significant weight.

In fact, the GmbH as a legal form is very popular with entrepreneurs for good reason. Because its great strength lies in the fact that it can reinvest profits and thus tax-advantaged. Although there are also opportunities for partnerships to save profits, these are hardly important in practice so far.

That is why it is always a good recommendation to seek professional advice in advance of a company conversion. The best way to do this is to use the expertise of a tax consultancy firm that, like ours, specializes in corporate tax law. Only an individual legal form comparison allows you to find a decision basis that takes all aspects into account. So directly: Benefit from our extensive experience by picking up the phone now and booking a consultation with us. Because when it comes to the future of your company, you should use the support of the best experts.