The Commercial Code (HGB) contains detailed provisions regarding the profit-sharing of shareholders of a person trading company (OHG, KG, GmbH & Co. KG). However, these legal regulations are by no means without alternatives. Rather, it is a dispositive right that intervenes if the shareholders themselves have not concluded any deviating agreements. This initial situation opens up numerous possibilities for design practice for individual shareholder profits. For the purposes of the following article, all the above-mentioned legal provisions relating to the OHG relating to § 161 para. 2 HGB can also be used for KG/GmbH & Co. KG.

Comparison of legal forms

In the video we explain the advantages & disadvantages of the GmbH and the GmbH & Co. KG and determine which is the best legal form for you.

1.Legal starting point for profit sharing

1.1. Determination of profit in the person trading company

The profit of a person trading company is determined on the basis of the balance sheet to be drawn up for the closing of a financial year. The positive change in company assets compared to the previous year’s balance sheet represents the company’s profit.

1.2 Use of profit

The basis for the use of profit is, of course, the company profit recorded on the balance sheet for the previous financial year. The use of profits must be decided unanimously by all shareholders, unless the articles of association provide for a majority vote (see § 119 HGB). The distribution of the profit decided by the shareholders is then governed by § 121 HGB. This first provides that each shareholder receives a pre-dividend in the amount of four percent of his capital participation in the company. It should be noted that the statutory provisions of the HGB are based on variable capital shares of the shareholders (§ 120 para 2 HGB). According to the statutory model, the shareholders' capital shares can thus be changed, for example through deposits, profits left standing or corresponding losses. Any change in this variable share of capital has a direct impact on the amount of the pre-dividends of each shareholder.

The company profit exceeding the pre-dividend is subsequently, according to the legal concept acc. § 121 Abs. 3 HGB, in each case equal shares among the shareholders. The profit utilisation resolution grants the co-shareholders a right of withdrawal in the amount of the profit to which they are entitled (§ 122 para 1 HGB). However, the shareholders can also agree in the articles of association a direct distribution of the profit without the need for a formal withdrawal act.

2nd design options for profit sharing

As already mentioned in the introduction of this article, all legal provisions relating to the profit-sharing of the co-shareholders are replaceable by different agreements of the shareholders in the company contract. As a result, there is scope for a wide range of design alternatives, including the contract drafts presented below.

2.1. Linking of the distribution of profits to a fixed share of capital

The most common method of profit distribution in practice is made possible by the formation of fixed capital shares of the shareholders in social contracts. The fixed capital shares modeled on the GmbH shares have the great advantage over the variable capital shares provided for by law that the shareholdings of the shareholders in the company remain unchangeable. By linking the distribution of profits to the fixed capital shares, constant profit participation of the co-shareholders can thus be guaranteed.

In this context, it is quite common and logical to refrain from the pre-dividend provided for by law and to link the entire distribution of profits to the fixed capital shares. This applies in particular to companies in which the shareholders make different amounts of deposits and the equal distribution of profits by head therefore does not appear appropriate. With regard to the capital shares, it is also conceivable to design them semi-variably and to include a cap on the capital shares by a fixed upper limit in the social contract. By means of such a clause, certain shareholding relationships can be provided as targets, while the profit distribution is always based on the respective current shareholding relationships.

A corresponding social contractual provision can guarantee individual shareholders an advance from the company profit. Although these correspond in principle in their effect to the pre-dividends provided for by law, they are in regard to Height and beneficiary shareholder freely designable. The benefit of individual shareholders does not usually violate the company fiduciary duty. In practice, such contractual clauses are applied in particular to profits for managing partners or founding partners. Prepayments on profits to individual shareholders in the form described reduce the remaining profits of the company. This is then to be distributed to the shareholders according to the relevant – legal or social contractual – regulations.

2.3. Profit sharing: Non-profit payments to shareholders

In addition to the payment of profits from the past financial year, it is generally permissible in personal trading companies to agree on non-profit-related payments to the co-shareholders. This makes sense especially in (entrepreneurial) companies, through which the co-partners provide a large part of their livelihood. In these constellations, it is usually not appropriate to draw a large profit payout in the year. Rather, the regular fixed costs require monthly remuneration of the shareholders. Contractual clauses with non-profit-making payments can be designed in various ways. Among other things, the fixed interest on liquid funds left in the company (especially so-called “cash interest”) can be considered. “standing profits” as well as monthly payments of a concretely agreed amount of money. The company is usually only entitled to a refund claim for non-profit-related payments against the shareholders if such a claim was either agreed in the articles of association or the payment was made contrary to the requirements of the articles of association.

For limited partners of a limited partnership (limited partners), meanwhile, the special feature applies that, in particular, fixed and profit-independent monthly payments which ensure that the agreed contribution in the amount of the liabilities is effectively restored by the company, revive the personal liability of the limited partner for company debts (cf. § 171 para 1 HGB). Personal liability, however, remains limited to the amount of the liability sum entered in the commercial register. The limitation of liability revives as soon as the value of the liability sum is reached by the contribution of the limited partner.

Conclusion on profit sharing

The room for manoeuvre opened up by contractual freedom enables corporate law practice to draw up the corporate contracts of OHG, KG and GmbH & Co. KG with regard to the use of profit and profit distribution as far as possible free of restrictions. In addition to the presented design options, various further profit distribution options as well as the combination of different variants are also conceivable. As a rule, a concrete factual analysis is required for each individual case in order to present the profit share of the co-shareholders in the articles of association properly. In this context, it should be noted that the profit distribution regulations of a company contract can be adjusted not only in the course of the company formation, but also subsequently individually. Our experts in corporate law design consulting are at your disposal as contact persons.