GmbH & Co. KG is a limited partnership in which the general manager is a legal entity instead of a natural person, namely a GmbH. Thus, GmbH & Co. KG as a form of company is a partnership in which, however, a limited liability company assumes the role of the full owner. What seems paradoxical here at first, however, implies a whole series of advantages, especially in comparison with a GmbH. Thus, with a profit of about EUR 50,000, one pays less income tax as a shareholder than a GmbH shareholder. In addition, there is the possibility of commercial development in connection with the rental of real estate, so that no business tax arises. In addition, the transfer of real estate, for example between the limited partner and the GmbH & Co. KG, is possible without a real estate transfer tax.

Individual companies convert into GmbH or GmbH & Co. KG?

1. The essence of GmbH & Co. KG

1.1. Is the GmbH & Co. KG a chimera from GmbH and KG?

In order to delve into the essence of GmbH & Co. KG, we first want to define what it is. Sure, one may say, we have a form of society here. More specifically, it is a limited partnership, where this abbreviation stands for limited partnership. And anyone who looks into the Commercial Code (HGB) knows that this is a partnership.

However, the matter is a little more complex. Because a partnership is the GmbH & Co. KG basically only because certain characteristics support this classification, but not all. Because if you subject the name GmbH & Co. KG to a more precise – that is to say – literal analysis, then the abbreviation GmbH comes to the fore. So this is another company, a limited liability company. And now it gets exciting: a GmbH is not a partnership, but a capital company. But what connects a partnership with a corporation?

1.2 Essential characteristics of a KG

For the moment, we take a step back to take a closer look at the characteristics of a KG. A limited partnership is a company in which there are two different types of shareholders: at least one general partner and also at least one limited partner. It is the same for all partnerships that shareholders who personally bear the financial risk of the company participate in it. This means that a shareholder must use his private assets in the event of legitimate financial claims of third parties arising in connection with the company’s activities. But the KG is at least partly an exception in this respect. Because of the two variants that a KG shareholder can take, only the general partner is involved in the company as a full shareholder. The limited partner, on the other hand, bears only a limited entrepreneurial risk corresponding to the size of his financial participation. Thus, a limited partner is liable indirectly with his limited partnership contribution, while the general partner is directly involved in questions concerning the liability of the company.

1.3. Essential characteristics of a GmbH

Now that we know that GmbH & Co. KG is a limited partnership in which a GmbH is involved, we want to approach the essence of this corporation analytically. First of all, we are surprised to find that the GmbH is an independent person, namely a legal person (as are all corporations). Unlike a natural person who can make decisions with his own will, a legal person needs a representative to do this for him. Of course, this representative is then also a natural person; It's the manager.

Another highlight of the GmbH already tells us its name: it is a company with limited liability (also a feature of all corporations). Thus, in the event of liability to third parties, only the assets of the company are available to cover the claim. Accordingly, the private assets of the GmbH shareholders remain unaffected in these cases. And this is an important difference to the partnership, especially with regard to the general partner of a limited partnership.

As we will see in a moment, this is the decisive point in defining Konstrukt GmbH & Co. KG precisely.

1.4 Composition of GmbH & Co. KG from GmbH and KG

At GmbH & Co. KG, the GmbH is the general partner, while other shareholders are involved as limited partners. Thus we have with the GmbH a full-fledged, who himself but only limited liabilities. What may sound a little absurd at first is quite logical. In fact, the reference to the term “limited liability” exists only on the own shareholders of the GmbH, but in no case on the obligation to be liable for the own liabilities. As a legal person, the GmbH is liable with all its assets. And this is also the case when the GmbH joins a KG as a general partner.

As we have already revealed, GmbH & Co. KG is a partnership with a GmbH as general partner and other shareholders as limited partners. As a rule, the GmbH is then also the only general partner in the GmbH & Co. KG. But how exactly does the foundation of a GmbH & Co. KG actually take place? So now we look at how to start a GmbH & Co. KG, where we recreate this step by step with an example.

2.1. Step 1: Establishment of the future Complementary GmbH

In order to found a GmbH & Co. KG, you first have to found a GmbH. This is also the thinking of our fictional client Naoto Norigumi from Nuremberg, after whom our tax consultants advised him with detailed information. It should be noted that he wants to found his GmbH as the sole shareholder. In doing so, he integrates in the articles of association a passage customary in such cases, which allows the managing director to do business between the GmbH and himself (exemption from the prohibition of self-contracting according to § 181 BGB). In addition, this exemption must also be published in the commercial register. Of course, he appoints himself as Managing Director of the NNN GmbH he has now founded.

2.2. Step 2: Establishment of GmbH & Co. KG

Now he acts as Managing Director of his NNN GmbH in exactly this sense: He agrees between NNN GmbH, which he represents as Managing Director, and himself as a private person the establishment of a GmbH & Co. KG. In doing so, he envisages NNN GmbH joining the KG as a general partner and himself as a limited partner, which he intends to name Nürnberg Nippon Lebkuchen GmbH & Co. KG. Because with a beautiful lithography of the Nuremberg Saint Lorenzkirche on his wooden crates, he hopes to achieve rushing sales of this Nuremberg specialty in Asia, but especially in Japan.

2.3. More details about our example

In order to use the example in the analysis of the corporate and tax advantages of GmbH & Co. KG, we reveal some details from the social contract of Nürnberg Nippon Lebkuchen GmbH & Co. KG. First of all, it is determined that the voting relationships in the limited partnership correspond to the participation relationships. The following scheme is given: NNN GmbH receives 0% and Mr Nori 100% of the voting rights. In fact, this is quite possible if, as in the present case, only one natural person is involved in both companies. What tax consequences this division entails, we explain, after we take a look at the aspects of company law in the next chapter.

Furthermore, Mr. Nori paid the legally required minimum share capital of EUR 25,000 into his company when NNN GmbH was founded. On the other hand, his shareholding in Nürnberg Nippon Lebkuchen GmbH & Co. KG amounts to EUR 100,000.

In terms of company law, the question of liability dominates the general interest. A limited partnership is a company consisting of at least one general partner and one limited partner. As already explained above, NNN GmbH assumes the role of full owner at GmbH & Co. KG, while Mr. Nori has only limited liability as a shareholder. According to the information provided above, Mr Nori’s indirect liability as a limited partner is therefore EUR 100,000. At the same time, Mr. Nori is also liable indirectly through his participation in NNN GmbH. So a potential debtor of Nürnberg Nippon Lebkuchen GmbH & Co. KG can expect a maximum liability of EUR 125,000. In addition, Mr. Nori assumes no liability, in particular from his private assets.

3.2. Voting rights at a GmbH & Co. KG

The distribution of the voting rights of the shareholders of a limited partnership is legally standardized in the HGB. The law stipulates that in principle every shareholder is entitled to one vote, regardless of whether he is a general partner or a limited partner. However, the HGB allows different regulations. However, regulations deviating from the law must be specified in the social contract. Accordingly, the distribution of voting rights can then correspond to the shareholdings of the shareholders. So look at the level of capital injections.

This is also included in the social contract of Nürnberg Nippon Lebkuchen GmbH & Co. KG. Because, remember, Mr. Nori chose to have 100% of the voting rights in the limited partnership.

3.3. Profit distribution at a GmbH & Co. KG

On the basis of statutory provisions (§ 168 HGB), shareholders of a limited partnership initially receive a profit share corresponding to 4% of the respective share of capital. In other words, a statutory interest on the limited partnership’s capital at an interest rate of 4 % applies here. However, if there is a profit that is lower than the sum of the profit shares so interest-bearing, the profit is simply divided among the shareholders. This also applies to a loss instead of a profit. However, if instead a balance of the profit remains after the interest, then under the law an even distribution of this balance takes place.

Just like the distribution of voting rights, the distribution of profits may deviate from the legal requirements if these alternative provisions are part of the articles of association. For this reason, Mr. Nori also has the opportunity to claim the profit of GmbH & Co. KG practically 100%. However, there is a certain limitation. The GmbH is at least entitled to compensation for the expenses incurred in connection with its participation in the limited partnership.

3.4. Management and representation of a GmbH & Co. KG

One of the most important questions about the GmbH & Co. KG is in connection with the management. Because the management of a KG is usually the responsibility of the general partner. In the case of a GmbH & Co. KG, the GmbH provides the managing director of the KG. Thus, this Managing Director also represents GmbH & Co. KG in external relations with third parties.

If this is basically the only activity of the GmbH, then instead of a non-self-employment that a managing director normally performs, in this case one assumes a commercial activity of the GmbH for the limited partnership. But this also has tax implications, which we will discuss in the next chapter.

In order to fully describe the commercial obligations of a GmbH & Co. KG, you have to address the individual company levels. This is because both GmbH & Co. KG and Komplementär-GmbH are subject to HGB.

4.1. Annual accounts of GmbH & Co. KG

First of all, it is important to understand that the limited partnership must prepare an annual financial statement according to the rules of the HGB (§ 242 paragraph 3 HGB). Of course, this includes the preparation of a balance sheet and a profit and loss statement. Unlike a pure partnership, however, there is an obligation for a GmbH & Co. KG to publish the balance sheet in the Bundesanzeiger.

Incidentally, the GmbH & Co. KG also determines the profit separately and uniformly, so that the tax office can assign the profit shares to the individual shareholders. Since in our example only Mr. Nori and the general partner GmbH are involved in the limited partnership and Mr. Nori receives a profit share of 100%, this is of only minor importance.

4.2. Annual accounts of the GmbH

In addition, the Komplementär-GmbH has to prepare and publish its own annual accounts. In the case of NNN GmbH, however, this matter is quite manageable because the only business activity involves holding a stake in Nürnberg Nippon Lebkuchen GmbH. It does not include any profit either, in accordance with the arrangements made by Mr Nori. Only a compensatory compensation payment and possibly a remuneration of the assumption of liability then appear in the balance sheet. The compensation includes in particular the costs for the preparation of the annual accounts and the publication of the balance sheet, to which NNN GmbH is legally obliged. After all, the associated costs are quite manageable due to the small amount of accounting transactions.

Tax treatment of a GmbH & Co. KG

On a tax level, we immediately consider the taxation of the profits of Nürnberg Nippon Lebkuchen GmbH & Co. KG. In our example, it should be EUR 64,500 in 2020.

5.1. Taxation of GmbH & Co. KG

Since GmbH & Co. KG is regarded as a partnership from a tax point of view, the transparency principle applies here. This means that instead of the limited partnership, its shareholders have to declare the taxes on the profit generated by it and, of course, have to pay them.

However, there is an exception. Because the GmbH & Co. KG bears the trade tax itself. For this we expect the trade tax levy of 467% valid for Nuremberg. In order to determine the business income, we may deduct an allowance of EUR 24.500 from the tax base (EUR 64.500); The business income is then EUR 40,000. This means that we calculate a tax measurement amount of EUR 1,400 (EUR 40,000 x 3.5% = EUR 1,400). Finally, we apply the lift rate of 467% to the measured tax amount: EUR 1,400 x 467% = EUR 6,538 business tax.

5.2 Taxation of the GmbH

As already indicated, at the level of the GmbH, there is basically only a taxation of the income that the GmbH & Co. KG pays as compensation for the expenses associated with it. This also includes taking over the costs that the GmbH pays to Mr. Nori as a managing director’s salary. Thus, all revenues are taxed in the context of the collection of corporate tax.

Normally, as a shareholder of a partnership, you can offset the trade tax paid on the profits of the company to a certain extent with the income tax. However, this only applies to shareholders who are natural persons themselves. On the other hand, a corporation which, as in the case of a GmbH & Co. KG, is involved in a partnership, cannot make a deduction.

5.3 Taxation of the natural person

And now for the taxation of the main actor, the natural person who is both GmbH shareholder and limited partner of GmbH & Co. KG. As a GmbH shareholder and its managing director, Mr. Nori is entitled in principle to both a dividend and a managing director salary. However, since NNN GmbH does not generate any profits, the dividend is correspondingly clear. However, should a dividend actually come to the distribution, the income tax on this income is usually paid with a flat-rate capital gains tax with a tax rate of 25 %. Alternatively, the beneficiary can also choose an approach within the framework of his general income tax assessment. Of course, this only makes sense if the applicable personal tax rate is less than 25%.

But in our example and in similar cases this is different. Because if the GmbH only operates the management of the GmbH & Co. KG, then this requires a purely commercial treatment of the income generated with it. This applies both to a possible dividend and to the managing director’s salary. So Mr. Nori must state this income as commercial in his income tax return. They are then generally subject to the personal tax rate.

Of course, Mr. Nori also taxes his profit directly distributed by GmbH & Co. KG as a commercial income. For this purpose, he can also deduct the trade tax paid by the limited partnership in accordance with his profit share within the framework of the statutory regulations from his income tax.