The general partnership (OHG) is a special form of civil law partnership (GbR) in Germany focused on commercial businesses that are run by at least two partners. Profit distribution is one of the key issues for this legal formation. In 2024, the German government introduced a new regulation that fundamentally altered how OHGs distribute profits and losses.

This article discusses the legal regulations for distributing profits in an OHG and options for individual agreements. We also provide information on taxes and examples of profit distribution calculations.

What’s in this article?

• What is an OHG?
  
• What are the legal regulations on profit distribution in an OHG?
  
• How can you make individual arrangements for profit distribution in an OHG?
  
• Profit distribution in an OHG: Practical examples
  
• What are the legal regulations on distributing losses in an OHG?
  
• Taxes on profit distribution in an OHG
  
• How Stripe Revenue Recognition can help
  

What is an OHG?

Section 105 of the German Commercial Code (HGB) defines an OHG as a partnership formed for the purpose of operating a commercial business under a joint business name. All partners are personally and completely responsible for the company’s liabilities.

As a partnership, an OHG must be established by at least two individuals or legal entities. This legal formation can be beneficial for entrepreneurs who want to partner up, make decisions together, and share responsibility. Its flexibility makes it particularly favorable for small and medium-sized enterprises (SMEs). An OHG can quickly adapt to factors such as management and profit distribution.

The primary prerequisite for forming an OHG is that at least two partners operate a commercial business. Freelance professionals and small businesses cannot set up an OHG because they are not considered businesses, according to the HGB. One of the key benefits of an OHG is that no minimum capital is required when establishing it. This makes it particularly attractive for entrepreneurs with limited financial resources.

What are the legal regulations on profit distribution in an OHG?

The legal regulations on OHG profit distribution appear in Section 120.1 of the HGB and Section 709.3 of the German Civil Code (BGB). The HGB stipulates that the partners appointed as managing directors are obligated to draw up an annual financial statement (Section 242.3). They must also calculate each partner’s individual share in the profits or losses for the financial year.

According to the BGB, the ownership structure determines profit or loss distribution. If no ownership structure has been established, the share in profit is determined in relation to the contributions made. In other words, it is determined by how much the partners have invested in the partnership in terms of money or resources. If the value of the contributions have also not been agreed upon, then all partners shall have an equal vote and share equally in the profits and losses, regardless of the value of their contributions.

This regulation has been in effect since January 2024 and was introduced as part of a legislative amendment. The previous regulation was the old version of Section 121 of the HGB. It stipulated that shareholders would initially receive a share of the profits amounting to 4% of their capital share in the annual profits, taking into account their contributions and withdrawals during the financial year. The remaining profits and any losses were then divided equally among the partners.

How can you make individual arrangements for profit distribution in an OHG?

While the HGB does provide general provisions for profit and loss distribution in an OHG, partners should also reach individual agreements. They can do so with a partnership agreement that considers factors such as the partners’ experiences, roles, and capital and service contributions.

There are many ways to split profits in an OHG. One common method is for partners to distribute the profits based on their contributions. For example, the partnership agreement can establish that profits are distributed proportionately to the financing or resources put into the partnership. This sort of provision is a particularly good idea when partners are contributing different amounts of capital and want profits to be distributed fairly based on these contributions.

Partners can also take other factors into account, such as an individual’s workload or specialist expertise. With a variable sharing model, profit distribution is based on the amount of services rendered. For example, a partner who has invested more time in the business could receive a higher share of the profits than a passive partner who only contributes capital.

Profit distribution in an OHG: Practical examples

To illustrate the flexibility of an OHG and different profit distribution methods, we have provided two example scenarios with calculations:

Example 1: Profit distribution by ownership structure in accordance with statutory regulations

Two partners set up an OHG. They agree to distribute profits according to Section 709.3 of the BGB. This means they will distribute profits based on the OHG’s ownership structure, which is defined by their capital contributions. Partner A has put €60,000 into the partnership, while Partner B has a €40,000 stake. Profits are split proportionately to the partners’ contributions.

Therefore, assuming an annual profit of €100,000, Partner A would take a 60% share, and Partner B would take a 40% share. In concrete financial terms, Partner A receives €60,000, and Partner B receives €40,000.

Example 2: Profit distribution according to the provisions of a partnership agreement

In the second example, the OHG is run by three partners. Here, however, profits are split according to the partners’ contributions and individual arrangements set out in a partnership agreement. The partners have established that 40% of profit will be split according to their capital contributions, and 60% of profit will be split according to their labor.

Partner A puts in €50,000 and works for the partnership full-time. Partner B invests €40,000 and also works full-time. Partner C contributes €10,000 and works for the partnership only part-time. The OHG’s profits for the year are €150,000:

• Equity stake: 40% of profits (i.e., €60,000) are split according to the partners’ capital contributions.

  • Partner A (€50,000): 50% of €60,000 = €30,000
    
  • Partner B (€40,000): 40% of €60,000 = €24,000
    
  • Partner C (€10,000): 10% of €60,000 = €6,000
    

• Labor: 60% of profits (i.e., €90,000) are split according to the partners’ labor.

  • Partners A and B work full-time, and Partner C works part-time. Therefore, Partners A and B each receive 40% of the labor portion, and Partner C receives 20%.
    
  • Partner A (full-time): 40% of €90,000 = €36,000
    
  • Partner B (full-time): 40% of €90,000 = €36,000
    
  • Partner C (part-time): 20% of €90,000 = €18,000
    

• Total share in profits:

  • Partner A: Share in capital (€30,000) + labor (€36,000) = €66,000
    
  • Partner B: Share in capital (€24,000) + labor (€36,000) = €60,000
    
  • Partner C: Share in capital (€6,000) + labor (€18,000) = €24,000
    

What are the legal regulations on distributing losses in an OHG?

The rules for losses in an OHG are essentially the same as for profits. All partners have to bear losses jointly.

Unless otherwise stipulated in a partnership agreement, losses are split the same way as profits. This means partners distribute losses according to the ownership structure, amount of contributions, or number of partners.

It’s important to make clear provisions in the partnership agreement for sharing losses. If partners are contributing labor and know-how in addition to capital, it is also important to agree on an individual loss-sharing model. For example, partners can agree to split losses according to the amount of work performed or responsibility assumed.

Provisions in the partnership agreement on sharing losses require careful attention because partners’ liability in an OHG is not limited, and their personal assets are at risk. Consequently, a high share in losses can put a significant financial burden on individuals.

Taxes on profit distribution in an OHG

As a partnership, an OHG does not pay corporate income tax. Instead, the partners are taxed individually. This means all partners must report their share in the profits on their personal income tax return and pay tax individually. This is a key difference between an OHG and a limited liability company (GmbH), which is liable for both corporate and personal income tax.

At a business level, an OHG also has to pay trade tax. However, it can offset some of this against the partners’ income tax. Trade tax is determined according to the partnership’s commercial income and local tax rate.

It is also important that the partners in an OHG are regarded as joint venturers (Mitunternehmer). Their income is allocated based on their stake in the partnership (Section 15 of the German Income Tax Act [EStG]). Regarding personal income tax, the profits of an OHG are taxed according to the applicable tax rate.

The partners can establish individual provisions on profit distribution in the partnership agreement to accommodate their tax needs. However, an unequal profit distribution that is not sufficiently based on ownership ratios could result in corrections by the tax office.

How Stripe Revenue Recognition can help

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