A Gesellschaft bürgerlichen Rechts (civil law partnership), or GbR for short, is a popular German corporate structure both in the business world as well as in the private sphere. However, you should always carefully consider whether the features of a GbR fit your particular project, or whether another legal formation may be more suitable. An assessment should be carried out on a case-by-case basis. This article will provide valuable advice to help you make a decision. In particular, we will explore the advantages and disadvantages of a GbR.

What's in this article?

• What are the advantages of a GbR?
  
• What are the disadvantages of a GbR?
  
• At a glance: What are the advantages and disadvantages of a GbR?
  

What are the advantages of a GbR?

A Gesellschaft bürgerlichen Rechts (civil law partnership), or GbR for short, is the most general and simple legal formation for a partnership under German law. It is also known as a BGB business, as its legal basis is regulated in paragraphs 705 to 740 of the German Civil Code (BGB). The stipulated requirements result in a GbR having several specific features that could be considered advantageous for partners.

Simple to set up

Compared with other legal formations, founding a GbR is quick and straightforward. A GbR is a business structure that sees two or more people joining forces to bring a project to life and pursue common business interests. Legally, a GbR is considered to have been founded solely on the basis of a joint decision by the partners.

Anyone carrying out commercial activities as a GbR must register the business with the local trade office. This will ensure that the information is made available to the local tax office, the Chambers of Commerce and Industry, and the employers' liability insurance association. However, if the GbR is a consortium of freelancers, it is not required to register with the trade office. Freelancers must contact the tax office independently when setting up a GbR. See our article for more detailed information about the different types of self-employment in Germany.

You are not required to register the business in the commercial register. However, you can choose to register voluntarily if you are dealing with a commercial business operation.

Furthermore, having a memorandum of association is not a mandatory requirement when founding the GbR. Despite this, we recommend producing a written agreement, as having a GbR contract can help to regulate key elements, such as the purpose of the business, the allocation of responsibilities, decision-making, profit distribution or liability.

Given the above, it is possible to found a GbR informally with minimal administrative effort and very manageable costs. As a GbR can be used for almost all conceivable purposes, notwithstanding a handful of exceptions, it is ideal for a consortium of small business operators or freelance professionals, as well as group practices or joint ventures.

No minimum level of share capital

Founding a GbR does not require a minimum level of share capital as part of the business's assets. This makes it a particularly compelling option for business owners who only have limited financial resources. For comparison, the minimum share capital of a GmbH is €25,000. For an AG, it is €50,000. These relatively high values can be attributed to the fact that the liabilities of GmbHs and AGs to third parties are limited to the business's assets. Therefore, the level of share capital serves to protect the business's creditors.

Low administrative effort

A GbR is exempt from many of the administrative obligations that apply to other types of business. As long as profit does not exceed €60,000 per annum and turnover does not exceed €600,000 per annum, there is no requirement for a GbR to prepare or publish a balance sheet or an annual financial statement. The only requirement is to submit an income statement (Einnahmen-Überschuss-Rechnung, or EÜR) – see Section 4, Paragraph 3 of the EStG. If the GbR generates losses, the partners can offset these relatively easily by using their own capital.

Tax benefits

Being a partnership, the GbR does not have its own legal personality. This means it is not subject to income or corporation tax. Instead of submitting its own tax return, a GbR needs to submit a separate profit statement to the relevant tax office. In addition to the business's profit or loss, this statement outlines the shares allocated to the individual partners. The partners will then declare their share of the profit in their individual tax returns. As a consequence, the GbR's profits are not taxed at a business level, but at a partner level. If the partners are natural persons, their profits are subject to income tax. If they are legal entities, corporation tax applies. Taxation applies whether the profits remain in the GbR or are withdrawn.

For value-added tax (VAT) purposes, a GbR is a separate taxable entity – provided that it is considered a business under the terms of the VAT Act (UStG). It therefore has to pay VAT of 19% or 7% for goods and services provided for a fee in Germany. However, if turnover is low, the GbR may be exempt from VAT under the rules for small-scale entrepreneurs. This rule applies when a business's annual turnover for the previous year does not exceed €22,000 and is not expected to exceed €50,000 in the current year. These prerequisites are laid out in Section 19 of the VAT Act. For more information, see our article on GbR taxes.

Significant right to co-determination

When it comes to the GbR's strategic direction and activities, the partners have a significant right to co-determination. The management of a GbR is shared by its partners. Accordingly, the consent of all partners is required for all resolutions and business transactions.

In the GbR contract, the partners can outline their agreement to transfer the management of the business to one individual or several individuals. This process can also be used to bestow individual powers. Furthermore, resolutions can be adjusted by making corresponding annotations in the memorandum of association. For example, the partners could opt to make decisions via majority vote instead of by unanimous decision.

What are the disadvantages of a GbR?

The several conveniences and special rights that come with a GbR are offset by the presence of obligations that may have a detrimental impact on the partners.

Ineligibility of sole traders

Founding a GbR requires at least two people, making it an unsuitable business type for sole traders.

Restrictions on choosing the GbR's name

As the GbR is not entered in the commercial register, it is not a business in the legal sense. Therefore, a GbR does not have a formal trading name. Instead, it has a simple business name. As the business name must be unique, stricter requirements apply when choosing it. First, the business name must contain at least the surnames of the partners. The first names are optional. Then, the business name must contain the legal formation "GbR" at the end. There are also clear guidelines outlining the type of content that is not permitted in the name. These include:

• Additional location information or regional information
  
• References to the size, importance or performance of the GbR
  
• The terms "partner" and "partnership"
  
• References to the business's succession, such as "formerly" or "& sons"
  
• Academic titles without direct reference to the partners
  
• Business names comprised solely of abbreviations or a combination of letters and numbers
  
• Names that are likely to be confused with well-known and protected brand names
  
• Any additions that imply a limitation of liability, such as "mbH" or "Limited"
  

Find out more information on naming your business.

Personal liability of the partners

As the GbR is a partnership and not a legal entity, the share capital may not be used to cover liability. As a result, all partners are personally and fully liable – this liability includes their private assets (Section 721 of the German Civil Code). There is no limitation of liability to cover only the business's assets. In the event of the GbR becoming insolvent, there is a risk that this could affect the partners' private lives and assets. However, you do have the option to specify individual powers within the memorandum of association. This allows partners to protect themselves against damage that may arise, for example, as a result of individual partners exceeding their powers.

According to Section 709, Paragraph 3, Sentences 1 and 2 of the German Civil Code, the share of the profit or loss attributable to each partner is based on the shareholding structure as defined in the memorandum of association. If this has not been agreed, the contributions made by each partner serve as the basis of assessment. If the contribution values have not been agreed upon, the partners hold the same voting power and receive an equal share of profits and losses. In this scenario, the question of whether the partners have rights of representation or active influence on the business is irrelevant. All partners must bear any historic liabilities – even if they only joined the GbR after the fact (Section 721a of the German Civil Code). Regardless of the shares of profit and loss, a limitation or exclusion of liability is only possible within individual contractual agreements with the respective parties to a contract.

Reduced prestige in the business community

A further potential disadvantage stems from the lack of share capital. Compared with other legal formations, a GbR will not enjoy the same level of prestige within the business community. Investors may consider a GbR to be a less reputable type of business.

Unanimous decision-making

In a GbR, decisions and resolutions can only be made unanimously – unless an alternative resolution has been formalised in the memorandum of association. This set-up can delay or prevent resolutions being passed. Furthermore, the requirement for resolutions to be unanimously agreed upon can lead to arguments and disputes between partners.

Forced conversion to an OHG

If a GbR generates over €500,000 per year, it is automatically classed as a commercial business. As a result, the GbR must be converted into a general partnership (OHG) and meet all resulting obligations. The same requirement applies, regardless of revenue, if the GbR is operated as a commercial enterprise.

At a glance: What are the advantages and disadvantages of a GbR?

In the following table, we provide a summary of the advantages and disadvantages of a GbR.

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