The GmbH & Co. KG is a favourable choice for start-ups in Germany because of its many benefits. Businesses frequently use this hybrid legal form for asset management, while trading firms rely on it to limit shareholder liability risk. In this article, you will learn what a GmbH & Co. KG is and how it differs from a traditional GmbH. We’ll also cover how to set up a GmbH & Co. KG and outline its main pros and cons.

What’s in this article?

• What is a GmbH & Co. KG?
  
• What’s the difference between a GmbH and a GmbH & Co. KG?
  
• How do you set up a GmbH & Co. KG?
  
• What are the pros and cons of a GmbH & Co. KG?
  

What is a GmbH & Co. KG?

A limited liability company and limited partnership, abbreviated in German as GmbH & Co. KG, is a special form of limited partnership (KG). The GmbH & Co. KG combines two legal forms: the GmbH as a corporation and the KG as a partnership.

There are two types of partners in a KG. First, there are the general partners, who manage the company and are personally liable with their private assets. Then there are the limited partners, who are investors and excluded from management, being liable only up to the amount of their contribution.

Liability

The unique aspect of a GmbH & Co. KG is that a GmbH serves as the general partner in the KG. This limits liability to the GmbH’s company assets. Combining the partnership structure of a KG with the limited liability of a GmbH forms a type of limited liability partnership. The term Compagnie (Co.) signifies that a GmbH & Co. KG includes a GmbH as a legal entity and at least one other individual.

Statutory regulations

The GmbH & Co. KG legal form mainly follows the regulations that apply to a KG. There are no explicit statutory regulations for the GmbH & Co. KG form because of the principle of freedom of contract in company law, which permits modifications to legally regulated types of companies. This has led to the creation of new company types, such as the GmbH & Co. KG, that cater to the needs of the modern economy.

What’s the difference between a GmbH and a GmbH & Co. KG?

In terms of legal form, the GmbH is a corporation, while the GmbH & Co. KG is a partnership. This has tax implications, among other things.

Tax regulations

As a legal entity, the GmbH is liable for corporate income tax, among other obligations. Shareholder distributions are subject to capital gains tax. For a GmbH & Co. KG, limited partners are responsible for paying income tax on their share of the profits. Corporation tax is due only on the profit share attributed to the GmbH as general partner. Besides these tax benefits, a GmbH & Co. KG offers the significant advantage of letting profits be withdrawn privately. In contrast, you must first obtain approval for your profit distributions in a GmbH. You can find further information on this topic in our articles on the tax burden of a GmbH in Germany and reducing taxes with a GmbH in Germany.

Liability

For a GmbH, liability is limited to the contributions of the shareholders. This means shareholders are liable for up to the amount they have invested. In a GmbH & Co. KG, the GmbH, as the general partner, is fully liable with its assets. Limited partners are liable only up to the amount they have contributed.

Management

A GmbH is run by managing directors chosen by the shareholders, so those shareholders don’t have to manage the business themselves. The management’s salary is considered a business expense, even if the managing directors are shareholders. This allows for potential tax savings. In a GmbH & Co. KG, the GmbH alone handles management as the general partner. If the partners serve as managing directors, the shareholders wouldn’t consider their salary a business expense, and instead they would classify a partner’s salary as a private withdrawal.

Share capital

A GmbH requires a minimum share capital of €25,000. The business must pay half of this when the company is established. For a GmbH & Co. KG, there is no legally required minimum contribution. However, the regulation still applies to the general partner GmbH, which must have €25,000 available. So if a business needs capital, there is no difference between a GmbH and a GmbH & Co. KG.

Disclosure obligations

The GmbH is subject to strict accounting and disclosure requirements. For example, the annual financial statements must be published in the Federal Gazette (Bundesanzeiger). For a GmbH & Co. KG, the disclosure requirements are less extensive.

How do you set up a GmbH & Co. KG?

To establish a GmbH & Co. KG, you must first create a GmbH and a KG. Internally, to create a GmbH & Co. KG, the general partner and the limited partner form a partnership agreement. Externally, the GmbH & Co. KG exists when it starts business activities or is entered in the commercial register, provided this is done beforehand. Here are the key steps for establishing a GmbH & Co. KG:

• Establishing a GmbH: To form a GmbH & Co. KG, a general partner GmbH is required. This can be a newly established or existing GmbH. To form a GmbH, you need to prepare and notarise the articles of association, open a business account, pay the share capital, and register in the commercial and transparency registers as well as with the trade and tax office. The GmbH must also be registered as a member of the relevant Chamber of Commerce and Industry (IHK) or Chamber of Crafts (HWK). Learn more about incorporating a GmbH in Germany.
  
• Establishing a KG: The second step in forming a GmbH & Co. KG is to establish a limited partnership. This also requires registration in the commercial and transparency registers, and if engaging in commercial activity, registration with the trade office is required. To apply for a tax number, you need to complete a tax registration questionnaire from the tax office. You must also be a member of the IHK or the HWK. The KG’s articles of association are especially important in establishing a GmbH & Co. KG. They include key details about the internal affairs of the limited partnership and govern the relationships between all partners, including the limited partners and the general partner GmbH. The terms and conditions in the partnership agreement transform the KG into a GmbH & Co. KG. The articles of association for the GmbH and KG need to be well aligned to ensure the smooth formation and operation of the GmbH & Co. KG. The new company must include “GmbH & Co. KG” in its name.
  

Establishing a GmbH & Co. KG is more complex than forming a pure GmbH or KG because it requires creating and registering two companies. The process needs careful planning and must follow legal regulations. It’s important to get legal and tax advice to make sure all requirements are met and the company is set up correctly.

What are the pros and cons of a GmbH & Co. KG?

Establishing a GmbH & Co. KG has pros and cons. The key points are:

Pros of a GmbH & Co. KG

• Limited liability: The main benefit of a GmbH & Co. KG is that it limits liability for all shareholders. Typically, personal liability is excluded. Partners can be held personally liable only in cases of serious violations.
  
• Tax relief: The low corporate tax creates tax benefits for the GmbH & Co. KG. Assets can be transferred at a tax-neutral book value. Because the GmbH & Co. KG is a partnership, it also has a trade tax allowance of €24,500. Trade tax is payable only if profits exceed the allowance limit. To keep track of your sales tax burden at all times, explore Stripe Tax. You can automatically collect and report taxes for global payments with a single integration. It also provides access to all relevant tax documents, saving you time and effort.
  
• Flexibility in raising capital: By bringing in new limited partners, a GmbH & Co. KG can quickly and flexibly raise new equity. Changes to the articles of association don’t need to be notarised; they just need to be registered in the commercial register.
  
• Simple profit withdrawal: The shareholders of a GmbH & Co. KG can privately withdraw profits from the company. This simplifies access to profit shares compared with a GmbH, where profit distributions must first be decided.
  
• Clear separation of management and investors: No matter how many limited partners are involved, management remains solely with the general partner GmbH. This ensures a clear allocation of roles and straightforward decision-making powers.
  
• External managing directors can be appointed: The management of a GmbH & Co. KG can also be assigned to non-shareholders. These external managing directors can be a solution for succession planning to ensure the company’s continuity.
  

Cons of a GmbH & Co. KG

• Complex formation process: The GmbH & Co. KG legal form requires the separate formation of a GmbH and a KG.
  
• Formation costs: The formation costs for a GmbH & Co. KG are higher than those for other legal forms, partly because of the required commercial register entries and notarisation.
  
• Significant need for guidance: The complex structure of a GmbH & Co. KG leads to a significant need for guidance, usually involving additional financial costs.
  
• Limited partners have limited influence: In a GmbH & Co. KG, limited partners have no direct control over the management. Though this can enable quick decisions, it might also cause conflicts within the company if disagreements arise.
  
• Complex bookkeeping: A simple excess income statement is not sufficient for the bookkeeping of a GmbH & Co. KG. Instead, a GmbH & Co. KG requires double-entry bookkeeping. You must also prepare annual financial statements for the GmbH & Co. KG and the GmbH.
  
• Low creditworthiness: Many banks and credit institutions require personal liability to grant loans.
  
• Managing director’s salary is not an operating expense: Unlike a GmbH, the management salary in a GmbH & Co. KG cannot be deducted as a business expense for tax purposes.
  

Pros and cons of a GmbH & Co. KG