Anyone who sets up a GbR (civil law partnership) accepts they are taking on a level of risk that should not be underestimated—liabilities for financial obligations also extend to the private assets of the partners in a GbR. Therefore, it is key that you take the time to reflect, ask the right questions, and take all necessary precautions when starting your business. This article will explain which parties are liable for what in a GbR, how long the liability applies, and whether it is possible to add a limitation of liability. You will also receive tips on how you can minimize the liability risk for partners.

What’s in this article?

• Who is liable for what in a GbR?
  
• How long does liability last for a GbR and its partners?
  
• Is a limitation of liability possible?
  
• How can partners minimize their liability risk?
  
• What should a memorandum of association contain in order to minimize liability risk?
  

Who is liable for what in a GbR?

In a GbR (short for “Gesellschaft bürgerlichen Rechts” in German, or “civil law partnership” in English), all partners are personally and fully liable—this liability includes their private assets (Section 721 of the German Civil Code). According to the legislator, this is justified due to the fact that the GbR is a partnership, and not a legal entity in which the share capital may be used to cover liabilities.

If business assets exist, these can be covered under the GbR’s liabilities. However, this does not mean that the partners are exempt from being personally liable up to the value of their business’s assets. Creditors are free to decide whether to pursue these liabilities through the business or directly via the partners. Partners will still hold equal and joint liability in the GbR, even if they have no right of representation and therefore no active influence over the business. Furthermore, partners must bear all historic liabilities—even if they only joined the GbR after the fact (Section 721a of the German Civil Code).

Liability refers to all of the GbR’s corporate debts and liabilities, as well as any damages incurred by the business or third parties due to wrongful acts or poor decisions by the partners.

How long does liability last for a GbR and its partners?

Even if a GbR is dissolved or partners leave, the liability continues for five years. According to the principle of residual liability, the partners are obliged to meet the costs of historic liabilities or proportional joint costs within this period.

However, with the introduction of the Act to Modernize the Law on Partnerships (MoPeG) in January 2024, subsequent liability for partners who left the business was limited—providing this relates to a liability resulting from a claim for damages. According to Section 728b Paragraph 1 Sentence 2 of the German Civil Code, partners who have left the business are only liable if the breach of contractual or legal obligations leading to the compensation claim occurred before the partner’s departure. In this scenario, the key factor is the time at which creditors find out about the partner’s departure or when it is entered in the Company Register.

Is a limitation of liability possible?

A limitation of liability to cover only the business’s assets is not possible in a GbR. This also applies in the event a one-sided statement is made—for example, if the business adds a suffix to its name such as “GbR with limited liability.” In addition, adding a corresponding note in the GbR’s general terms and conditions does not release the partner from liability. Partners are always fully liable toward third parties, which includes their private assets.

In theory, it is possible for partners to limit liability according to their share distribution in the GbR within the memorandum of association. However, this regulation only covers the internal relationship between the partners. Third parties can still pursue their claims against all parties involved.

Limitation or exclusion of liability is only possible within individual contractual agreements with the respective parties to a contract. For example, it is possible for partners to have subordinated liability or a limitation of liability that is linked to a specified amount.

In addition, special regulations only apply to closed-end real estate funds or building owners’ associations: these may limit liability within their general terms and conditions.

How can partners minimize their liability risk?

In order to minimize their financial liability risk, partners should ask themselves a few basic questions and take all necessary precautions before founding a GbR.

• Legal formation: Anyone who rejects the idea of joint and several liability should choose a different legal formation to a GbR. For example, one potential alternative includes a Partnergesellschaft (partner company). Like the GbR, this does not require share capital. One advantage of a Partnergesellschaft is the potential limitation of liability for private assets. Other options would be an OHG (general partnership) or GmbH (limited liability company).
  
• Partner selection: A GbR requires at least two partners who, as a result of their personal and unlimited liability, must be willing to take financial responsibility for each other’s mistakes or negligence. Therefore, it is important to think carefully about the suitability of any partner before incorporating a business. Good friends do not always make good business partners.
  
• Reserves: To ensure there is protection in the event of a financial emergency, the GbR’s partners should ensure they begin building up assets and reserves from day one. These can be called upon in the event of a liability.
  
• Professional liability: A further type of financial protection comes in the form of professional liability insurance. When taken out, professional liability insurance covers professional errors and the resulting costs.
  
• Business plan: Well-considered business and financial plans provide partners with key direction in the early stages of the business, and they also act as the basis for a forward-looking business strategy, laying the foundations for the success of a GbR. They also reduce liability risk over the medium and long term.
  

What should a memorandum of association contain in order to minimize liability risk?

Although it is possible to form a GbR informally, partners shouldn’t solely rely on verbal agreements. All important basic rules and regulations about the business and the specific collaboration between partners should, ideally, be recorded in writing in a memorandum of association.

• Power of representation: In view of the unlimited personal liability, extreme care should be taken to determine which decisions may be made independently by partners with individual power of representation, and which decisions must be made jointly. The total sum that can be invested independently should also be specified.
  
• Grounds of opposition: It is recommended to define the circumstances under which the power of representation can be withdrawn, and to record this definition in the memorandum of association. The corresponding grounds of opposition should be adapted to specific individual cases.
  
• Dispute process: Conflicts or legal disputes can arise between the partners in a GbR. The memorandum of association should, therefore, outline how to proceed in such scenarios.
  
• Private withdrawals: The partners should collectively decide what amount can be withdrawn privately from the GbR per month and set this out in writing.
  
• Noncompetition clauses: In order to prevent partners from entering into competition with their own business, the legislature outlines noncompetition clauses. But unlike OHGs, there is no statutory noncompetition clause for a GbR, although it is partly derived from the concept of fiduciary duty. It is advised to include specific agreements on this within the memorandum of association. Due to the complexity of this topic, it would also be advisable to seek legal advice.
  
• Expulsion of a partner: All reasonable grounds justifying the expulsion of a partner from the GbR should be established from the outset.
  
• Change of partners: The memorandum of association should also outline the process that should be followed in the event of a change of partner or partners.
  
• Continuation clause: A continuation clause and a succession regulation can help ensure that the GbR continues to operate even following the departure or death of a partner.
  

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