Upon founding a GbR, one of the first questions from the partners is: do we need a contract? This article will help you to discover whether you need a GbR contract and what advantages a contract can have for the business and its partners. We will also outline the most important elements that you should include in a GbR contract.

What’s in this article?

• Is it mandatory to have a GbR contract?
  
• What are the advantages of a written GbR contract?
  
• What should a GbR contract include?
  

Is it mandatory to have a GbR contract?

A Gesellschaft bürgerlichen Rechts (civil law partnership), or GbR, is a business structure that has two or more people joining forces to bring a project to life and pursue common business interests. Small business operators, freelance professionals, and group practices or joint ventures can set up a GbR with limited administrative efforts, since the business is not entered into the Commercial Register and can be founded relatively informally.

Legally, a GbR is considered to have been founded purely on the basis of a joint decision by the partners. The legislature does not require a GbR contract or memorandum of association—neither verbal nor written. There is one exception, however: if the partners introduce real estate into the GbR, a contract is required (Section 311b of the German Civil Code). If no GbR contract is drawn up, the legal requirements outlined in paragraphs 705 to 740 of the Civil Code apply. However, these are general and only provide limited guidance.

What are the advantages of a written GbR contract?

Despite the fact that a memorandum of association is not strictly required to set up and run a GbR, there are good reasons to draw one up. Rather than just making a verbal agreement, it is best to record it in writing. Should disputes arise within the GbR at a later stage, having a contractual document can be useful as a basis for the discussion. If you are not able to refer to a written document, discussions will proceed solely on the basis of the partners’ subjective recollections of any agreements. One clear advantage of a GbR contract is conflict management—for example, if the GbR is dissolved, if there is a change in partners, or in the event of queries regarding the distribution of finances or powers of representation. Having a GbR contract reduces the risk of ambiguity and legal disputes. Furthermore, having clear agreements in place ensures that the business can continue to run smoothly even if exceptional situations occur in the GbR.

In addition, a GbR contract can help reduce liability risk for the individual partners. Unlike in a GmbH or similar business structures, all partners in a GbR are personally and fully liable—this liability includes their private assets (Section 721 of the German Civil Code). This 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. If the actions of one or two individuals result in financial damage, the other(s) must also bear responsibility. Therefore, you are advised to use a memorandum of association to set out specific agreements and responsibilities that shall minimize the liability risk for all parties involved. For example, you may consider a personal liability limit for individual partners.

Ideally, a GbR contract should be tailored to the specific needs and objectives of the partners. This includes setting out regulations governing the decision-making processes or the distributions of profits and losses. For example, the German Civil Code assumes that all partners have contributed equal shares and that, therefore, profits are equally distributed. Individual profit distribution must be clearly outlined in the memorandum of association. The rights, duties, and responsibilities of the partners can also be clearly structured. Therefore, having a memorandum of association can ensure greater security and clarity.

Externally, having a written GbR contract can demonstrate to potential partners, investors, and other interest groups that the business is operating in a professional manner. This can increase the GbR’s credibility and strengthen trust in the business.

What should a GbR contract include?

From a purely legal perspective, the GbR’s partners enjoy a significant level of freedom when drawing up the GbR contract. However, some particular elements are strongly recommended for inclusion:

Purpose of the business

The memorandum of association should clearly state the common purpose that the partners are pursuing through their activities (Section 705 of the German Civil Code). Ideally, the business’s purpose is clearly defined and is neither too broad nor too narrow. In any case, there should be scope to slightly expand or restrict activities in the future. Very general descriptions such as “sale of all types of products” are not recommended. Within the memorandum of association, a sentence defining the business’s purpose could read as follows:

“For the purpose of jointly running an art business for the purchase and sale of works of art, the signatories shall establish a civil law partnership (GbR) under the name: Schmidt & Müller Art Dealers GbR.”

Management

The GbR’s management is shared by its partners. Accordingly, the consent of all partners is required for all resolutions and deals. The only exception is if other agreements are stipulated within the memorandum of association. In order to facilitate quick decision-making and day-to-day operations, management of the GbR is often delegated to one person or a handful of individuals. You are advised to contractually define the scope of individual transactions and restrict these to manageable amounts. Management may then act independently up to an agreed amount, without being required to obtain the consent of the other partners. The management team can also represent the business and all partners externally. Accordingly, it is possible to have different variants within the memorandum of association:

“Management and representation of the business is carried out jointly by all partners.”

“The partners are jointly entitled to manage and represent the business. However, each partner may represent the business alone in external relations.”

“Management and representation of the business is carried by the partner Martina Müller.”

Decisions

The GbR contract should also regulate the business’s decision-making process. The German Civil Code generally requires decisions to be unanimous, which is not always practical. Therefore, the partners should carefully consider whether decisions can be made unanimously or via majority vote. Among others, the following two phrases could be included within the memorandum of association:

“The partners shall take decisions on the business’s affairs via resolutions. Each partner holds one vote. The business’s resolutions are passed unanimously.”

“The business’s resolutions are passed upon a straightforward majority of the votes cast across the business.”

A regular partners’ meeting is recommended for businesses with four or more partners. This forum allows partners to share information about the GbR’s financial situation and any upcoming decisions. Specific agreements regarding the frequency and running of the meeting, along with reasons for calling the meeting and resolutions, can be outlined within the memorandum of association.

Contributions

In general, the German Civil Code assumes that each partner has made an equal contribution to the GbR. The law does not stipulate a minimum deposit. While a capital contribution is required for a GmbH, a GbR may receive nonmonetary contributions such as contributions in-kind, contacts, or knowledge-sharing. These personal contributions from partners can and should be noted in the GbR contract, particularly if they differ significantly in scope. This is due to profit sharing. In the memorandum of association, the following phrasing could be used:

“Manuel Schmidt contributes €3,000 in cash to the GbR along with technical equipment valued at €2,500.”

“Martina Müller contributes €1,000 in cash to the GbR along with furnishing valued at €4,500.”

Profit sharing and appropriation

Assuming that the partners contribute equally to the GbR, the German Civil Code stipulates that they shall also share equally in the GbR’s profits and losses. However, if the contributions were not equal, the profit distributions should be adjusted proportionally in the memorandum of association. The following phrases could be used:

“The partners have an equal share in the business, particularly in its profits and losses.”

“The partner Manuel Schmidt holds 60% of the GbR. The partner Martina Müller holds 40%. This is particularly applicable to shares in the business’s profits and losses.”

The appropriation of profits can also be regulated in the memorandum of association. For example, partners can specify that a certain percentage of profits should be retained as reserves.

Remuneration

The German Civil Code does not stipulate any requirements regarding remuneration for a GbR’s partners. Partners are primarily compensated through their profit share. In the case of a GbR founded for an indefinite period of time, these profits are distributed once a year. In the case of a limited-term GbR, these profits are only distributed when the GbR is dissolved. However, there is an alternative option for partners who wish to receive capital from the GbR: private withdrawals may be agreed upon in the memorandum of association. Partners must simply determine the amount and frequency of the remuneration:

“Partners shall receive monthly remuneration for their work in the GbR, regardless of the business’s profit or loss. The partner Manual Schmidt shall receive €3,000 per month. The partner Martina Müller shall receive €3,500 per month.”

Liability

With a GbR, it is not possible to include a limitation of liability or an exclusion of the personal liability of individual partners. In principle, all parties are equally liable. This liability includes their private assets. However, by specifying individual powers within the GbR contract, partners can protect themselves against damage that arises, for example, as a result of individual partners exceeding their powers. Possible phrasing in the GbR contract could include:

“Partners hold joint and unlimited liability to third parties for the obligations of the GbR. Internally, partners are liable in the event of slight negligence proportional to the shareholding. In the event of intentional or grossly negligent damage, the partners responsible for this damage are solely liable.”

Furthermore, the GbR contract can outline the regulations for changing the business’s name, which can come into effect as soon as the previously specified circumstances occur. For example, this could be a specific revenue target.

Resignation

According to Section 723 of the German Civil Code, the partners in a GbR may resign at any time, providing the GbR was founded for an indefinite period of time. In the case of a limited-term GbR, termination before the end of the term is only possible on reasonable grounds. For example, this could include gross negligence by one of the other partners which causes financial distress to the GbR. Resignation may prevent personal damages. However, such resignations would only be permissible providing they are not “untimely.” For example, a resignation would be considered “untimely” if the business suffered financial damage as a result of a sudden resignation. Possible phrasing in the memorandum of association could include:

“Any partner may withdraw from the memorandum of association with six months’ notice
to the end of a calendar year.”

The date at which a resignation is first possible should always be stipulated in the memorandum of association. There should also be a written agreement regarding notice periods. Furthermore, it may be prudent to determine the amount that will be paid out to departing partners.

Dissolution

There are various reasons for dissolving a GbR: these include the insolvency of the business or one of the partners. If the business is insolvent, standard insolvency proceedings must be applied for. According to these proceedings, the GbR is either dissolved or restructured and continued. Should a scenario arise involving the personal insolvency of one of the partners, the GbR may only continue to be run by the other partners if this is expressly stipulated in the memorandum of association.

In the case of limited-term GbRs, the long-term nonfulfillment of the business purpose or final fulfillment of this purpose can also lead to dissolution. However, if the partners would like to continue the GbR until the set deadline has passed—even if the purpose has been fulfilled—this is always possible. This aim can be outlined in the memorandum of association.

The same applies for the continuation of the GbR in the event of a partner’s death. The death of a partner would not automatically mean the end of the GbR, as this scenario is generally provided for by the law. This applies even if only one other partner can manage the business. In this scenario, the GbR may continue to operate as a sole proprietorship. The following wording may be used in the memorandum of association to cover this:

“In the event of the death of a partner, the GbR will not be dissolved. The business may continue with the descendants of the deceased if they are named as heirs. All rights and obligations of the deceased shall pass to the heirs, who act as successors to the deceased.”

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