Limited Partnerships and the Liability of a KG
The limited partnership, or KG for short, is one of the most common legal forms in Germany. Although there are far fewer limited partnerships (KG) in Germany than there are limited liability companies (GmbH), they are nonetheless very popular among founders. The reason: The powers and liability of the partners can be clearly separated from one another.
In principle, the KG is a partnership and consists of at least one general partner and at least one limited partner. The KG must be entered in the commercial register, and all partners are registered in the process. A minimum capital requirement is not necessary. The company’s capital consists of the individual contributions made by the partners.
Liability in a Limited Partnership
What do founders need to know about liability? Who is liable in a KG?
General partners have unlimited liability for the partnership’s obligations to creditors with their entire personal assets. In contrast, the liability of limited partners is limited to the liability amount entered in the commercial register, which can be freely determined. Are there differences in liability between forming a new KG and joining an existing one?
If the newly formed KG conducts business before its registration in the Commercial Register, all partners—including the limited partners—are liable to creditors. In principle, this liability is unlimited and extends to their entire personal assets. As attorney Tobias Grau of the law firm CMS Hasche Sigle explains, it is important to distinguish the following: “The limitation of liability for limited partners takes effect only upon registration in the commercial register. To avoid liability, the KG should therefore not begin conducting business until after registration. The same applies to joining an existing limited partnership (KG).”
When individuals acquire shares, the parties involved should insist on the entry of a corresponding note. In legal terminology, this is called a “succession note.” Attorney Grau explains: “Otherwise, creditors could argue that, in addition to the existing limited partner, another limited partner with an additional liability contribution is available. This can be disadvantageous for the existing limited partner in terms of liability law.”
What else do founders need to know? The term “tort liability,” also known as “fault-based liability,” is frequently used. This refers to liability arising from tortious acts. Tort liability is enshrined in law in §§ 823 ff. of the German Civil Code (BGB). Attorney Grau says: “Unlike contractual liability, which is based on breaches of contractual obligations, tort liability arises from violations of the law and therefore does not require a specific contractual relationship between the tortfeasor and the injured party.” In principle, claims for damages based on tort liability can coexist with claims for damages based on contractual liability.
When it comes to liability issues, should founders opt for a limited partnership (KG), or would a limited liability company (GmbH) or an entrepreneurial company (UG) be a better choice?
The Disadvantage of a Limited Partnership
The disadvantage of a KG is that the partners have unlimited liability with their entire personal assets and are directly liable to creditors in their external relationships. In the case of a GmbH or UG, however, the situation is as follows: If a GmbH or an UG commences business operations after the articles of association have been notarized but before registration in the commercial register, the shareholders are liable only for start-up losses and only internally vis-à-vis the company. Creditors would first have to attach these assets.
The Advantages of a Limited Partnership as a Legal Form
The advantages of the KG are: “Limited partners can ‘buy’ limited liability in a KG more affordably, since no minimum amount is prescribed for the liability sum,” says attorney Grau. This is similar to a UG, where virtually no minimum capital needs to be raised. However, the UG must set aside a statutory reserve in its annual balance sheet, into which one-quarter of the net income for the year (reduced by any loss carried forward from the previous year) must be allocated. “And, in principle, an UG’s profits can only be distributed to shareholders without limitation once the minimum capital requirement for a GmbH—25,000 euros—has been reached and entered in the commercial register.”