Limited Partnership (LP)

The Limited Partnership (KG): A Versatile Legal Form for Businesses

The limited partnership (Kommanditgesellschaft, KG) is a widely used and well-established legal form for businesses in Germany. It combines elements of a partnership and a corporation, offering a range of advantages for entrepreneurs and investors. In this article, we outline the fundamentals, advantages and disadvantages, as well as practical aspects of this corporate form.

Structure and Liability in the KG

The defining feature of the limited partnership is the distinction between two types of partners: general partners (Komplementäre) and limited partners (Kommanditisten).

• General partners are personally liable partners. They bear unlimited liability with their entire private assets for the company’s obligations. At the same time, they usually act as the managing directors of the KG and represent the company externally.

• Limited partners, on the other hand, have limited liability. Their liability is restricted to the amount of their capital contribution registered in the commercial register (the limited partnership contribution). They are excluded from management and have fewer decision-making rights than the general partners.

A KG must have at least one general partner and one limited partner. Beyond this, many configurations are possible, such as multiple general and/or limited partners or legal entities (e.g., GmbHs) acting in either role.

Advantages of the Limited Partnership

The KG offers several benefits that make it attractive to many entrepreneurs and investors:

• Limited liability for investors: Limited partners are liable only up to their capital contribution. This allows them to limit their risk and protects their private assets from total loss. This facilitates attracting investors and raising equity capital.

• Flexibility and freedom of structuring: The statutory requirements for structuring a KG are far less restrictive than those for a stock corporation (AG). Many aspects, such as profit and loss distribution, capital contributions, or information rights, can be freely regulated in the partnership agreement.

• Tax transparency: As a partnership, the KG itself is not subject to corporate income tax. Profits and losses are directly allocated to the partners and taxed at their level. Depending on the situation, this can offer tax advantages, for example, through the use of personal allowances and tax rates.

• Access to credit and reputation: Due to the personal liability of the general partners, KGs often enjoy high creditworthiness and a strong reputation in business dealings. This can facilitate access to debt financing and cooperation with business partners.

• Inclusion of investors and successors: Through limited partnership interests, investors or family members can be flexibly involved in the company without being involved in management. This can strengthen the equity base and facilitate business succession.

Disadvantages and Challenges of the KG

Alongside its advantages, the KG legal form also entails some disadvantages and challenges that should be considered:

• Unlimited liability of general partners: The personal unlimited liability of at least one partner is mandatory. This can pose a significant risk, especially for smaller businesses or sole proprietors, and may reduce the willingness to start a business.

• Difficult separation of company and private affairs: Due to the close interlinkage of company and private assets for general partners, it is often difficult to separate business and private matters. Liability issues and succession problems are often more complex than with corporations.

• Potential for conflict and instability: Since general partners have extensive management powers but also bear personal liability, disagreements among partners are often harder to resolve than in corporations. When there are multiple general partners, deadlocks and standstills are not uncommon.

• Complex formation and disclosure obligations: Establishing a KG requires a notarized partnership agreement and registration in the commercial register. Subsequent changes often also require notarization. Additionally, there are extensive disclosure obligations, such as the publication of annual financial statements.

• Trade tax liability and social security: Unlike some partnerships, KGs are subject to trade tax. The social security obligations of partner-managers are often more complex and disadvantageous compared to corporations.

Special Form: GmbH & Co. KG

A common special form is the GmbH & Co. KG. Here, the personally liable general partner is not a natural person but a GmbH. The limited partners are usually the shareholders of this GmbH.

The advantage of this structure is that the liability of the natural persons is effectively limited to their limited partnership and GmbH contributions. At the same time, many benefits of the KG remain, such as tax transparency and flexible profit distribution.

The downside is the increased formation and administrative effort, as both a GmbH and a KG must be established and operated. The preparation and auditing of annual financial statements are also more complex.