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As an entrepreneur or businessperson, you may be familiar with the different types of business structures available when setting up a company. One option that can offer unique advantages, particularly for those seeking to optimise to save tax in Germany or involve multiple stakeholders with varied or unequal capital, is the GmbH & Co. KG. In this article, we will explore what a GmbH & Co. KG is, its advantages and disadvantages, and the process of setting it up.
What is a GmbH & Co. KG?
A GmbH & Co. KG is a business model that fuses the characteristics of a GmbH (limited liability company) with those of a KG (limited partnership), creating a distinctive hybrid structure. The name itself reflects this combination, with "GmbH" representing the general partner with unlimited liability, and "KG" indicating the limited partners with limited liability.
One of the notable features of a GmbH & Co. KG is that it allows for flexibility in the type of company you can use as the general partner. While it is common to use a GmbH, it is also possible to use a UG (Unternehmergesellschaft) or a Ltd. (Limited Company). This allows for greater flexibility in tailoring the structure to the specific needs of your particular business and stakeholders.
A GmbH & Co. KG typically involves two types of partners: the general partner (Komplementär) and the limited partner(s) (Kommanditisten). The general partner assumes the role of managing the company and has unlimited liability covering their personal assets with respect to any liabilities the company may incur. In contrast, the limited partners enjoy a GmbH-style limitation of liability, which means that they are ordinarily only responsible up to the level of their capital contributions.
One unique aspect of a GmbH & Co. KG is that the theoretically unlimited liability of the general partner (if using a GmbH or other limited structure) is ultimately still limited to the general partner’s share capital if it is a limited-liability legal entity. This means that the personal liability of the individual shareholders of the GmbH is almost totally avoided, providing an additional layer of protection. This structure can be particularly appealing for entrepreneurs looking to protect their personal assets while still being actively involved in managing the business.
Advantages of a GmbH & Co. KG
There are several advantages to consider if you are considering how to save tax in Germany by starting a GmbH & Co. KG:
- Lower Taxes
When well-optimised, a GmbH & Co. KG can offer potential tax savings compared to other business structures. The taxation of the company structure begins at the level of the limited partnership, with the GmbH & Co. KG paying trade tax (Gewerbesteuer) based on its profit, which can vary between 7-18% depending on the city. However, the company is fully exempt from trade tax if its profit does not exceed 24,500 EUR, providing potential tax savings. Additionally, the profit is divided between the general partner and limited partner(s) according to the provisions in the articles of association, offering flexibility and tax efficiency in distributing profits.
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You can tailor the articles of association of a GmbH & Co. KG to regulate the distribution of profits, providing greater flexibility and easier access to profits for the business owners. This can be valuable by providing extra control over the distribution of profits amongst stakeholders.
The limited partners in a GmbH & Co. KG have limited liability, similar to a GmbH, protecting personal assets even in the event of the company’s failure. This can provide peace of mind for entrepreneurs and businesspeople who want to be involved in the business while also protecting their personal assets if the business ultimately fails.
Limited partners in a GmbH & Co. KG can more easily and favourably bring high-quality assets into the company, such as personally-held real estate. By transferring high-value assets to the GmbH & Co. KG, limited partners can benefit from potential tax deductions and other favourable tax treatment, depending on the jurisdiction and accompanying regulations.
A GmbH & Co. KG can also be advantageous in terms of succession planning. In many cases, transferring ownership of a GmbH & Co. KG to heirs can result in lower inheritance taxes compared to transferring ownership of other types of business entities. This can be an important consideration for entrepreneurs and businesspeople planning for the long term and wanting to pass on their business to the next generation.
A further advantage of the GmbH & Co. KG is its flexibility in changing limited partners. Limited partners can easily transfer or sell their ownership interests, making it easier for family members or investors to participate or exit the business at a later date. This ease of entry or exit can make the company’s ownership structure much more flexible and adaptable to changing circumstances.
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Disadvantages of a GmbH & Co. KG
On the other hand, there are some disadvantages of this special legal form you have to consider before start:
- Double Costs and Administration:
One of the main disadvantages of a GmbH & Co. KG is that it involves doubling costs and administration compared to other business entities. Separate accounting and annual accounts must be prepared for both the GmbH and the GmbH & Co. KG, which can result in higher accounting and administrative expenses. Additionally, tax consultancy costs may be higher at the outset to ensure that the structure is optimised from a tax perspective, which can further add to the overall costs of establishing and maintaining a GmbH & Co. KG. - Legal and Regulatory Requirements:
Setting up a GmbH & Co. KG involves complying with legal and regulatory requirements, such as drafting and notarizing the articles of association, registering the company in the commercial register, and adhering to specific regulations regarding the structure and operation of the company. These requirements can be more complex and time-consuming compared to other business entities and may require professional assistance from legal and financial experts, adding to the overall complexity and costs of establishing and maintaining a GmbH & Co. KG.
Taxation of a GmbH & Co. KG
The taxation of a GmbH & Co. KG is another important aspect to consider when choosing this business structure. The taxation occurs at two levels: the level of the limited partnership and the level of the general partner (GmbH or UG). Here are some key points to understand about the taxation of a GmbH & Co. KG:
- Trade Tax:
The GmbH & Co. KG is subject to trade tax (Gewerbesteuer) based on its profit. The trade tax rate varies depending on the city where the company is located and can range from 7% to 18%. However, the company is completely exempt from trade tax up to a profit of EUR 24,500. It becomes liable for trade tax only when the profit exceeds this threshold. - Income Tax for Limited Partners:
Limited partners, typically individuals or natural persons, are liable for income tax on the profits they receive as their share. The income tax is calculated based on the individual tax rates applicable to the limited partners. - Corporate Income Tax for General Partner:
The general partner, which is usually the GmbH or UG, is subject to corporate income tax on its share of the profits, with Germany’s corporate income tax rate currently sitting at 15%. It's important to note that the general partner GmbH or UG usually has minimal activities and may only receive a small expense allowance to cover its costs. Because of the limited resources typically present in the general partner entity, it is critical to consult with a tax advisor and ensure tax compliance. - Foreign General Partner:
If the general partner is a foreign company, it will be subject to taxation under the tax laws of the country where it is located. Taxation of a GmbH & Co. KG can become intricate due to variations in tax laws and regulations across different countries, which can introduce additional complexity. - Value Added Tax (VAT)
The GmbH & Co. KG is also subject to Value Added Tax (VAT) in Germany, which is essentially a consumption tax levied on nearly all goods and services. The VAT rate can vary depending on the type of goods or services provided by the company, and proper compliance with VAT regulations is critical to avoid penalties and fines. - Losses and Deductions
Another aspect to consider in the taxation of a GmbH & Co. KG is that losses incurred by the limited partnership can only be offset against profits of the same limited partnership. This means that losses incurred at the partnership level cannot be offset against the profits of the general partner or other companies. The company's ability to take deductions and other tax benefits may be restricted based on the tax laws and regulations of the jurisdiction in which it conducts business.
How to Set Up a GmbH & Co. KG
Setting up a GmbH & Co. KG involves several steps, starting with the completion of the formation of the corporation, such as a GmbH, UG, or Ltd. In Germany, registration in the commercial register is sufficient, even without a tax number. Then, you will need to have the articles of association must be drawn up you must take these before a notary public to have them officially notarised. Once notarised, you can register the company in the commercial register as a GmbH & Co. KG, with the word GmbH adapted according to the form of the company.
A useful tip is to consider buying a shelf company from GmbH-UG.com, which can save you significant time and effort. With a shelf company, you only need to visit the notary once, as the KG can be registered at the same time as the purchase of the shelf company. This can save you a second visit to the notary and several weeks of waiting.
It's important to note that GmbH-UG.com does not provide tax or legal consultations, and the information provided is for informational purposes only without checking your individual circumstances, so we cannot guarantee that this structure is an optimal way for you to save tax in Germany. Therefore, it's crucial to seek professional advice from qualified tax and legal experts to ensure that this structure is suitable for your specific circumstances and that you genuinely can save tax in Germany by starting a GmbH & Co. KG.