Partnership – Definition and Legal Classification
Term and General Definition
A partnership is a type of company under German corporate law, characterized by the association of several persons for the pursuit of a common purpose with joint participation in the company’s assets and earnings. The hallmark of the partnership is the personal connection of the partners to the company, typically including extensive participation, control, and liability rights and obligations. In contrast to corporations, the partners in a partnership are significantly involved in decisions and the success of the business.
A partnership is distinguished in particular by the personal liability of its partners and their equal status both internally and externally, as opposed to corporations where capital participation and limited liability prevail.
Types of Partnerships
In Germany, the following types of companies are classified as partnerships:
- Civil Law Partnership (GbR)
- General Commercial Partnership (oHG)
- Limited Partnership (KG)
- Partnership Company (PartG)
Civil Law Partnership (GbR)
The GbR is the simplest and most original form of partnership. It is formed by a partnership agreement between at least two persons aiming to pursue a common purpose.
General Commercial Partnership (oHG)
The oHG is a specific form for operating a commercial business. It has legal capacity and can acquire rights and enter into obligations.
Limited Partnership (KG)
The KG combines elements of both partnerships and corporations. There are general partners (who have unlimited liability) and limited partners (whose liability is restricted).
Partnership Company (PartG)
The PartG is specifically intended for the exercise of liberal professions and regulates the cooperation of professionals in its own company form.
Legal Basis
Statutory Regulations
The legal basis for partnerships can be found in particular in the following laws:
- German Civil Code (BGB): §§ 705 ff. regulate the basics of the GbR.
- German Commercial Code (HGB): Contains regulations for oHG and KG (especially §§ 105–177a HGB).
- Partnership Company Act (PartGG): Regulates the PartG.
Partnership Agreement
A key requirement for the establishment of a partnership is the conclusion of a partnership agreement, which can generally be made informally, unless specific statutory provisions dictate otherwise. Minimum content requirements typically concern the company’s purpose, the partners’ contributions, the allocation of profits and losses, and the company’s organs.
Legal Personality and Legal Capacity
The legal capacity of a partnership depends on its specific form. While the GbR has had recognized legal capacity since the legislative change on January 1, 2024, the oHG and KG have long been legally capable. They can therefore enter into contracts, sue and be sued, and acquire property in their own name. The PartG likewise has legal capacity and can act under its own business name.
Internal Relations of the Partners
Rights and Duties
Partners in a partnership have equal rights and jointly manage the business, unless the partnership agreement provides otherwise. They are obliged to contribute towards achieving the company’s purpose according to their contributions and to act in the interests of the company.
Management and Representation
Generally, management is vested collectively in all partners (GbR and oHG), unless the partnership agreement provides for individual action or delegation of management authority. External representation and management do not necessarily coincide; in particular, only the general partners are authorized to manage the business in a KG.
Rights of Control
Each partner has extensive rights to information and control. These include, for example, the right to inspect books and records as well as the right to information about business matters.
External Relations: Liability of the Partners
Unlimited Liability
Partners in partnerships are generally personally and unlimitedly liable with all their personal assets for the company’s liabilities. In contrast, in the KG, the liability of limited partners is restricted to their capital contribution, while general partners remain fully liable.
Joint and Several Liability
Partners’ liability is typically joint and several. This means that creditors can claim the whole amount from any partner. Internally, there is then an adjustment among the partners.
Tax Treatment
Transparency Principle
Partnerships are not taxable entities for corporate tax purposes, but are fiscally transparent. Income is attributed to the partners and taxed at their individual income tax rates.
VAT and Trade Tax
For VAT purposes, partnerships are considered entrepreneurs and are subject to VAT. With regard to trade tax, they are generally subject to trade tax, although exemptions and special regulations may apply for tax-privileged professions. The company itself files trade tax returns, but income tax is borne by the partners.
Dissolution and Liquidation
Reasons for Dissolution
A partnership is regularly dissolved by:
- Expiry of the agreed term
- Achievement or impossibility of the company’s purpose
- Resolution of the partners
- Insolvency of the company or individual partners
- Termination by a partner (GbR, oHG)
- Other statutory or contractual grounds for dissolution
Liquidation Procedure
After dissolution, the company is wound up in the course of liquidation. This means the company’s assets are realized, creditors satisfied, and any surplus distributed among the partners. Special formal requirements may have to be observed depending on the company type and agreement.
Differences from Corporations
- Liability: Partners generally have unlimited liability, whereas in corporations, liability is limited to company assets.
- Legal Status: Closer personal connection and participation rights in partnerships.
- Establishment Effort: Lower formal requirements and lower founding costs.
- Disclosure Obligations: Reduced disclosure obligations compared to corporations.
Advantages and Disadvantages of Partnerships
Advantages
- Lower bureaucratic and financial effort in establishment and management
- Flexible and simple decision-making structures
- Personal connection and co-determination of the partners
Disadvantages
- Personal and joint and several liability
- Limited possibilities for raising capital
- Potential for conflict in the event of differing interests among the partners
Summary
The partnership represents a fundamental organizational form in German corporate law, characterized by close personal ties, extensive participation and control rights, and broad liability among the partners. The most important forms include the GbR, oHG, KG, and PartG. Partnerships are particularly suitable for small to medium-sized enterprises and associations of professionals, where cooperation and trust among partners are paramount. Their legal structure is subject to extensive legal regulations, which must be observed both at formation, during ongoing business, and in dissolution.
Frequently Asked Questions
How is the formation of a partnership carried out from a legal perspective?
The formation of a partnership generally requires the association of at least two natural or legal persons who agree by contract to pursue a common purpose. The legal basis is usually the partnership agreement, which can generally be concluded without formality unless special legal requirements (such as for the partnership company) apply. The partnership agreement sets out key terms such as management, representation, profit and loss distribution, and rules for admitting new partners and the departure of existing members. Registration in the commercial register is not required for the Civil Law Partnership (GbR), but is required for the General Commercial Partnership (OHG) and the Limited Partnership (KG). Legally, the formation is completed with the conclusion of the partnership agreement, unless official approvals or further formalities are necessary.
What statutory liability provisions apply to partnerships?
For partnerships, as a rule, all partners are liable without limitation, directly, jointly and severally, and personally for the company’s obligations. This means creditors may claim directly against the personal assets of the partners. An exception exists for the Limited Partnership (KG), where the liability of limited partners is restricted to their contributions, provided these have been made. Unlimited liability cannot be effectively excluded by partnership agreement and is a core characteristic of partnerships compared to corporations. Liability commences with the start of business activities and continues even following a partner’s exit for obligations incurred prior to their departure, unless a limitation of liability or release under § 160 HGB is applicable.
Who is authorized and obliged to manage and represent the company?
The management and power of representation in partnerships generally lies with all partners jointly, unless otherwise stated in the partnership agreement. In the Civil Law Partnership (GbR), management is collective, i.e., decisions require the consent of all partners. In the General Commercial Partnership (OHG), individual management is common unless joint management is agreed. In the Limited Partnership (KG), only general partners are usually entitled and obliged to manage and represent the company, while limited partners generally do not possess these rights. Deviating arrangements are possible but should be explicitly laid out in the partnership agreement.
Are partnerships subject to disclosure or accounting obligations?
Partnerships are subject to varying obligations depending on their legal form and size. The Civil Law Partnership (GbR) is not required to keep books, but must comply with basic record-keeping requirements for tax purposes (cash method of accounting). The OHG and KG, however, must keep books and prepare annual balance sheets according to commercial law (§ 238 HGB, § 242 HGB). Tax exemptions may apply for small partnerships. Disclosure obligations under the Commercial Code only arise once certain size criteria set out in § 264a HGB are exceeded. From a certain size, further obligations such as annual financial statements and management reports may be required. However, the obligation to publish, as with corporations, exists only in a limited manner for limited liability companies.
How is the termination of a partnership carried out from a legal perspective?
The termination of a partnership typically follows a multi-stage process: first dissolution, then winding up (liquidation), and finally deletion. Dissolution may be triggered by circumstances outlined in the partnership agreement (such as expiry of time, achievement of purpose, withdrawal or death of a partner) or by statutory provisions (e.g., unanimous resolution by the partners, insolvency). After dissolution, the company is limited to winding up (liquidation); it may not enter into new transactions and must settle ongoing business and distribute assets. The company continues to exist until settlement is complete and, if necessary, it is deleted from the commercial register. A special case is the continuation clause in the partnership agreement, which allows the company to continue in the event a partner leaves.
What are the tax consequences of the partnership legal form?
For tax purposes, partnerships are considered transparent, meaning they are not corporate income tax subjects; taxation takes place at the partner level according to their participation share. The company itself is, however, subject to trade tax as a business enterprise, with an allowance under § 11 GewStG. The company’s income is attributed to the partners as business profits (from trade or self-employment) for income tax purposes. In addition, the company is subject to VAT obligations as far as it is entrepreneurially active. In practice, company and tax law requirements are closely interwoven, so careful tax advice is essential when establishing and running a partnership.
How does a partnership legally differ from a corporation?
The main difference is the personal liability of the partners, which is generally unlimited in partnerships, while in corporations (e.g., GmbH, AG) liability is limited to the company’s assets. In addition, management in partnerships is usually less formalized and characterized by greater involvement of the partners. Formation typically requires fewer formalities (no notarial certification, lower minimum capital requirements). Management is typically the responsibility of all partners, not just certain corporate bodies. Tax treatment also differs significantly: While a corporation is treated as a separate taxable entity (corporate tax), in a partnership, members are taxed transparently. There are also differences in disclosure and accounting requirements.
What should be considered regarding succession arrangements?
In the legal context, determining succession depends on whether and how the articles of association regulate the continuation of the company in the event of death, withdrawal, or transfer of shares. Without an explicit continuation clause, the death of a partner in a GbR or OHG generally leads to the dissolution of the company. In practice, a succession clause is often agreed upon to regulate, for example, the transfer to heirs or the acquisition by co-partners. Admission of new partners can also be made contingent on certain conditions (such as approval by the remaining partners, qualification requirements). In any case, careful contractual drafting is required to avoid disputes and uncertainties in the event of transition, as statutory rules may often be inflexible or incomplete.
