The pros and cons of the GbR: Weighing up the civil law partnership in Germany

Contents

• What is a GbR?
• Pros
• Cons
• Weighing things up
• Want to know more? 

What is a GbR?

Before we weigh up this type of German business, let’s quickly unpack what a GbR is exactly.

A GbR (civil-law partnership) is a legal form for businesses. Two or more natural persons (human beings) or legal entities (incorporated companies) can come together to form this civil law partnership.

The partners can’t be a “Kaufmann” or “Kauffrau” (these terms roughly translate to “registered merchant”) because a GbR can’t be entered into the Handelsregister (commercial register).

To establish a GbR, the partners enter into a  Gesellschaftervertrag (partnership agreement). They can more or less create the Gesellschaftervertrag as they see fit as this contract doesn’t have to follow strict rules like other business legal forms (it doesn’t even have to be in writing).

GbRs are set up for either “external” or “internal” purposes. This concept is a little tricky but let’s unpack this using examples.

Most GbRs operating in Germany are a so-called Außengesellschaft – an external business. An Außengesellschaft is a public-facing business that makes transactions in its own name. Moreover, it has common (joint and several) assets. For example, an “external” GbR can be a local Mexican eatery that sells burritos in its own name.

In contrast, an Innengesellschaft (internal company) doesn’t act as a business in the marketplace. There are no joint assets of the internal company. There are only connections to the assets under the “law of obligations” (i.e., a contractual connection), especially settlement claims.

The advantages of the GbR

– A straightforward legal structure to unite people for a specific purpose.
For example, a special project, an association of Freiberufler (liberal professionals), small businesses, etc. Because the GbR is not a legal entity, the formation is simple and its legal obligations lighter.

– You have more freedom regarding how the business is managed
You can delegate certain powers to one or more partners, or decisions can be made via voting.

– Partners share profits and losses equally
But the Gesellschaftervertrag (shareholders’ agreement) can modify this rule.

– Taxation
A GbR only has to pay Gewerbesteuer (trade tax) and Umsatzsteuer (VAT). The partners are assessed for tax purposes as individual persons which means Körperschaftsteuer (corporate tax).

– Low formation costs
As the GbR is an incorporated legal form (i.e., not a corporation like the GmbH) there are hardly any starting costs. There is a small fee to register with the Gewerbeamt (trade office) and the IHK (chamber of industry and commerce). There is no minimum Stammkapital (share capital) etc. to worry about before you can start operating.

The disadvantages of the GbR

– Liability
Probably the most significant disadvantage of a GbR is the question of liability. The partners are jointly and severally liable. This means all partners are liable for a GbR’s debts with all their personal assets. Even if one of the partners has caused damage – possibly without the knowledge of the others – they are all liable individually and in full. Insurance is doubly important for the GbR legal form.

– Tax liability of each individual must be declared
Each of the partners is obliged to take care of the taxation of his or her profits independently. This means profits are taxed for each partner at their personal income rate. This tax rate is among the highest in the world. Make sure you know the tax implications of the different legal forms before you start operating.

– Only Kleingewerbe (small businesses/traders) can use it as a legal form
In the case of commercial enterprises, the legal form of a GbR is only possible for small businesses. In addition, a conversion must take place.

– Written agreements are advisable
Having a too-liberal governance structure can result in disputes later down the track. Therefore, there should be an agreement made in writing. Matters should include, among other things:

• Management and representation
• Remuneration for activities
• Withdrawal rights from accounts
• Withdrawal of a partner and the like.
• Division of labour, i.e. which partner is responsible for what

Conclusion: Weighing things up

For two or more entrepreneurs who want to start a small business together, setting up a GbR is a sensible and easy way to go about this. If you compare it to other legal forms such as the GmbH, the financial commitment is low, and there is less red tape to grapple with. The partners of a GbR have a lot of freedom when it comes to its organisational structure.

The major downside of a GbR is its unlimited liability. This should be your number one concern when doing a cost-benefit analysis. Another downside is the absence of regulations when it comes to internal governance. A GbR partner could easily exploit this unregulated environment for personal gain. (Thus, a putting together a partnership agreement in writing, although not mandatory, is always wise thing to do.)

Want to know more about the GbR?

Our essential GbR reading:

1. What is the GbR? 
2. The pros and cons of the GbR
3. The unwanted GbR
4. How to start a GbR

Master list:

• The Master list of all Company Formation articles