GbR liability: How to protect your private assets as a founder

Introduction

No matter what the size of the business, take the time to talk to your partners about failure and liability risks. You can mitigate some of the classic reasons for failure early on and minimise your risks with a proactive business policy. The first important decision in this regard is the choice of the appropriate legal form and the limitation of liability.

Establishing a GbR the uncomplicated way

Although partnerships such as the GbR cannot claim any limitation of liability (Haftungsbeschränkung), they do not require any share capital and are easy to form. And, precisely for this reason, the GbR is one of the most popular legal forms for founders and Freiberufler. All you need is a trade license (Gewerbeschein), register with the Chamber of Commerce or the Chamber of Trade (IHK) and you’re ready to go. You don’t even need a partnership agreement (Gesellschaftsvertrag).

You can do something as simple as nailing a sign to your garage and, after registering your business or becoming a freelancer, you can accept your first orders once your tax ID has been issued. The GbR is therefore also a popular legal form for side businesses.

As a trade-off, the advantage of a nearly formless and entry-less establishment, which only needs to be registered, is gained by accepting a liability risk, which can hang over your company like the sword of Damocles.

Dangers of personal liability at the GbR

A partnership like a GbR, oHG or KG is always established with at least one additional founder. And even if you are friends today, you should still make arrangements to control the liability risk that could result from a partner becoming unpredictable. This is because if GbR shareholders can no longer serve the liabilities of your GbR, the consequences of insolvency can be severe. You are personally liable all of your private assets and there’s no limit to that liability.

GbR partners are even liable for unauthorised actions or incorrect decisions by another partner, as the German Federal Court of Justice (BGH) ruled years ago. Therefore, if your employees’ or partners’ mistakes have resulted in insolvency, you pay your share of the GbR liabilities from your private fund. You cannot limit this risk, for example by simply setting a limitation of liability in your terms and conditions (allgemeine Geschäftsbedingungen). If you cannot pay your creditors, you must report private bankruptcy.

To prevent a worst-case scenario, you should set rules that are relevant to GbR liability in the business plan and the partnership agreement. You’ll find out the best way to do that right here.

Want to know if your business idea is viable before committing to a UG or a GmbH? Establishing a GbR can be the quickest way to test the market.  

Specify business ideas and tasks in the business plan

Founders of a GbR are often friends or at the very least trust each other. Trust is good, of course; but it’s better if you already use a business plan to agree on “rules of the game”. For example, define your business ideas as accurately as possible. Separate them into positives and negatives. Use this to shape a business model that aligns with your business ideas as accurately as possible.

Your business model should include how you propose to finance your venture and the tasks, roles and rights of representation the individual shareholders may and must exercise. Specify in the business plan which kind of business and voting shares each shareholder has and, if applicable, which contributions in kind (Sacheinlagen) each will contribute.

These rules in the business plan can only be achieved through in-depth discussions with your partners. The more accurately you record all the positive and negative or permissible and inadmissible regulations with protocols, the greater clarity your business ideas and your business model will have.

The business plan can then also formulate the partnership agreement, which serves as the judicial instrument in case of conflict.

Reduce GbR liability risks in the Gesellschaftsvertrag

The written GbR partnership agreement can be a powerful tool to reduce liability risks as much as possible. The following instruments are available for this purpose:

1. Conversion to a capital/incorporated company after the start-up phase
2. Building up of company assets
3. Limitation of the power of representation of GbR shareholders
4. Business succession upon termination or departure of a partner and the consequences.

Change into a capital company after the start-up phase

Despite the liability risk for the shareholders, the GbR is one of the most popular legal forms for founders in Germany. Unlike corporate legal forms, no starting capital is required. It should be noted that the German entrepreneurial limited liability company – the UG (haftungsbeschränkt) – requires only €1 in share capital (Stammkapital). But the formation effort with notarial certification and entry in the commercial register (Handelsregister) is complicated and costly. If you just want to get started, the start-up costs of the GbR are comparatively low.

You should specify in the business plan, and later in the partnership agreement of your GbR as well, rules that mitigate the risk for your business. This is always recommended if individual transactions of your GbR exceed the current company assets. If the business goes wrong and you have higher obligations than GbR can currently shoulder, you quickly slip into insolvency. To avoid this, stipulate in the GbR’s partnership agreement that you must change forms to a GmbH or UG (haftungsbeschränkt) if certain and defined circumstances occur. These may include:

• The individual business has a scope that is greater than the current GbR assets
• Sales or profits exceed a certain order of magnitude
• You want to raise capital for an order and limit the liability risks of the shareholders.

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NB: For the retail trade, i.e. online shops or wholesaling and retailing, legislators provide that a GbR must change into a general partnership (oHG) once turnover between €250,000 and €500,000 and a certain number of employees have been reached. At this point, it must also be entered in the commercial register, is subject to double-entry bookkeeping and requires specialised accounting as well as publishing of its annual accounts (Jahresabschluss). A bit of a disadvantage is that, as a public company, the oHG has additional requirements, rights and obligations but there’s no liability restriction.

Therefore, your goal with a side business should be to change your GbR into a GmbH or UG (haftungsbeschränkt). But, for this, you need €25,000 in share capital for the GmbH or at least half of it as a cash contribution at the time of formation. In the case of the UG (haftungsbeschränkt), part of the profits must be transferred to the reserves from day one until the required share capital is generated.

Building up of company assets

To avoid difficulties in changing the company type, you should already book part of the proceeds (profits) from the current business activity of your GbR into the reserves. It is also advisable to strengthen shareholder capital to avoid sudden insolvency.

An example of ceteris paribus

Let’s assume that you have a side business that uses the GbR legal form. You may have started out with a friend in the living room and rented a garage for storage. Suddenly, there is a unique opportunity to buy super low-cost remaining stock for €10,000 in China. It could mean €30,000 in turnover. You trust that it will be a quick deal and scrape every last penny together. You won’t receive a loan as a young founder and you unfortunately missed applying for start-up loans from the German Reconstruction Loan Corporation (KfW). Then, the goods do not arrive and have gone missing. Suddenly, you can’t service your liabilities to other suppliers, and you can no longer pay your health insurance. You’re now insolvent.

The lesson:

1. The current business must always remain liquid.
2. You should only make risky investments if you have sufficient reserves.

For such cases and your own financing, you should state in the partnership agreement that you and your partners always transfer part of the profits to the reserves. That way, you have the opportunity to go for a riskier deal. Above all, these reserves should be used so that you can establish a limited liability company by, for example, generating the share capital required to form a GmbH.

Limitation of the power of representation of GbR shareholders

Let’s stick with our example of the lost goods from Asia. One of your partners agreed to the deal in China without your knowledge; nevertheless, you are completely liable. To prevent this from happening, you should specify in the partnership agreement which legal transactions each GbR partner may complete independently.

Above all, you must define the conditions under which only all GbR shareholders must agree to conduct a legal transaction. At the same time, you must make sure in the regulation on the power of representation that you do not hinder the day-to-day business, ie the task-related activities of each partner, through long decision-making processes and resolutions. Allowing each partner of the GbR to act alone up to a certain extent can be very practical.

Business succession after a shareholder leaves

Problems with personal liability for GbR shareholders may also arise in the case of business succession. If a partner dies, resigns or is let go, the GbR first goes into the dispute. In the process, the assets, i.e. voting shares and liabilities of the previous shareholders (partners) are offset and paid out. If a new shareholder joins, he or she also assumes liability for pre-existing obligations.

Conclusion

Like sole proprietors, all GbR shareholders are also liable with their private assets. You can reduce the risks of personal liability by designing the partnership agreement with the formation of reserves and limiting the power of representation of the shareholders. However, you can only achieve a limitation of liability if you change the company type to a GmbH or a UG from a certain amount of turnover. Therefore, especially when setting up a GbR as a trade, plan to switch to an oHG after opening a second company or going through a phase of growth. Alternatively, pre-emptively pursue one of the legal forms that provide the limitation of liability.