GbR: Meaning, definition and formation of a civil law partnership in Germany

What is a GbR?

The term GbR stands for Gesellschaft bürgerlichen Rechts and is a civil law partnership. It’s the simplest business partnership in Germany, suitable for both commercial traders and liberal professionals. Forming a GbR is quick and straightforward. A GbR is not a separate legal entity, but a partnership between at least two parties. Companies can join a GbR, provided at least one partner is a natural person.

All partners are personally liable with their private assets, unlike shareholders in corporations (e.g., UG or GmbH), who are only liable up to their capital contribution. However, partners in a GbR have more direct control over business decisions. The legal basis for this structure is found in §§ 705 ff. BGB.

In addition to the GbR, legal forms such as oHG (general partnership) or KG (limited partnership) also belong to the category of partnerships.

The accidental GbR

A GbR can automatically happen by accident. For example, many founders share an office and the necessary office supplies to keep running costs as low as possible. This can give the impression of a GbR, even if there is no active cooperation between the office users. But, the tax office (Finanzamt) will be the judge of that.

In fact, if the Finanzamt thinks that a de facto GbR exists, they may send you a hefty tax bill for back payments.

How to establish a GbR

The GbR can be set up quickly and with little bureaucratic effort. This makes a good fit for founders just starting out or who want to test business ideas. Here is a rundown of what’s involved:

• Calculate the starting capital according to need only. Unlike incorporated companies such as the GmbH, there are no statutory capital or capital contributions.
• Agree on a corporate purpose (Gesellschaftszweck) for the business with the other GbR partners. The purpose of the GbR doesn’t necessarily have to be commercial (gewerblich). The GbR could have a non-profit business purpose, or be a GbR of Freiberufler (practising liberal professionals).
• Conclude a partnership agreement (Gesellschaftervertrag) – also known as a GbR-Vertrag (GbR agreement).This legally doesn’t have to be in writing. A GbR contract can be concluded in writing, orally or even tacitly with a handshake. But, do this at your own risk (see the tip below).
• All GbRs have to register with the Finanzamt (tax office).
• Only commercial (gewerblich) GbRs have to register their business at the Gewerbeamt (trade office).

IHK & HWK (industry chambers)

You have to also register with the IHK (chamber of industry and commerce) or the HWK (camber of crafts and small businesses), as membership in one of the chambers is mandatory.

Freiberufler GbRs are exempt from this regulation. For them, compulsory membership with the IHK or HWK does not apply. You must then register with the Berufsgenossenschaft (the professional association that oversees statutory accident insurance) responsible for your professional occupation.

FAQ

Is there a limitation of liability with the GbR legal form?

No. Some GbRs try to give the impression of limited liability by adding “mbH” to their business names. But, this is an illegal misrepresentation because the GbR can never be a limited liability entity. Others try and limit their liability in the general terms and conditions for their services – which is also unlawful.

Is a GbR considered a company (Firma)?

No. You can’t enter a GbR in the Handelsregister (commercial register). And because there is no company name without a commercial register entry, the GbR is not a Firma (company). Why? The GbR is not a legal entity but a partnership legal form.

This also means that a GbR doesn’t have a Firmenname (company name) but an Unternehmensbezeichnung (official business name).

When is a GbR actually an oHG?

Certain circumstances can change your GbR into an oHG (offene Handelsgesellschaft, or General partnership) whether you like it or not. But, the nature of these circumstances is hard to pin down.

The most tangible is when your GbR starts generating a high turnover. If this happens, expect the tax office to convert your GbR into an oHG. With an annual turnover of more than €250,000 and more than five employees, the tax office often assumes that the GbR is a “kaufmännischer Geschäftsbetrieb” (“merchant business”).

In Germany, there are certain business types beyond the incorporated entities such as the GmbH or the UG that have to be entered in the Handelsregister (commercial register). These include Kaufleute (merchants) and Handelsgewerbe (commercial enterprise, or commercial trading business). And, of course, the oHG. Generally, these are bigger businesses rather than small businesses or enterprises, which GbRs usually begin as.

Like their incorporated peers, these legal forms have to follow stricter rules, namely the Handelsgesetze (commercial laws).

If the tax authorities think that the circumstances of your GbR need tighter regulations, they might force it to change into an oHG. It is best to ask your tax adviser if you think this is something likely to happen to you.

Simple bookkeeping

Since a GbR is not entered in the commercial register, its accounting rules are far less stringent. No double-entry bookkeeping required! Simple bookkeeping and an EÜR (income surplus statement) are usually enough.

GbR partner rights and duties

Partners in a GbR have certain rights and obligations. These are defined in the GbR agreement. Instead of regulations set by the GbR partners, only the statutory provisions apply:

• Each partner is the joint owner of the GbR and has an equal share in the company. Thus, all the partners bear an equal share of the profits and losses.
• The partners are jointly and severally liable and unlimitedly liable with their private assets.
• The partners are subject to a duty of loyalty, which means safeguarding the GbR’s interests and avoiding foreseeable damage.

GbR contracts often allocate areas or activities to individual partners. For example, one partner is responsible for marketing, another for sales.

Business assets

Since the assets of the GbR are held jointly by all partners, the individual partners cannot dispose of the share they have contributed. They are also not entitled to demand a division of assets, because they are jointly owned by all partners.

Management

The joint management is the responsibility of all partners, i.e. the GbR is managed jointly by all partners. In practice, this means that all GbR managing partners must be present at every legal transaction and sign every contract.

Therefore, the GbR agreement often establishes a division of labour. For example, setting a monetary value within which partners can act independently.

Just as the powers and privileges can be given to a partner, so can they be taken away. But, it has to be for a legitimate reason, for example, a gross breach of duty or an inability to manage the business.

Dissolution and liquidation

No matter the business, there should be a plan for winding it down. The best way to do this is to set the rules in the partnership agreement. From a purely legal standpoint, there are three reasons which can lead to the dissolution of a GbR:

• The purpose (goal) of the GbR was fulfilled or was impossible to fulfil
• Insolvency
• Death of a partner

Automatic dissolution

Specifying the provisions in the event of death or insolvency in the partnership agreement prevents the automatic dissolution of the GbR if they happen.

Liquidation

After a GbR is dissolved it is then liquidated. If liquidation rules are not contractually determined, the statutory regulations kick in:

1. All current business has to be wound up and all debts repaid.
2. The partners’ contributions and contributions in kind are refunded and returned.
3. The remaining assets are divided among the partners.

Who should found a GbR?

A GbR is a legal form for teams that want to start a business with the least amount of capital and red tape possible. Both the lower tax burden and the simple bookkeeping are definitely perks. But, the downside of the GbR is unlimited private liability. Ultimately, the risk profile of your business is likely to be the deciding factor.

An incorporated alternative

If limited liability is a non-negotiable, consider forming a UG (haftungsbeschränkt). Shareholders can benefit from the limitation of liability and regulate the company shares with the help of the articles of association. Although slightly more expensive to set up, the minimum share capital is only one euro per shareholder.

Since the UG has to be entered into the commercial register, its company name is (somewhat) protected. However, entry into the commercial register also comes with more red tape. You’ll have to hire a tax adviser to do your double-entry bookkeeping and publish the company’s annual financial statements and tax returns.