The modernisation of German partnership law – A need to review the GbR and other partnerships
Changes to partnerships under German civil law
Legal capacity
For a long time, it was disputed whether or not a GbR (under Sections 705 ff. of the Civil Code [Bürgerliches Gesetzbuch, BGB]) could be considered to have legal capacity since – in contrast to the OHG or the KG – the legal capacity of a GbR was not specifically stated. Guidance on liability issues relating to this type of partnership was hitherto provided by court rulings and not the wording of legislation. The aim of the German lawmakers is now to align the codified rules with the existing case law. In the new legislation a distinction will basically be made between a GbR with legal capacity (Sections 706-739 BGB in its amended version) and one with no legal capacity (Sections 740-740c BGB in its amended version).
According to Section 705(2) BGB in its amended version, a condition for a GbR with legal capacity shall be a shared will to engage in legal transactions. There shall be a presumption of this shared will if the business purpose of the partnership, according to Section 705(3) BGB in its amended version, is the operation of a business under a common name. According to Section 713 BGB in its amended version, contributions (usually deposits) by the partners as well as rights acquired by the partnership and the obligations established against these shall constitute the assets of the partnership. Jointly-held assets will be replaced by the concept of partnership assets. This will result in the abolition of the joint ownership principle as well as a clear separation between partnership assets and private assets. It will now be possible to assign rights and obligations to the partnership.
If there is no shared will to engage in legal transactions then the entity would be an undisclosed partnership (Innengesellschaft) with no legal capacity within the meaning of the amended version of Section 740 BGB. In this case, the legal form shall serve the purpose of organising the relationships between the partners.
Public Register for GbRs (Gesellschaftsregister)
While OHGs and KGs have always had to be registered in the Commercial Register (Handelsregister), for GbRs there had hitherto been no possibility to have an entry in a public register. Therefore, within the scope of MoPeG, a new register will be introduced – the so-called Gesellschaftsregister – in which a GbR may indicate registration by means of a specific name affix of eingetragene Gesellschaft bürgerlichen Rechts, or eGbR [registered partnership under German civil law]. The GbR legal form has thus been divided into three different types, as shown in Fig. 1. There is admittedly no registration obligation, nevertheless, in the future registering the GbR in the Gesellschaftsregister will be a mandatory requirement for the acquisition of title to holdings in a GmbH, shares, real estate or other rights registered in public registers.
Please note: Consequently, in many cases, there will effectively be a registration obligation.
Legal representation and partners
In the future, there will be separate regulations for management (Section 708 ff. BGB in its amended version) and representation (Sections 715 f., 720 BGB in its amended version). While management concerns internal relationships, representation governs external relationships. In doing so, the self-governing body principle still needs to be complied with. This means that at least one of the partners with unlimited liability also has to be a representative.
With respect to liability for the obligations of the partnership, there will be no change in practice when compared with existing legislation. The partners will be personally liable with their private assets and also personally liable as accessories. A creditor will have the option of asserting their entire claim against one, several or all the partners (Section 421 BGB) and execute it against their entire private assets. As there is accessorial liability, amounts owed by the partnership will be basically owed by each individual partner in the full amount.
Please note: To date, this principle has been implemented through the analogous application of Sections 128 ff. of the Commercial Code (Handelsgesetzbuch, HGB), in the future however, Sections 721 ff. BGB in its amended version will apply. Since solely a GbR with legal capacity will likewise be able to engage in legal transactions, liability for the partnerships’ obligations could only arise there.
Changes for other types of partnerships
Allocation of profits
Currently, the law regulates profit distributions as follows: Each partner receives advance profit at a rate of 4% of their share of the capital. Apart from that, the annual profit is allocated on a per head basis.
Under MoPeG the allocation of profits will be newly regulated. Instead of advance profit payments and the allocation of the residual profit on a per head basis, profits will be allocated according to the agreed sizes of the stakes in the partnership or, in cases of doubt, in proportion to the agreed values of the capital contributions. The allocation on a per head basis would remain only if no values had been agreed for the capital contributions either, in accordance with Section 713 BGB in its amended version.
Opening up for freelancers
Up to now, carrying on a commercial business pursuant to Section 105(1) HGB was a requirement for an OHG, KG or GmbH & Co. KG [German limited partnership with a limited liability company as a general partner]. Now, as a result of the reform, freelancers will also be able to organise themselves in the legal form of a professional partnership (Section 107(1) HGB in its amended version). The requirement for freelancers will be the opening up of the respective relevant professional practice regulations as well as an entry in the Commercial Register.
Please note: The GmbH & Co. KG, in particular, could be an interesting structure in view of the limitation of liability. In the case of a limited partnership, the liability related to the professional activity is limited but there is no general liability exclusion, however, the use of a Komplementär-GmbH [general partner private limited company] can make it possible for this liability to be limited to the amount of your capital. Nevertheless, use can be made of the benefits of a partnership when compared with a corporation.
Switching between legal forms – a GbR with legal capacity and an OHG
A registered GbR can be transformed into an OHG by way of a so-called change of status if it is voluntarily registered in the Commercial Register. The Gesellschaftsregister will pass on the eGbR, under preservation of its legal identity, to the Commercial Register where it will subsequently be
registered in its new legal form.
It is also possible to switch the legal form from an OHG into an eGbR. The requirements here relate to the characteristics of the so-called optionally registrable business person (Kann-Kaufmann). The absence of a commercial enterprise and the voluntary registration in the Commercial Register mean that freelancers and asset management partnerships will always able to shed their commercial status. However, in the future, the partnership will no longer simply be able to cease to exist pursuant to Section 31(2) sentence 1 HGB, instead it will have to go through a change of status pursuant to Section 107(2) sentence 2 HGB and be registered as a GbR in the Gesellschaftsregister. The cancellation of the eGbR that has switched its legal form can only be done in the Gesellschaftsregister in accordance with the general provisions, – thus, for example, after a liquidation has been completed – (cf. Section 707a(4) BGB in its amended version).
Please note: The aim of this legislation is to prevent firms from being ‘buried’ – a process where companies cease to exist outside of the insolvency proceedings without undergoing liquidation.
Recommendation: The many changes in GbR legislation give rise to implications and recommendations for action for consulting practice. In particular, during the transitional period until 1.1.2024, a check should be performed to determine whether or not registering in the Gesellschaftsregister is an option, or will become necessary in the future. The new register will enhance legal certainty and the protection of legitimate expectations and, therefore, it would be interesting for partnerships that engage in general legal transactions on a daily basis.