The limited partnership – LP for short according to abbreviationfinder – is a special legal form for trading companies. The LP is used by most when additional start-up capital is required, but only one person wants to run the company as managing director and boss. The LP is always divided into the general partner and the actual entrepreneur as well as other partners, who are referred to as limited partners. however, they only participate in the company with their deposits and are not personally liable, only with their deposits.
The functioning and liability of a LP
There are no restrictions on the personally liable partners of the LP, only the limited partners are limited in liability. In addition, the limited partners are also excluded from the management and representation of the company. In this case, the non-compete clause does not apply, because the limited partners are allowed to participate in other companies and companies in any form. But you have to pay attention to the guidelines of the partnership agreement, which must always be concluded when establishing a limited partnership. Although the limited partners have no influence on the management due to their limited right of control, it is possible that a limited partner is appointed as a personally liable partner and vice versa.
Should a partner as a limited partner withdraw from his liability, then he has to answer for his old debts for five years. Only after these five years is he liable only with his contribution.
According to the Commercial Code, the LP must present annual financial statements including a balance sheet. It is similar to a general partnership. Further obligations arise if the LP exceeds the size of a medium-sized company. If a LP is founded, it must be entered in the commercial register, whereby the costs depend on the number of general partners.
The distribution of profits and losses in a LP
The capital of a LP bears interest at 4% and should the annual profit be too low, then this is then subject to interest at a lower rate according to § 168, 121 HGB. As managing director and sponsor, the general partner bears the full risk and receives an appropriate share of the profit, whereby the form of the profit-sharing is contractually regulated.
The limited partner receives the profit credit on a special account and the general partner receives this on his private or capital account. Should a loss arise, the limited partner only participates up to the amount of his share and the losses exceeding this are repaid with later profits. But the limited partner is not indebted to the limited partnership.
The advantages and disadvantages of the LP
A clear advantage is the limited liability of the limited partners. As far as the minimum capital for the formation is concerned, this is not mandatory. In addition, the personally liable partner has a high degree of decision-making power. It is easier for them to obtain a loan from the banks and they have a good reputation because they are fully liable as a general partner. In addition, they have a high reputation due to their full liability as a general partner. The capital of the company can still be expanded through the limited partners.
Many family companies opt for this legal form, whereby the general partner is liable with his capital contribution and his private assets, and many see this as a disadvantage. In addition, there must be strong trust between the shareholders, because the company is run exclusively by the general partner. If there should be a dispute among each other, the existence of the LP can be endangered very quickly. The successor must also be explicitly specified in the partnership agreement.
The registration of the LP in the commercial register
The shareholders must have the LP entered in the commercial register and the entry and exit of shareholders, the relocation of the company headquarters and the change in the company must also be recorded or reported in the commercial register. The liability contribution is entered by at least one limited partner.
Here, the fact must be emphasized that the LP is created with the conclusion of the contract and the start of trading. The entry in the commercial register is therefore a legally binding measure. Even the liability applies with the start of general business operations.
The registration of the limited partner’s limitation of liability plays an important role. In accordance with Section 176 of the German Commercial Code (HGB), the limited partner is liable with all of his or her private assets until they are entered in the commercial register, and the limitation of liability only comes into force with the actual entry.
The tax peculiarities
When founding a limited partnership, there are a number of tax peculiarities that must be taken into account during the establishment and ongoing operation.
- The business tax
In most cases, the LP is a corporation subject to trade tax and is therefore subject to trade tax. A special feature here is that this tax does not count as business expenses. Instead, it is proportionally offset against the shareholders’ income tax (Section 4 (5b) EStG). In accordance with Section 11, Paragraph 1, Clause 1, No. 1 of the Trade Tax Act, an allowance of EUR 24,500 is deducted.
- Income tax
With his participation in the LP, the shareholder draws income from the business operations. If the business activity relates only to asset management, then income is generated from renting and leasing.
- The sales tax
In terms of the sales tax law § 2 UStG, the limited partnership is a company.