The Limited Partnership with Share Capital – An attractive legal form for business succession

Although the limited partnership with share capital (KGaA) continues to lead a rather obscure existence in the German business landscape, it represents an ideal instrument for regulating succession in family businesses. The KGaA offers the unique opportunity to combine the transferor’s control with the successor’s equity stake. 

Business succession represents a key challenge for many medium-sized enterprises. In addition to tax and family considerations, choosing the appropriate legal form is a decisive factor for a successful handover of the business. In this context, the KGaA offers numerous advantages that make it a particularly attractive alternative to other company forms, such as the GmbH or the GmbH & Co. KG.

Basic structure and functioning of the KGaA

A KGaA is a hybrid form combining elements of a public limited company (AG) and a limited partnership (KG). It consists of at least one general partner (the general partner) and one or more limited partners, whose liability is limited to their respective capital contributions. The limited shareholders hold a stake in the company’s share capital and exercise their rights through the general meeting. The general partner manages the business and bears the entrepreneurial risk (see also the SKW Insights of 14 March 2022, ‘KGaA – An underestimated corporate form!’).

This structure allows a clear separation between management and capital participation. Whilst the limited shareholders act as investors, business control remains with the general partner. This is particularly advantageous for family businesses or owner-managed companies, as it ensures that the family or the existing entrepreneur can retain influence.

Advantages of the KGaA in business succession

• Safeguarding control of the business: A key concern for the transferring company during business succession is typically to ensure that control of the business remains with the company itself or, at the very least, within the family. The KGaA is suitable in this respect because management lies with the general partner (the fully liable partner of the limited partnership – KG) who cannot, however, be removed by the limited partners (via the general meeting). This distinguishes the KGaA significantly from the AG, where the management board is appointed by the supervisory board and can be relatively easily dismissed.

The general partner of the KGaA may be a natural person, a partnership (e.g. a general partnership – oHG) or – particularly interestingly – a corporation (e.g. a GmbH). By appointing a family-owned GmbH as the general partner, the control of the company (the GmbH & Co. KGaA) can be secured for the family across generations.

• Flexible ownership options: The KGaA also offers flexible options for family members, investors or employees to acquire a stake in the company. Issuing shares to these parties allows the easy transfer of shares without jeopardising the company’s management. For example, children or other successors can be involved as limited shareholders, whilst management remains with the father or mother as general partners. External investors can also be easily brought on board in this way without being able to influence the management.
• Tax advantages: The KGaA is treated for tax purposes in the same way as a corporation (e.g. a GmbH). The company’s profits are therefore subject to corporation tax and business rates. However, tax planning options can be utilised in succession planning, for example through the gradual transfer of shares as part of an anticipated succession arrangement. The shares are valued at fair market value, which can yield tax advantages with skilful planning. Furthermore, tax allowances and reliefs can be utilised within the framework of inheritance and gift tax.
• Continuity and protection of existing rights: As changes in the composition of the limited shareholders have no impact on the continued existence or management of the KGaA, this structure offers a high degree of continuity and protection of existing rights. Even in the event of the general partner’s death, appropriate provisions in the partnership agreement can ensure a smooth succession. 

The KGaA also offers the possibility of excluding the general partner’s personal and unlimited liability by using a limited company. If, for example, the general partner of the KGaA is a limited company (GmbH), the liability of this general partner GmbH is limited to its corporate assets.

Practical implementation of business succession in a KGaA

• Structure of the Articles of Association: The Articles of Association of a KGaA offer a wide range of options. Consequently, provisions relating in particular to the succession of the general partner, the transfer of shares and the exercise of voting rights can be tailored to individual needs. In this regard, it is often advisable to appoint a family-owned limited liability company (GmbH) as the general partner in order to secure long-term control of the business and keep it within the family. The transfer of shares to children or third parties (such as investors or employees) can be carried out gradually, for example through (potentially tax-free) gifts or sales to them.
• Involvement of family members and third parties: Family members can be involved as limited shareholders without having any influence over the management. As mentioned, it is also possible to involve employees or external investors. The issue of non-voting preference shares offers additional flexibility. This allows capital to be raised without jeopardising control of the company.
• Succession arrangements for the general partner: If the general partner is a natural person rather than a company, clear succession arrangements should be set out in the partnership agreement in the event of their withdrawal or death. Appointing a limited company as the general partner offers particular advantages in this regard, as succession can be arranged within that limited company. This ensures that the business remains under sound management regardless of personal changes.

Comparison with other legal forms

Compared to the traditional GmbH or AG, the KGaA offers significant advantages when it comes to business succession. Whilst in a GmbH and AG the management can be influenced by the shareholders or the supervisory board, in a KGaA management remains with the general partner, independent of the limited partners. The flexible participation of family members and investors is made particularly straightforward through the issue of shares. The KGaA thus combines the advantages of a corporation in terms of changes to the shareholder structure with the entrepreneurial control of a partnership.

Conclusion and recommendations for action

The KGaA is an extremely attractive legal form for business succession, particularly for owner-managed and family-run businesses. It offers the opportunity to secure the family’s long-term control of the business, create flexible ownership structures and take advantage of tax benefits.

By combining elements of a partnership and a corporation, it brings together the advantages of both corporate forms and enables a bespoke succession solution. Entrepreneurs seeking a sustainable, cross-generational succession plan should seriously consider the KGaA as an alternative.

Dr Thomas Hausbeck, LL.M., would be happy to assist you with any questions or arrangements relating to business succession via a KGaA.