Definition and legal basis:

The partnership limited by shares (KGaA) is a hybrid legal form of German company law that combines elements of the limited partnership (KG) and the stock corporation (AG). It is regulated in Sections 278-290 of the German Stock Corporation Act (AktG) and combines the personal structure of a KG with the capital market-oriented structure of an AG.

The KGaA is a legal entity and trading company in which at least one partner (general partner) has unlimited liability for the company’s obligations, while the other partners (limited liability shareholders) only participate with their capital contribution and do not assume any personal liability.

Structure and organs:

The KGaA has the following characteristic structural elements:

1. general partner(s): At least one personally liable partner who assumes the management and representation of the company. The general partner can be a natural person or a legal entity (e.g. a GmbH).

2. limited liability shareholders: shareholders who hold shares in the KGaA and whose liability is limited to their contribution.

3rd Annual General Meeting: Meeting of limited liability shareholders that decides on fundamental matters of the company.

4. supervisory board: Supervisory body that monitors the management but, unlike the AG, does not appoint the management board.

The special feature of the KGaA is the strong position of the general partner, who is responsible for management and cannot be dismissed by the Annual General Meeting. This enables long-term and stable company management while at the same time utilizing the capital market for financing.

Foundation and raising of capital:

A KGaA is founded in a similar way to an AG:

1. adoption of the Articles of Association
2. Acquisition of all shares by the founders
3. Appointment of the Supervisory Board and the auditor
4. Registration and entry in the commercial register

The share capital must amount to at least EUR 50,000 and is divided into shares. The shares can be issued as par value or no-par value shares and are generally freely transferable, provided the Articles of Association do not stipulate any restrictions.

Management and representation:

The management and representation of the KGaA is the responsibility of the general partner(s). They have a very strong position, as they:

– Cannot be dismissed by the Annual General Meeting
– Have extensive freedom of decision in management
– Have the right to veto resolutions of the Annual General Meeting (if provided for in the articles of association)

The supervisory board monitors the management, but has limited powers compared to an AG, as it cannot appoint or dismiss the general partner.

Liability and profit distribution:

The liability structure of the KGaA is divided into two parts:

– General partner(s): Unlimited personal liability with private assets
– Limited partners: Limited liability to their contribution (share value)

Profits are generally distributed in such a way that the limited liability shareholders receive a dividend first. The remaining profit is divided between the general partner(s) and limited liability shareholders, with the exact distribution being regulated in the articles of association.

Tax treatment:

The tax treatment of the KGaA is complex and depends on its specific structure:

– At company level: The KGaA is subject to corporation tax.
– At the level of the general partners: The profit share attributable to them is subject to income tax (for natural persons) or corporation tax (for legal entities).
– At the level of the limited liability shareholders: Dividends are subject to withholding tax or the partial income method.

The KGaA is generally subject to trade tax, whereby the trade tax is incurred at the level of the company.

Advantages and disadvantages of the KGaA:

Advantages:
– Combination of personalized management and capital market financing
– Strong and stable position of the general partner
– Possibility of stock exchange listing while retaining control
– Flexibility in the design of the capital structure

Disadvantages:
– Complex legal form with high administrative costs
– Potential conflicts of interest between general partner and limited liability shareholders
– Limited control options for shareholders
– Less attractive to investors due to the complex structure

Practical significance and areas of application:

The KGaA is relatively rare in practice, but has advantages in certain situations:

– Family businesses that use capital market financing but want to retain control
– Companies with strong founders that want to go public
– Special structures in the area of private equity or company takeovers

Well-known examples of KGaAs in Germany are Henkel, Merck and some soccer clubs such as Borussia Dortmund.

Summary:

The partnership limited by shares is a special legal form that enables a unique combination of personal management and capital market-oriented financing. It offers companies the opportunity to raise capital via the stock market without losing control over management. Despite its complexity, in certain situations the KGaA can be an attractive option for companies that want to combine a long-term, stable management structure with the advantages of a stock market listing. However, the decision to adopt this legal form should be carefully considered, taking into account the specific business objectives, governance structure and tax implications.