Partnership refers to a form of business in which two or more natural persons (or legal entities) join to carry on a trade or a liberal profession together. Under German law the term covers classic forms such as the civil-law partnership (Gesellschaft bürgerlichen Rechts, GbR), the general partnership (Offene Handelsgesellschaft, OHG), the limited partnership (Kommanditgesellschaft, KG) and the partnership of professionals (Partnerschaftsgesellschaft, PartG). For accounting and taxation the most important point is: partnerships are tax-transparent, i.e. profits are attributed to the partners and taxed under the Income Tax Act (EStG).
Legal form, liability and tax classification
Partnerships differ materially in liability and registration requirements:
- GbR: simple formation, no registration in the commercial register required, commonly used for smaller projects.
- OHG: is a commercial partnership, registration in the commercial register is required, unlimited personal liability of all partners.
- KG: consists of at least one fully liable general partner (Komplementär) and one limited partner (Kommanditist) with restricted liability.
- PartG: mainly for liberal professions; specific rules on liability and professional law must be observed.
For tax purposes: the partnership itself is not subject to corporate income tax. Under the rules of the Income Tax Act (EStG) the partnership’s profits are determined and attributed to the partners. However, partnerships engaged in trade are subject to trade tax (Gewerbesteuergesetz). For sole proprietors and partnerships there is a trade tax allowance of EUR 24,500.
Impact on accounting and financial reporting
The legal form leads to concrete consequences for daily bookkeeping and the preparation of annual financial statements:
- Obligation to prepare financial statements: OHG and KG are generally required to prepare annual financial statements under the German Commercial Code (HGB); small GbRs may use a simplified income-surplus calculation (Einnahmen-Überschuss-Rechnung, EÜR) under certain conditions, provided they are not commercial traders.
- Commercial vs. tax balance sheet: Differences between the commercial balance sheet (HGB) and the tax balance sheet (EStG/UStG) are common: recognition of provisions, depreciation (AfA) and valuation options must be reconciled.
- Partners’ equity accounts: Each contribution, withdrawal and profit allocation is recorded on separate partners’ equity accounts; this is required in accounting to document cash movements and tax effects transparently.
Typical journal entries (practical examples)
Common entries in a partnership:
| Transaction | Example entry |
|---|---|
| Partner contribution | Bank to Partner capital |
| Private withdrawal | Partner drawings to Bank |
| Profit allocation (at closing) | Profit and loss to Partner capital (pro rata) |
VAT, trade tax and income tax in practice
From an accounting perspective the three tax areas are particularly relevant:
- Value-added tax (UStG): VAT liability generally applies; VAT advance returns must be filed electronically and on time. The small business exemption (§19 UStG) may be relevant for smaller partnerships.
- Trade tax: Commercial partnerships must pay trade tax. The partnership receives notices of trade tax prepayments; these payments should be taken into account in liquidity planning.
- Income tax (EStG): Profits attributed to the partners increase their personal taxable income; the partnership prepares the relevant information, e.g. Anlage G, or other statements for the partners’ income tax returns.
Practical tips for accounting implementation
Concrete recommendations for freelancers and small businesses:
- Clear account structure: Set up separate capital, drawings and profit-clearing accounts for each partner.
- Contractual arrangements: Agree binding rules in the partnership agreement on profit allocation, withdrawal limits and interest on contributions so that accounting and tax filings are consistent.
- Distinguish drawings from salary: Payments to actively involved partners are usually drawings or managing‑director remuneration; correct posting avoids queries from the tax office.
- Deadlines and prepayments: Factor VAT advance returns and trade tax prepayments into liquidity planning.
- Work with a tax advisor: Especially for commercial balance sheet management, elective choices under HGB/EStG and complex profit distributions, involve a tax advisor.
Partnerships offer flexibility but require a clear accounting separation between partnership assets and partners’ private assets. Structured bookkeeping, harmonised chart of accounts and regularly reviewed annual financial statements simplify tax treatment and reduce the risk of additional assessments by the tax office and trade tax authorities.