Atypical silent partnership with a limited liability company (GmbH): More liquidity, less taxes

Are you the owner of a GmbH and looking for ways to reduce the high taxation of your profit distribution? Or do you need new capital to implement a high-risk strategy?

In both cases, it may be worth considering an atypical silent partnership in your GmbH.

Thanks to this form of participation, you secure two tax advantages and get fresh capital without having to take out a bank loan.

The catch: An atypical silent partner shares in the increase in value of your company and can also receive extensive rights.

To help you make an informed decision, I will explain everything you need to know as an entrepreneur about an atypical silent partnership in this article. You will learn:

This post was updated on 4 August 2021.

What is an atypical silent partnership in a GmbH?

An atypical silent partnership in a GmbH is a special form of silent partnership. So-called silent partners can thus participate in your GmbH with a capital contribution (see also Section 230 German Commercial Code (HGB)).

This participation is simply agreed contractually and does not have to be registered in the Commercial Register.

The atypical silent partner participates from the time of the conclusion of the contract in the profit (and loss) as well as in the increase in value of the company.

In addition, they receive so-called co-entrepreneurial rights. This allows them (depending on the exact agreement) to check the annual financial statements, to object to certain entrepreneurial decisions or even to be active in the management.

How far these co-entrepreneurial rights actually go, however, can be contractually agreed and the atypical silent partner can also be granted less comprehensive rights.

Normal silent partnership vs. atypical silent partnership: What is the difference?

  1. Difference 1: Participation in the profit, loss and increase in value of the company

A normal silent partner only participates in the profit of the company. In the case of losses, they assume no liability and do not have to make any compensation payments. However, as a result, they also do not participate in the increase in value of the company.

An atypical silent partner takes more risk. They can receive a profit share, but must also compensate for possible losses. In return, they also share in the increase in value of the company.

  1. Difference 1: Control and co-entrepreneurial rights

A normal silent partner only has control rights. Thus, for example, they can audit the annual financial statements but cannot make any decisions.

An atypical silent partner is a co-entrepreneur and, in addition to their control function, can also object to certain management decisions. The extent of these rights and which decisions they can specifically influence are contractually agreed.

How do you benefit from an atypical silent partnership?

Used correctly, an atypical silent partnership can offer you many advantages. In addition to tax advantages, there are also concrete business advantages that can result from such a participation.

Advantage 1: The full distribution of profits is taxed at 42% or 45% and no longer at 49%

An atypical silent GmbH is taxed like a partnership. For you this means:

If the profit is up to €274,613, the tax rate is only 42%. If you make more profit, the tax rate increases to 45%.

In contrast, with the usual GmbH you have a burden of 49% when you distribute your profits. Thus, you save at least 4% in taxes.

Advantage 2: You can use a trade tax allowance of €24,500

Trade tax is always calculated based on your annual profit: The higher your profit, the higher the trade tax.

Since an atypical silent GmbH is considered to be a partnership for tax purposes, you can use the allowance of €24,500 and reduce your taxable profit.

Ordinary GmbHs cannot use this tax allowance (see Section 11 German Trade Tax Act (GewStG)).

Advantage 3: You can quickly increase your liquidity

If a loan to your company is considered risky or you want to use the capital for a daring expansion, it is very difficult to get a bank loan at a good rate.

In addition, you will always have to pay back the loan including interest – even if your plan fails.

An atypical silent partnership is a good alternative here: The silent partner consciously takes the risk and may even be faced with substantial liabilities in the event of a total loss.

Furthermore, the atypical silent partner only benefits if the venture financed by the silent partnership is financially successful for you.

Advantage 4: The participation does not appear in any register

If you are worried that everyone can see that you have one or more silent partners in your company, I can reassure you.

The partnerships are not at all visible to outsiders and neither banks nor business partners can see them.

Advantage 5: You can continue to benefit from all the advantages of a GmbH

Although your company is treated like a partnership for tax purposes, you can continue to enjoy all the atypical and silent advantages of a limited liability company (GmbH). These advantages include:

  • Simple succession rights regulated in the partnership agreement
  • Limitation of liability to the capital contribution
  • Option of the company pension scheme

What are the disadvantages of an atypical silent partnership?

Although an atypical silent partnership has many advantages, there are also “downsides” that you need to know about before the business transformation. I have summarized the three that I consider to be the most important ones for you here.

Disadvantage 1: You have to prepare two balance sheets

Since your atypical silent GmbH is treated like a partnership for tax purposes, you must prepare a tax balance sheet that meets these requirements.

Under commercial law, however, your company is still considered a GmbH. Therefore, a different balance sheet is required here, which may also differ greatly from the tax balance sheet.

For you, this results in higher tax consultancy and accounting fees.

Disadvantage 2: The silent partner is a creditor in the event of insolvency

The atypical silent partner’s share is not lost in the event of insolvency like a “normal” partner’s share.

On the contrary: They can reclaim their share and (depending on how the insolvency is handled) will receive at least part of it.

Disadvantage 3: The silent partner receives comprehensive co-entrepreneurial rights

As described above, an atypical silent partner, as a co-entrepreneur, can oppose corporate decisions and check many transactions (such as the annual financial statements and the balance sheets).

Admittedly: This need not always be a disadvantage. If you want the atypical silent partner to be actively involved in the company, this is even an advantage.

But in my experience, this is rarely the case and entrepreneurs fear that they may lose control of their company.

How can an atypical silent partnership be terminated?

The atypical silent partnership can be dissolved quite simply by termination of the contract.

Since the atypical silent partner participates in the increase in value of your company, they receive not only their initial capital investment, but also a share in the increase in value of the company.

The best way to explain this is with an example:

Assume you are an atypical silent partner and invested €50,000 in the partnership. At that time, the value of the total equity including your contribution was €500,000. Your share of the equity capital is therefore 10%.

After 10 years, you decide to terminate the partnership and cancel the contract. However, the equity of the company is now no longer €500,000 but €1,200,000.

Therefore, you receive a total payout of €120,000.

From the company’s point of view, this means: If you or the silent partner terminate the contract, a substantial amount of capital can flow out of your company.

However, if you are dependent on this capital due to planned investments or an economically difficult situation, you should do everything possible to keep the silent partner.

Caution: Avoid this mistake when terminating

When the atypical silent partnership is terminated, under tax law this is a transformation. The partnership for tax purposes is converted back into an “ordinary” limited liability company.

However, this reverse transformation is not tax-neutral until a period of 7 years has elapsed after the initial transformation.

This means: If you carry out the reverse transformation before the expiry of the period, you can expect a tax penalty.

Conclusion: Atypical silent partnership with a limited liability company (GmbH)? Yes, but only with the right partner!

An atypical silent partnership can offer you many tax and business advantages. Especially if you pay out your profits frequently or need fresh capital, this type of partnership can be ideal for you.

However, you should know exactly what you are getting into. This is because the atypical silent partner receives co-entrepreneurial rights, which can hinder you in the management of the company if the contract is not properly drawn up.

You must therefore carefully examine the advantages and disadvantages for your particular situation. If you are unsure, you should always consult a professional.

This is the only way you can be sure that all the details of the contract are to your advantage and you won’t have any nasty surprises.

Do you have any further questions about the atypical silent partnership in a GmbH? Or would you like to know how this kind of participation would work in your individual situation?

If you have these or similar questions, please feel free to contact me.

You can reach me at any time via phone (+49 40 44 33 11), e-mail (anfrage@steuerberatung-breit.de) or my contact form.

Kind regards,

Thomas Breit

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