Which is better LLP or Pvt Ltd.

LLP or PartG mbB - a comparison primarily between liability and insurance

| The partnership with limited professional liability (PartG mbB) is the answer to the "escape into the LLP". But has the legislator also succeeded in finding an appropriate answer? The structure of liability is of crucial importance. The article therefore compares the competing legal forms with a view to limitation of liability, but also to compulsory insurance and possible legal uncertainties. |

1. Freedom of establishment and more legal forms

It is thanks to the European freedom of establishment that companies can operate across borders in the internal market without encountering real borders. The freedom of establishment means that foreign legal forms are also recognized in the German legal area. They are legally and partisan and they are not deprived of the limitation of liability (BGH 14.3.05, II ZR 5/03). The consequence of this fundamental freedom of the European internal market is an increased presence of foreign legal forms in the German legal area.

The development that emerged on the legal advisory market was particularly striking: the British Limited Liability Partnership (LLP for short) has replaced the German legal forms, especially among larger and large law firms. A “flight into the LLP” was recorded (Henssler, AnwBl 14, 96, 98). Overall, this development in the internal market must be viewed critically: the freedom of establishment in Europe is increasingly leading to deregulation competition - a phenomenon known as the “Delaware effect” (Fleischer, MünchKomm GmbHG, introduction marginal no. 222). As a result, the German legislature was forced to provide a German answer to the trend towards LLP. With the aim of offering German freelancers an alternative to LLP, he introduced the partnership with limited professional liability into German corporate law in July 2013.

The regulatory approach and the concept of limitation of liability are very different compared to the LLP. The question is whether and to what extent PartG mbB is the right answer to LLP and can compete with it.

2. The PartG mbB's liability and insurance concept

The PartG mbB's liability for damage resulting from incorrect professional practice is limited to the company's assets in accordance with Section 8 (4) of the PartGG. This innovation in comparison to the classic partnership closes a major liability gap in the law of professional companies. While in the case of the concentration of liability according to Section 8 (2) of the PartGG, personal liability for incorrect advice can at best only be limited to one partner, with the PartG mbB no partner is personally liable for errors in advice.

2.1 Advisory and management errors

The weaknesses of PartG mbB's limitation of liability are evident on the one hand in all other claims such as salaries and rents. Here - i.e. for the so-called management errors - there is joint and several personal liability of all partners in accordance with Section 8 (1) of the PartGG. A circumstance that is particularly important for supra-regional societies. On the other hand, according to the reasons for the law, the limitation of liability does not extend to damage from a crime (BT-Drs. 17/10487, 14).

The fact that PartG mbB's limitation of liability only relates to contractual claims is unsatisfactory, especially for a freelance professional group: Health professionals, especially doctors, are traditionally not liable for treatment errors based on contracts. You are liable for offenses (§§ 823 ff. BGB). However, since the legislature left the partners' criminal liability untouched, the PartG mbB - a legal form specially designed for freelancers - does not offer the large group of health professionals any alternative. One solution could have been to expressly limit the liability of the legal form to negligent violations of legal interests i.S. of § 823 Abs. 1 BGB (see also Henssler AnwBl 14, 96, 104). The fact that the legislature has designed the limitation of liability so incompletely is a missed opportunity.

2.2 Risk of internal recourse

Another potential gap in PartG mbB's liability structure is in the form of internal recourse. In this sense, a possible personal liability of the partner can be revived "through the back door". Situations are conceivable in which a partner is at fault within the meaning of of § 1 Abs. 4 PartGG, §§ 708, 277 BGB - i.e. grossly negligent - or commits a knowledgeable breach of duty. If the insurer assumes no liability in these cases or the insured sum is exceeded, the injured client can have the company's recourse claim against the partner in accordance with Sections 829, 835 of the German Code of Civil Procedure (ZPO) attached and transferred. The same applies to any additional payment obligations of the shareholders. Ultimately, the PartG mbB's liability umbrella can be perforated (see also Römermann / Praß, NZG 12, 601, 604). The solution to the problem lies in the social contract. The right to internal recourse can be contractually excluded, so that a seizure of the claim is ruled out.

The internal limitation of the company's recourse claims does not have to be entered in the partnership register.

As a constitutive prerequisite for the limitation of liability, Section 8 (4) of the PartGG names the maintenance of a legally prescribed liability insurance. It is sufficient for the insurance to be "maintained". Actual occurrence of the insurance in the event of damage is not required for the limitation of liability (Grunewald, GWR 13, 393). This means: It is sufficient that an effective contract has been concluded and that insurance cover is generally given in the event of damage. Exceeding the contractual liability sums of the insurer and the resulting failure by the insurer do not lead to the loss of the limitation of liability (BT-Drs. 17/10487, 14).

If the client's damage is not settled by the insurer, the company's assets remain as the subject of liability. The minimum sum insured for lawyers and patent attorneys is EUR 2.5 million in accordance with Section 51a (2) BRAO and 45a (2) PAO. The maximum annual benefit of the insurer can be limited. However, EUR 2.5 million per partner, but not less than EUR 10 million, is the lower limit. For tax consultants (Section 67 II StBerG) and auditors (Section 54 Paragraph 1 WPO in conjunction with Section 323 Paragraph 2 No. 1 HGB), the minimum sum insured per claim is EUR 1 million.

2.3 Different insurance regulations

Obviously problematic are the differently structured insurance regulations. In order not to denounce the inadequate implementation of liability insurance for all groups of freelancers, the focus here is on interprofessionalism. If the above-mentioned professional groups want to join forces, the question of the correct sum insured for society arises. To the chagrin of tax advisors and auditors in society, the highest sum insured - that of lawyers - is relevant. Furthermore, it should be noted that lawyers must also insure the knowledgeable breach of duty - whereas insurers do not have to demand co-insurance from auditors and tax consultants in these cases and consequently no damage assumption takes place (Ruppert, DStR 13, 1623, 1627). Ultimately, liability insurance is inadequately regulated. The various distinctions between the individual professional groups are at the expense of the attractiveness of interprofessional associations.

3. The LLP's liability and insurance concept

The British LLP and the partnership company have a lot in common. The internal legal relationship of the LLP largely corresponds to that of a partnership. Both are taxed like a partnership (Weller / Kienle, DStR 05, 1102, 1103). The external relationship makes the biggest difference to the German partnership company. Like the PartG mbB, the LLP is a hybrid: Although its internal relationship resembles a partnership, the LLP is a corporation and therefore itself the bearer of rights and obligations (Henssler / Mansel, NJW 07, 1393, 1394). As a result, the LLP - similar to the GmbH - basically offers a full limitation of liability. In British law, however, the rule-exception principle of personal liability is different than in Germany. The principle is the liability shield by the corporation. The exception is personal liability of the partners for professional errors according to English tort law (see also Triebel / Silny, NJW 08, 1034, 1035). A functioning and coherent liability concept - but only in the British legal area. Because as soon as an LLP e.g. acts as a bogus foreign company in Germany, some questions arise. Probably the most important: Who is personally liable? Probably the most popular answer to this: Nobody! (see only Henssler / Mansel, NJW 07, 1393, 1395).

The principles of international private law dissolve the British structure of liability in such a way that German tort law applies to partners operating in Germany. This leads to a dubious improvement in the position of the German partners compared to their British colleagues: British tort law already intervenes in cases of negligence with personal liability for advisory errors, while the German only applies if there is intent.

3.1 Legal uncertainty due to a lack of decisions by the highest court

However, it is uncertain whether this almost paradisiacal liability constellation will actually exist in the event of an emergency under liability law: So far, not a decision by the highest court, it remains questionable whether the almost complete exemption from liability of German LLP partners, which is based only on different links under conflict of law, is legally secure. Especially the so far rather conservative case law of the BGH casts doubt on this. In addition, even the German legislator has expressed doubts about the durability of the LLP liability structure (BT-Drs. 17/10487, 13 et seq.). But despite all the uncertainty, the LLP has established itself in Germany.

At PartG mbB, the limitation of liability goes hand in hand with register disclosure. The British legal form must also be registered. At least for your country of origin, it is clear: the LLP must be registered and is subject to accounting and auditing requirements as well as professional supervision in England and Wales (Pleister, AnwBl 12, 801, 802). But does the LLP also have to be entered in German registers? The LLP is a corporation, so it could be entered in the commercial register. On the other hand, in terms of corporate law, the LLP is structured like a partnership. The taxation also points in the direction of mandatory registration, analogous to the partnership. In an overall view, there are some arguments in favor of having the LLP entered in the partnership register as a legal form comparable to the partnership according to §§ 5 Paragraph 2 PartGG in conjunction with § 13d HGB. Even if there is no normative obligation to do so and the previous practice almost consistently disregards this requirement.

3.2 Insurance obligation of the LLP

On the other hand, the question of compulsory insurance for LLP in Germany can be problematic. There are various options for this: apply the legal obligation to insure a lawyer, apply the obligation of PartG mbB accordingly or do not recognize any obligation to take out insurance.

Section 8 (2) sentence 1 of the law governing the activities of European lawyers in Germany speaks in favor of the minimum insurance regulation for Rechtsanwalts-GmbH of Section 59j BRAO with an insured sum of EUR 2.5 million. This states: "The personal liability of the established European lawyer for claims of the client for compensation for culpably caused damage is only excluded or limited by the legal form of an association to which he belongs in the home country, provided that there is professional liability insurance or guarantee that meets the requirements of the § 59j of the Federal Lawyers' Act. “This approach cannot apply to LLPs with purely German participation. According to § 1 and the EuRAG annex, they do not fall within the scope of the provision. However, applying the regulation to English LLP partners and thus placing them in a worse position than their German colleagues already appears questionable under European law. The BRAK has also spoken out against compulsory insurance for the LLP in accordance with BRAO regulations. Since the LLP could not be admitted as a law firm, there would be no room for an application (not even analogous) of § 59j BRAO (BRAK-Mitt. 09, 22, 23).

It is true that this quite surprising result can be seen in contradiction to conventional German legal principles (such as raising capital or compulsory insurance as the basis for limitation of liability). In contrast, the German legislature - recognizing this legal uncertainty (BT-Drs. 17/10487, 13 f.) - has not made any provision, so that there is no room for an analogous application of the regulations for Rechtsanwalts-GmbH or PartG mbB (also Henssler in NJW 14, 1761, 1765): the prerequisite for an analogy - the unintended loophole - does not apply. Ultimately, the LLP in Germany probably does not require a minimum insurance.

4. Better to play it safe

The LLP is clearly superior to the PartG mbB in terms of limitation of liability. But it is also in terms of risk. It is true that the described advantages of the LLP are widely recognized in the literature. However, some voices reject the concepts of bogus foreign companies in the form of the LLP. In addition, it remains questionable whether the case law of the BGH leaves the LLP's fragile liability structure untouched. There is a similar level of ambiguity with regard to registration and insurance requirements.