Convert a sole proprietorship into a GmbH: Your path to more security and growth

Why the GmbH could be the right choice for your company

The decision in favour of the GmbH legal form offers you as an entrepreneur numerous advantages that strengthen both your personal security and the future viability of your company.

Limited liability: As an independent legal entity, the GmbH is liable for its debts and liabilities. Shareholders are not personally liable, but only to the amount of their capital contribution. This protects your private assets and minimises personal risk.

Tax advantages: GmbHs are subject to corporation tax, which is currently 15 per cent (plus solidarity surcharge). This tax rate is often lower than the progressive income tax rate that sole traders pay on their profits. The GmbH also enables tax optimisation, for example through the formation of reserves or the use of investment deductions.

Financing and expansion: The clear structure and limited liability of a GmbH make it more attractive to banks and investors. This gives you a better chance of obtaining favourable credit terms and easier access to equity capital, which improves your company’s opportunities for expansion.

Professional image: The GmbH is perceived as a reputable and established legal form. It conveys a high degree of professionalism and stability to customers, business partners and investors, which strengthens business relationships and can open up new business opportunities.

Ways to become a GmbH: contribution or spin-off - what suits you?

The conversion of your sole proprietorship into a GmbH can be done either by contribution or spin-off. Both options offer specific advantages, depending on your individual goals and requirements.

Contribution: Your sole proprietorship as part of the GmbH

A contribution involves the transfer of individual assets. The sole proprietorship is not transferred as a whole to an existing or newly founded GmbH. For example, contracts must be transferred individually with the consent of the contractual partners. The entire business assets can be transferred to the GmbH in this way.

For tax purposes, this can be carried out as a “tax-neutral reorganisation” in accordance with Sections 20 et seq. UmwStG, which allows you to avoid an immediate tax burden.

Spin-off of a sole proprietorship into a GmbH: targeted transfer of business divisions

The first requirement for a spin-off is that the sole proprietorship must be entered in the commercial register as a merchant. The sole proprietorship can then be transferred in its entirety to a newly founded or existing GmbH by way of a spin-off.

This option is particularly advantageous as it is a form of so-called universal succession. This means, for example, that contracts belonging to the company do not have to be transferred individually. A tax-neutral reorganisation in accordance with the German Reorganisation Tax Act (Umwandlungssteuergesetz) may also be possible in the case of a spin-off under certain conditions.

The transformation process step by step - with L.W.P. at your side

The conversion of your sole proprietorship into a GmbH requires careful planning and precise implementation. L.W.P. accompanies you through the entire process and ensures that your change of legal form runs smoothly and efficiently.

1. Analysis and strategy development: A detailed analysis of your company’s situation and objectives forms the basis for a successful conversion. Legal and tax aspects are taken into account and a customised strategy is developed. A central component of this phase is the valuation of your company in order to determine the value of the contribution to the GmbH.
2. Legal structuring: The legal structuring includes drawing up the articles of association, which contain all the key regulations for the GmbH. These include the distribution of shares, the definition of the company’s executive bodies and the management regulations. The articles of association must be notarised in order to be legally binding.
3. Tax optimisation: The conversion has tax consequences that need to be carefully examined. A precise analysis of the tax aspects and the development of a customised tax strategy are crucial. The German Transformation Tax Act (UmwStG) plays an important role here, as it enables a tax-neutral transformation under certain conditions.
4. Entry in the commercial register: The spin-off only becomes legally effective when the GmbH is entered in the commercial register. Various documents are required for this, such as the transformation resolution, the transformation report and, if applicable, a non-cash formation report. The entire registration process can take several weeks.
5. Further formalities: After entry in the commercial register, additional steps are necessary to finalise the transformation. These include registering with the tax office to obtain a new tax number, registering with the relevant professional associations and amending existing contracts and business documents.

What does it cost to become a limited company?

Converting your sole proprietorship into a GmbH involves various costs that vary depending on the individual case. Precise cost planning ensures financial clarity in the conversion process.

The cost factors:

• Notary fees: Notarisation of the articles of association and other necessary documents is required by law. The costs for this depend on the value of the transaction and the scope of the notarial work. We can determine these in advance.
• Court costs: Fees are incurred for the entry of the GmbH in the commercial register.
• Consultancy costs: The use of lawyers, tax consultants and, if necessary, auditors is recommended in order to minimise legal and tax risks. The costs vary depending on the scope of the advice required.
• Share capital: A minimum share capital of 25,000 euros is required to set up a GmbH. If an existing sole proprietorship is incorporated into an existing GmbH, this cost item is not applicable.

Estimates of total costs:

The total costs for converting a sole proprietorship into a GmbH can vary greatly. A generalised estimate is not possible.

Cost-benefit analysis: Is the conversion worthwhile?

The conversion should not be assessed on the basis of costs alone. Long-term benefits such as limited liability, tax optimisation and improved financing options can quickly outweigh the initial costs. These advantages contribute significantly to the long-term profitability and stability of your company.

Tax considerations for the conversion

When converting a sole proprietorship into a limited liability company, taxes are a key aspect and require careful consideration.

Tax implications

• Income tax: In the case of a GmbH, corporation tax and trade tax must be added together to determine the income tax burden, as they are levied in parallel. In contrast to income tax, they are not subject to progression. The tax rate is therefore independent of the amount of taxable income or trade income. Corporation tax is currently 15% plus solidarity surcharge. The amount of trade tax depends on the assessment rate of the local municipality. With an average assessment rate of 450 %, a trade tax burden of 15.75 5 is to be expected. The total tax burden would therefore be approx. 31.5 %, whereas the tax burden for a sole trader is progressive, i.e. the tax rate increases with the amount of taxable income up to 45 % plus solidarity surcharge. A sole trader also pays trade tax. However, this is offset against income tax up to an assessment rate of 400%. At an average assessment rate of 450 %, the additional trade tax burden remaining for the entrepreneur is therefore 1.75 % of the trade income.Companies with higher profits in particular can therefore benefit from a lower tax burden of between 10 % and 15 % in the legal form of a GmbH. However, this only applies if the profits realised are not distributed to the shareholders. This is because the distributed profits are also subject to capital gains tax of 25% as a form of income tax levied on the shareholders.
• Turnover tax: The regulations on turnover tax remain unchanged, as both sole proprietorships and limited liability companies are subject to turnover tax.

Special tax advantages and obligations for GmbHs

• Favourable treatment of retained earnings: Undistributed profits in the GmbH are taxed at a lower rate, which represents a tax advantage.
• Bookkeeping obligation: In contrast to sole traders, who can use a simplified income statement (EÜR) if necessary, GmbHs are obliged to keep double-entry accounts.

Reorganisation Tax Act: Special tax features of the reorganisation

When converting an existing sole proprietorship into a GmbH, it should generally be avoided that the conversion process is subject to income tax in the same way as the sale of a company. This applies in particular if the business assets of the sole proprietorship include assets that were not previously recognised in the balance sheet due to tax accounting regulations (so-called hidden reserves). Under certain conditions, the German Reorganisation Tax Act (UmwStG) allows for a tax-neutral reorganisation in which these hidden reserves are not disclosed for tax purposes, but are instead transferred to the GmbH. However, the tax-neutral reorganisation requires compliance with specific requirements. Our experts will help you to fulfil these requirements and avoid tax traps.

6 tips for tax optimisation

1. Choosing the optimal time of conversion: Strategic planning of the time of conversion can help to take advantage of tax benefits and minimise burdens.
2. Tax-optimised drafting of the articles of association: Targeted provisions in the articles of association, such as the distribution of profits or special depreciation, can secure long-term tax advantages.
3. Utilisation of depreciation options: GmbHs offer a wide range of options for depreciating assets, which can lead to a reduction in the tax burden.
4. Creation of reserves: The creation of tax-free reserves can be used to make future investments tax-efficient.
5. Optimisation of managing director salaries: A well thought-out structure of managing director remuneration can also contribute to tax optimisation.
6. Splitting up businesses: Separating business divisions into independent companies can be advantageous for tax purposes in certain cases.

Advantages and disadvantages at a glance: Is a limited liability company really right for you?

Advantages of converting a sole proprietorship into a limited liability company

Limited liability: By forming a GmbH, your private assets are protected, as liability is limited to the company’s assets. This offers additional security in the event of financial difficulties or legal disputes.

Tax advantages: GmbHs benefit from a fixed corporation tax rate of 15% (plus solidarity surcharge). In addition, you can optimise your tax burden through measures such as preferential reinvestment or loss offsetting. These tax advantages can improve your company’s financial planning in the long term.

Better financing options: The structured organisation and limited liability of a GmbH create confidence among banks and investors, which facilitates access to capital and supports expansion plans.

Disadvantages of converting a sole proprietorship into a GmbH

Increased administrative effort: Converting to a GmbH requires additional bureaucratic measures such as double-entry bookkeeping and regular reporting obligations. These administrative tasks are time-consuming and require corresponding resources.

Formation costs and ongoing administration: In addition to the costs of notarisation, entry in the commercial register and consultancy costs, there are ongoing administrative costs. These include the preparation of annual financial statements and compliance with legal requirements, which are associated with additional expenses.

The choice of the right legal form, whether a GmbH or another, should be based on a thorough analysis of your business objectives and the specific advantages that a GmbH can offer your company. Consider both the long-term benefits and the additional obligations that come with setting up and managing a GmbH.

Legal framework - secure and compliant through the transformation process

The conversion of a sole proprietorship into a GmbH requires compliance with specific legal requirements.

Legal requirements for the conversion

In order to convert a sole proprietorship into a GmbH through a spin-off, several legal requirements must be met. Firstly, the conversion resolution must be notarised. In addition, a transformation report and a balance sheet are required to document the economic situation of the company. These requirements are set out in the German Reorganisation Act (UmwG) and the German Limited Liability Companies Act (GmbHG). Entry of the sole proprietorship in the commercial register is a prerequisite for the reorganisation.

Rights and obligations after the reorganisation

After the conversion, all rights and obligations of the sole proprietorship are transferred to the GmbH. This includes all existing contracts, liabilities and assets. Shareholders of the GmbH must contribute the share capital in full and are entitled to a share in the profits. The role of the managing director and other internal regulations are defined in the articles of association. In addition, subsequent liability for liabilities that were established before the spin-off takes effect must be taken into account.

Required documents and formalities

The following documents are required for the successful conversion:

• Articles of association: Defines the structure of the GmbH, including the distribution of shares and management regulations.
• Conversion resolution and conversion report: The resolution must be notarised and is the basis for entry in the commercial register. The transformation report can be dispensed with in many cases.
• Registration with the commercial register: The GmbH is created by registration with the competent registry court. The spin-off is entered both in the commercial register of the sole proprietorship and in the commercial register of the absorbing GmbH.

Your checklist for an efficient change of legal form

1. Advice from experts: Consult lawyers, tax advisors and auditors to clarify legal and tax issues comprehensively.
2. Drafting the articles of association: Determine the management, capital structure and shares of your GmbH.
3. Notarisation: Have the articles of association and other necessary documents notarised.
4. Entry in the commercial register: The notary registers the GmbH with the relevant registry court to finalise the legal formation.
5. Registration with the tax office: Apply for a new tax number and organise all tax matters.
6. Transfer of assets: Ensure that all property rights and contracts are correctly transferred to the GmbH.
7. Communication with business partners: Inform your business partners about the conversion and adjust existing contracts accordingly.
8. Adapt internal processes: Update accounting and internal systems to reflect the new GmbH structure.