What are the advantages of a GmbH?
Many new businesses are set up as sole trader businesses (Einzelunternehmen) due to the lower administrative burden. Over the course of an entrepreneurial career, however, the question arises as to whether the legal form of a GmbH might be better suited to the circumstances of the business.
In contrast to the personal liability of a sole trader, a GmbH is only liable with its company assets. The legal form of a GmbH can also bring tax advantages. For corporations (Kapitalgesellschaften), the combined burden of 15% corporation tax (Körperschaftsteuer) and the local trade tax rate (Gewerbesteuersatz) results in a total tax burden of approximately 30%. Only when profits are distributed to the shareholder is the remaining amount subject to 25% capital gains tax (Kapitalertragsteuer) plus solidarity surcharge (Solidaritätszuschlag). Where the personal income tax rate is high, it is therefore advantageous to retain profits within the GmbH and allow them to work.
However, there are also reasons that argue against a change of legal form. Advantages of a sole trader business include, among others, lower formal costs for the annual financial statements and the avoidance of the obligation to disclose annual financial statements.
How is a sole trader business transferred into a GmbH?
In some cases it is possible to wind up the sole trader business and conduct all new transactions through the GmbH. A transfer (Einbringung) is preferable where the business contains significant hidden reserves that are to be transferred on a tax-neutral basis.
When transferring a sole trader business, a distinction must be made between:
- Formation of a GmbH by contribution in kind (Sachgründung), and
- Transfer into an existing GmbH.
In the case of formation by contribution in kind, the new GmbH is provided with the required minimum share capital through the transfer of business assets. The GmbH must be endowed with 25,000 euros. Unlike cash formation, where formation with as little as 12,500 euros is possible, partial payment of the share capital is excluded in the case of formation by contribution in kind. In this case, a formation report (Sachgründungsbericht) must be prepared pursuant to § 5 para. 4 GmbHG and, as a rule, evidence of value must be provided.
It is also possible to contribute the sole trader business as a premium (Agio) as part of a cash formation or by means of a capital increase in an existing corporation. A capital increase can be carried out for as little as one euro. Where the value of the contributed business assets exceeds the premium, the excess can be allocated to the capital reserve or issued as a shareholder loan.
It should be noted that, in the case of a transfer by way of singular succession (Einzelrechtsnachfolge), the consent of the creditors is required so that the liabilities can be transferred to the newly formed corporation. Rental and lease agreements must in principle be terminated and newly concluded. The rights and obligations arising from employment relationships are, by contrast, assumed by the company by operation of law.
A further option is available to a sole trader registered in the commercial register (eingetragener Kaufmann, e.K.). Such a trader can transfer the registered sole trader business into a GmbH by way of a hive-down (Ausgliederung). The advantage here is that the business assets, together with all assets, liabilities, contracts, rights and obligations, are automatically transferred to the GmbH in the course of universal succession (Gesamtrechtsnachfolge).
How can the transfer be structured on a tax-neutral basis?
A transfer of a sole trader business into a GmbH can be structured on a tax-neutral basis - that is, at book value rather than fair market value - provided the conditions of § 20 UmwStG are met. The key requirements are that the entire business is contributed in exchange for new shares in the receiving GmbH. The transfer can be backdated by up to eight months before the date of the agreement. Annual financial statements drawn up as at 31 December can therefore still be used as the basis for the transfer, provided the application is filed with the commercial register before 31 August of the following year. Following a tax-neutral transfer, a lock-up period of seven years applies during which the GmbH shares received should not be disposed of.
Are you considering converting your sole trader business into a GmbH?
A change from a sole trader business to a GmbH entails changes to liability, financing, company structure and the taxation of the business. The decision to change and the path towards it should always be made with regard to the individual situation and goals of the entrepreneur.
We are happy to support you in finding the right solution for your circumstances. Simply arrange a no-obligation initial consultation - we advise you personally, transparently, and with the aim of achieving the best outcome for you.