At some point, every sole trader is faced with the question of who will succeed him in his company. It is not uncommon for the question to be postponed due to a lack of a suitable successor. Once such a person has been found, problems often arise unexpectedly during the transfer of the company that are connected with the legal form of a "sole trader" and which can be avoided if the issue is dealt with in good time.
At first glance, it seems tempting: a sole trader company can be set up quickly and is uncomplicated to manage. A sole trader is not subject to any disclosure obligations, there are no complicated regulations on capital maintenance and no risk of triggering a hidden profit distribution. In addition, the personal liability of the sole trader can mean a trust bonus for business partners.
However, the disadvantages of trading as a sole trader become apparent at the latest when it comes to succession or the sale of the company:
- With the legal form of a sole trader, there are naturally no shares that can be gradually transferred to a successor or investor if necessary;
- When a sole proprietorship is transferred in the form of the sale of all assets, all hidden reserves are generally disclosed and must be taxed;
- In addition, the individual transfer of certain legal positions (in particular the transfer of contracts) requires the consent of the contractual partner or these cannot be transferred at all (e.g. certain permits under public law);
- Even after the transfer of the business, the seller remains liable for the liabilities established prior to the transfer and - even if the acquirer is prepared to assume existing liabilities - bears the risk for five years that his successor may fail and be unable to settle the liabilities assumed;
- Tax relief can only be claimed from the age of 55 and only once in a lifetime. However, subsequent variable purchase price components (e.g. a so-called earn-out or a retirement provision from future earnings) can prevent the tax reduction from being claimed even after the age of 55.
It is therefore advisable for sole traders to address the question of how best to make their company "succession-ready" at an early stage.
Conversion of the sole trader company
One way to increase succession capability is to convert the sole trader's business into a company in order to enable a gradual transfer, possibly taking advantage of tax benefits. The law offers the sole trader the option of a so-called "UmwG" with §§ 152 ff. UmwG offers sole traders the option of a so-called "spin-off".
In a spin-off, the sole trader transfers all or part of the assets belonging to his company as a whole to an existing company in the legal form of a partnership or company with limited liability, i.e. to an oHG, a limited partnership, a GmbH & Co. KG, a GmbH or an AG or to a newly founded GmbH or AG in the course of the spin-off by way of a so-called universal succession.
Prerequisites for a spin-off
Prerequisites for a spin-off include the sole trader being entered in the commercial register or being entered immediately before the spin-off and the liabilities of the sole trader not exceeding its assets.
Consequences of a spin-off
Pursuant to Section 131 para. 1 no. 1 UmwG, the entry of the spin-off has the effect that the spun-off part of the assets, including the liabilities, is transferred as a whole to the acquiring legal entity in accordance with the division provided for in the spin-off and takeover agreement. The consent of third parties, in particular contractual partners, is generally not required and can therefore not be refused.
The spin-off is also generally possible at book value for tax purposes, provided that a complete business or part of a business is spun off. Hidden reserves are not disclosed in this case and therefore do not have to be taxed.
The company of the sole trader can be continued by the absorbing company.
However, certain highly personal legal positions, such as personal permits under public law and limited personal easements, are excluded from the universal succession. These must either be newly applied for or additionally transferred by way of singular succession.
Eligibility for succession
The conversion of a sole proprietorship into a company offers the following advantages from the perspective of a planned succession:
- A potential successor can already gain experience in managing the company as a managing director or be tested for suitability without having to become a co-shareholder straight away.
- It is possible to gradually transfer company shares to a successor in order to allow them to "grow into" the responsibility; shares can also be transferred according to the financial capacity of the transferee, while at the same time it is possible for the transferring entrepreneur to participate in the company and its success on a transitional basis.
- The sale of shares in companies (GmbH, AG) is tax-privileged under certain conditions, regardless of the age of the seller and even if only part of the shares are sold.
If you have any questions about the possibilities of a spin-off or alternative ways of structuring your company succession, please do not hesitate to contact us.
Certified lawyer for commercial and corporate law