With sustainable entrepreneurial success, even a GbR with only two shareholders will eventually become too small. Especially the question of limitation of liability increases with success. In addition, questions about the use of profit are becoming increasingly complex. No wonder, then, if after some time shareholders of a GbR want to convert their company into a GmbH, preferably with a holding company for each or each of them. But there are some risks in which you should know in advance how to avoid them.

1st GbR in GmbH tax neutral convert – Introduction

Anyone who brings a business idea onto the market without choosing a specific legal form runs a sole proprietorship. However, if two partners start with their idea without choosing a certain legal form, they usually act automatically as a civil law company (GbR). This is due to the fact that they only represent a legal entity after a certain company size, instead of within the framework of the legislation of the Civil Code (BGB), that is subject to the standards of the Commercial Code (HGB). For small companies, you are usually in the area of a GbR. The counterpart for larger companies within the meaning of the HGB, on the other hand, would be the open trading company (OHG).

But let’s stay calm with the GbR, because it is basically the most elementary form of partnership. So the GbR has many advantages, but also some disadvantages. In particular, the question of limitation of liability can become significantly more important with increasing success. As GbR, the shareholders are always liable for all liabilities of their company. In other words, in the event of liability, they are even obliged to use all their private assets to cover all financial claims of third parties. Sooner or later, this leads almost all GbR shareholders (as well as individual entrepreneurs) to the realization that this should be changed. Only in what should you convert a GbR?

converting 2 GbR into GmbH

If a GbR is the model for a company in which all shareholders are equally responsible for the fortunes of their company and are liable accordingly, then the company with limited liability (GmbH) is the exact opposite from the group of corporations. Because, as the designation already suggests, the shareholders are liable here at best to a limited extent, namely up to the amount of their contribution. In addition, the GmbH offers the further advantage that it can only be founded with a single shareholder. But that's another very different aspect.

In any case, it is important for our considerations that the GmbH can be clearly favored as a target structure for the conversion of a GbR. Although there is also the entrepreneurial company (haftungsbeschränkt) (UG), this is only a minimal version of a GmbH, for which a share capital of EUR 1 is already sufficient for founding. However, UG has to spend part of its future profits to increase the share capital to the level of the minimum share capital of a regular GmbH, so that you end up with a GmbH anyway. And other corporations, such as Aktiengesellschaft (AG), are only rarely suitable for our purposes presented here; They're just too big.

converting GbR into GmbH: this is how it works

All right, the GmbH should now replace the GbR. The next question is: how do you do it? You could simply convert the GbR into a GmbH as part of a conversion. Yes, that is possible, but opens up another topic. Because when it comes to deciding what to do with the profits, all shareholders must agree among themselves. Nobody can then freely dispose of their own profit share. So how do you solve this obstacle?

With a holding company. More specifically, with a holding company for each shareholder. Because then each shareholder can decide for himself whether he would like to distribute his profit share or rather reinvest or reinvest. So if you already want to convert the GbR into a GmbH, you should also think about the question of whether a holding structure is worthwhile. And often the answer is yes.

But there are already tax risks lurking at the next step. If you convert a GbR into a GmbH and then set up holding companies for the shareholders, this is a process that is taxable under the Conversion Tax Act. In order to transfer a shareholding in one capital company to another capital company in a tax-neutral manner, the shareholding ratio must be more than 50 % (Section 20 (1) second sentence of the UmwStG).

For a single shareholder, this condition is easy to meet, but for two shareholders? With the same shareholding ratio, each partner has too few shares in the GmbH with 50% to be able to make the prerequisites for a tax-neutral contribution to his own holding company. And granting a holding to only one of the two shareholders via a majority shareholding is also not a sensible solution. Does the transformation of GbR into a GmbH ultimately fail at this detail?

Converting GbR into GmbH with Holding – the correct order

The short answer is: no way. Because if you follow a certain order when converting the GbR into a GmbH, you can transfer the GbR into a GmbH with holding company in a tax-neutral manner. However, the two shareholders must first establish a new GmbH before the conversion of GbR. However, this remains empty at first, because they will be the future holding companies. Once these GmbHs have been established, each GbR shareholder contributes its 50% GbR shares to its Holding GmbH. If this is done tax-neutrally, you can then finally convert the GbR into a GmbH.

Now you wonder why this is suddenly tax-neutral, when the contribution of GmbH shares with a quota of a maximum of 50% still led to taxation? Because the conversion tax law only considers the contribution of shares in a limited company with a shareholding of 50 % or less to be taxable. However, partnerships are not subject to such strict rules on the level of participation. And this is exactly what we have exploited in our process. That is why the sequence of the individual steps in the conversion of a GbR into a GmbH with holding structure is so essential. Otherwise, this leads to unpleasant tax surprises.

converting GbR into GmbH with holding structure – Conclusion