If you want to convert a sole proprietorship into a GmbH and use the opportunity to make this retroactive, then this has an impact on the accounting. In the course of the eight-month retroactive effect period, various special features arise in accounting, which require an adjustment. This is the case, for example, in the case of the registration of VAT, in which the retroactive effect is not taken into account. Retroactive effect, on the other hand, is the determining factor in drawing up the balance sheets.

Design consultancy develops concepts that show entrepreneurs ways to save taxes with their companies. If we now implement this design, however, other aspects also come to light. We notice this especially in accounting. That's why we thought we'd introduce you to this side of the coin. And the best way to do that is by example. For this purpose, we assume that a sole proprietorship will be converted into a GmbH and now see how this affects the accounting in the year of conversion.

So we convert a sole proprietorship into a GmbH (according to § 20 UmwStG). To this end, we follow our general recommendation and make this retroactive at the beginning of the year. In this way, we can use the final balance sheet of the previous year as a conversion balance sheet. This means that we have time from January to the end of August to retroactively convert the individual company into a GmbH within the statutory retroactive effect period of eight months. If the conversion process takes longer, you have to create a separate conversion balance, which therefore comes with avoidable costs.

This also involves the statutory fiction that the GmbH already exists for income tax purposes on January 1, although the actual conversion only takes place significantly later. In the meantime between 01.01. and 31.08., in which we convert the sole proprietorship, we must also make the bookkeeping for sales tax purposes. Here, however, the actual date of conversion is crucial for the change in accounting. So how do we do that?

As you can see, there is a variety of points to consider in accounting when converting a sole proprietorship. Let's do it.

First of all, we look at how we have to treat the GmbH, which is created retroactively at the beginning of the year, in financial accounting in order to prepare the annual accounts and tax balance sheets from it. In the period up to the registration of the converted GmbH in the commercial register, the business continues as a sole proprietorship. Since the sole proprietorship does not receive any attention at the end of the year when drawing up the annual accounts and tax returns, the bookings made initially can be transferred unchanged to the new mandate of the GmbH. Thus, at least this part of the conversion can be implemented relatively easily.

The transfer of assets from the sole proprietorship to the balance sheet of the GmbH is already significantly more complex. Although this is always the easiest way to transfer tax-neutrally to book values with the same values. However, in certain cases it may be useful to carry out this transfer to partial values or even to market values. If you follow this path, you have to pay very close attention to what you book in the opening balance of the GmbH. In most cases, the difference resulting from the higher valuations in fixed and working capital is taken as the basis for bookings into the capital account. Of course, this is now the basis for taxation under conversion tax law.

Probably the biggest challenge in accounting, if you want to convert a sole proprietorship into a GmbH, is the recording of current sales. Because for this you have to make the separation between the deliveries of the individual company and the GmbH. However, this also has an impact on the preparation of the annual VAT return. Either way, these bookings are extremely error prone. A conscientious bookkeeping specialised in this matter is therefore a well-considered risk mitigation measure. Because on the one hand, no entrepreneur wants to pay sales tax twice, nor to evade taxes by an accidental omission. And if even cross-border transactions play a role and they are subject to VAT abroad, then one suspects that their accounting means a high effort if one wants to convert a sole proprietorship.

What is the quintessence of our considerations? On the one hand, we were hopefully able to show that the actual transformation of a sole proprietorship is less of a challenge than that of the accounting accompanying it. This is due in particular to the different requirements towards a GmbH and a sole proprietorship. On the other hand, it was important for us to focus on the enormous importance of specialized accounting when converting a sole proprietorship. So if you run a sole proprietorship and now want to convert it into a GmbH, for example, you should also make sure that at least in the transition phase the accounting pays attention to exactly these special features. This should be in experienced hands at least until the preparation of the financial statements.