partnership (GbR, OHG, KG) | Capital company (UG, GmbH, AG)

Tax Rate (Income/Corporate Tax) | Up to 45% (plus solidarity surcharge and, where applicable, church tax) | 15% (plus solidarity surcharge)

Business tax | Depending on the municipality, on average about 15% crediting of the shareholder's personal income tax possible | Depending on the municipality, on average about 15% no crediting of business tax at shareholder level

Taxation of profit distributions | No profit distribution in the proper sense possible | 25% (withholding tax), alternatively part income procedure

Treatment of withdrawals into private assets | Taxation with the common value | Taxation with the common value

Contracts between company and shareholder | Special operating income or special operating expenses, if applicable; assets to be recorded in special balance sheet | recognised for tax purposes; Exceptions are hidden distributions of profit (breach of the arm's length principle)

Sale of shares by the shareholder | Silent reserves are subject to taxation pursuant to § 16 EStG | Capital gains are subject to § 17 EStG

Individual partnerships and corporations each offer individual advantages and disadvantages. However, sometimes in the course of a “corporate life” there are changed objectives that require a change of legal form. Many founders also start as partnerships, usually in the legal form of the GbR, but later, for example, the company turns out to be more suitable. Since the conversion of a partnership into a GmbH is particularly popular, we take a look at the underlying process in this article.

Possible reasons for converting a partnership into a GmbH

Partnerships are comparatively easy to set up and – to put it somewhat polemically – can be created “at the regular table” within a few seconds. This applies in particular to the company civil law (GbR), since this requires only an oral agreement of common goals.

At the same time, the income of a partnership is subject to the individual tax rate of the respective shareholders. Section 15 (1) no. 2 of the EStG provides for taxation according to the so-called transparency principle. This creates a tax burden of up to 50%, which can be significantly reduced, in particular by setting up a corporation. The same also applies to the personal liability of the partners.

Let’s take a look at three good reasons for converting a partnership into a GmbH!

1.1. Reducing the tax burden

The taxation according to the principle of transparency charges up to 50% of the income of each shareholder of a partnership (income tax, solidarity surcharge and, where applicable, church tax).

This is contrasted by the tax burden of a domestic corporation. It is on average around 30%, but can also be reduced to only around 22% to 25% by cleverly choosing the company location. The reason for this is the trade tax, in which each municipality determines its own lifting rate.

The transformation of a partnership into a GmbH thus means that at the level of the company “more net from gross” remains. For example, the company has additional funds available to invest in capital investments or the business itself.

1.2. Establishment of a holding structure

Although a partnership can also act as a holding company, there is greater scope for design with a corporation. In particular, it offers the advantage of ‘quasi-zero taxation’, since the profits of the subsidiaries only have to be taxed at 1,5 % at holding level. The reason for this is § 8b KStG, which may be combined with trade tax reductions.

The transformation of a partnership into a GmbH thus enables the recovery of company profits at the level of the holding company. Combined with a company depot or the simple establishment of an additional retirement provision for the shareholders of the GmbH, this results in considerable tax advantages, especially over several years.

1.3. “Leaning down” of administrative structures

At least two natural persons are always involved in a partnership. In many cases, for example at GmbH & Co. KG – it legally represents a limited partnership and thus a partnership – a corporation is added as a legal entity. Since the income of each person must be independently determined and explained, the administrative burden is regularly considerable.

A corporation like the GmbH offers noticeable advantages here. Because it is legally a single legal person, at the level of which the income is determined and declared to the tax office. The conversion of a partnership into a GmbH therefore also offers cost and structural advantages.

Example: ABCD-GmbH & Co. KG involves A, B, C, D and AB-GmbH. All shareholders have special assets in which profits and losses arise. The commissioned tax office must keep books at the level of the limited partnership as well as at the GmbH level. After the end of the marketing year, tax returns must be submitted for each shareholder (A-D, AB-GmbH) as well as a declaration of approval for the limited partnership itself.

This would not be the case for an “ABCD GmbH”. Here only tax returns would have to be created for the GmbH and books kept on an ongoing basis. The preparation of income tax returns for shareholders is also regularly associated with less effort in practice.

2. Differences in taxation of partnerships and corporations

Partnerships and corporations are already taxed differently in principle. Although they are comparable in many respects, for example in the case of sales tax, in particular in the case of income taxes, various principles must be observed. The following table gives an overview:

Unlike corporations, partnerships can also manage the shareholders’ private assets. These assets are then subject to the generally applicable rules, so that, for example, a tax-free sale after 10 years is possible in the case of real estate (§ 23 (1) no. 1 EStG). This possibility is excluded in the case of limited liability companies, since they have only operating assets.

Conversion of the partnership into a GmbH: change of form or growth?

For the conversion of a partnership into a GmbH, several ways come into consideration in civil and tax law practice. In particular, changes of form and “extended growth” are common, since a so-called asset deal can lead, for example, to the discovery of a previously untaxed company value. The tax consequences of the conversion are always based on the Conversion Tax Act (UmwStG).

3.1. Change of legal form of the partnership into a corporation

In the change of legal form, a so-called universal succession occurs with regard to the new corporation. It follows in the “footsteps” of the previous partnership, which no longer exists as such. The established corporation assumes all legal connections and obligations of the previous partnership.

According to § 20 UmwStG, a change of form is tax-neutral possible, but requires a corresponding application to the tax office. Basically, it comes here to the discovery of hidden reserves, which “snooze” in the previous co-entrepreneur shares. A so-called transition to book values occurs only or the corresponding application is only approved if the following conditions are jointly available: