Changing Legal Form: From Sole Proprietorship to Corporation (AG or GmbH)
When a business grows, many entrepreneurs consider changing the legal structure from a Sole Proprietorship to a Corporation (AG or GmbH). While the term “change” is often used, the process involves forming a new legal entity that absorbs the sole proprietorship’s assets and liabilities. The sole proprietorship is then dissolved. There are two main methods for this transformation:
- Asset Acquisition: The new company takes over all assets and liabilities during formation, with some assets potentially remaining as loans.
- Contribution in Kind: Sole proprietorship assets are used to pay for new shares in the corporation.
Both methods require the sole proprietorship to have maintained double-entry accounting and an audited annual account.
Method A: Asset Acquisition
In this process, all the assets and liabilities of the sole proprietorship are transferred to the new company during the formation stage. The transferred assets are either partially or fully used to pay for the shares, with the remaining assets often functioning as loans. This method requires that the sole proprietorship’s annual accounts have been filed and verified by an accredited auditor. Once all components are transferred, the sole proprietorship ceases to exist, and details of the transfer are published in the Commercial Registry.
Method B: Contribution in Kind
Here, the sole proprietorship’s assets are used to subscribe to new shares of the corporation. An accredited auditor verifies whether the assets’ declared value corresponds to their actual worth. The assets, their value, and the number of shares received are then published in the Commercial Registry. While less commonly used, this method offers another way to convert a sole proprietorship into a corporation.
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