Alternatives to a loan arrangement when converting to a GmbH

Until now, converting a sole proprietorship into a limited liability company (GmbH) has involved the option of converting the sole proprietorship’s equity into a loan to the GmbH. However, due to new legal regulations, this loan-based solution is no longer possible. We will examine the pros and cons of alternative solutions to this problem.

Background: Converting a Sole Proprietorship into a GmbH

When converting a sole proprietorship into a GmbH, numerous legal and tax considerations must be taken into account. For a tax-neutral conversion, for example, it is necessary for the GmbH to issue new shares. Until now, it was common practice to convert the sole proprietorship’s equity into a loan to the GmbH. However, new legal provisions restrict this option.

New Regulations and Consequences

The previously common loan solution for utilizing equity is no longer possible due to new laws. Commercial registries may refuse to register the conversion if an excessive loan has been agreed upon. However, this change appears to be spreading only slowly among commercial registries.

Alternatives to the loan solution

There are various workarounds to achieve the goal of the conversion:

• Withdrawal of equity before the conversion: Equity can be withdrawn until the conversion is registered in the commercial register. However, this requires careful planning, as excessive withdrawals can have tax consequences.
• Conversion of equity into a third-party loan: The sole proprietor can withdraw the equity and, for example, gift it to their spouse, who then grants it to the GmbH as a loan. However, this solution requires a gift tax review and possibly a reservation of the right to revoke the gift.
• Contribution instead of spin-off: Instead of a spin-off, the conversion can take the form of a contribution. This offers tax advantages and involves lower notary fees.

Conclusion

The new legal regulations make the previous loan solution for utilizing equity capital when converting a sole proprietorship into a GmbH impossible. Fortunately, alternative solutions are available that make it possible to achieve comparable results.

Do you need assistance with converting your sole proprietorship into a GmbH? Schedule an appointment at one of our offices in Düsseldorf or Oberhausen. Our experts will be happy to advise you.