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Tax and Legal
David Merz | Founding Partner
Zurich, June 12, 2022
In the dynamic world of business, companies often need to adapt to changing circumstances. One significant change that a company may undergo is a conversion of its legal form. In this article, we explain what it means to convert a company into another legal form, why you would consider doing so, the steps involved, and some important factors to consider while going through the process.
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A change of legal form involves transforming a company from one legal entity type to another, such as converting a sole proprietorship into a GmbH (limited liability company) or an AG (stock corporation), or converting between a GmbH and an AG.
There are numerous types of legal forms available for businesses in Switzerland. In this article, we will explore conversions between the three most popular: a sole proprietorship, a GmbH, and an AG.
There are many potential reasons to consider converting a company into another legal form. Some of the most common motivations for doing so include:
In Switzerland, one of the most common changes of legal form is from a sole proprietorship into a GmbH or AG. This occurs regularly due to the need for small-time business owners to expand their operations and ensure they have limited liability protection.
It is also quite common for a GmbH to change its legal form to an AG and vice versa, due to changing circumstances and objectives of the company in question.
The process of converting a company’s legal form requires careful planning and adherence to legal requirements. The exact steps involved can vary significantly depending on the jurisdiction and especially the specific legal forms involved. However, there are some general considerations that apply to most conversion processes.
When going through a conversion of legal form, the following points should be kept in mind:
Sole proprietorships often evolve into more complex legal structures to accommodate business growth and mitigate personal liability risks. This where it becomes necessary to convert the sole proprietorship into a GmbH or AG.
Strictly speaking, the legal form of a sole proprietorship cannot be changed, as it is not a separate legal entity. Instead, the sole proprietorship must be completely dissolved, and the assets and liabilities can be transferred to a newly founded GmbH or AG. This is known as a “takeover” of the sole proprietorship into the GmbH. For this operation to be possible, the assets at the time of the conversion must be greater than the liabilities (there should be excess assets). After the conversion, the sole proprietorship ceases to exist. If it was previously entered in the commercial register, it must be removed.
This conversion process represents what is known as a “qualified foundation”. The legal requirements of a qualified foundation are higher than an ordinary cash contribution foundation, which therefore results in higher formation costs.
In the case of a qualified founding described above, the new company can take over all the assets and liabilities of the sole proprietorship through an acquisition in kind or a contribution in kind. An acquisition in kind involves acquiring the assets of the sole proprietorship as part of a transaction (i.e., purchasing the assets for an agreed amount).
On the other hand, a contribution in kind occurs when assets are contributed or transferred from one entity (in this case the sole proprietorship) to another (the newly formed GmbH or AG) as a capital contribution or investment. In other words, all assets and liabilities are taken over as part of the founding and used to (partially) finance the shares of the new company.
Founding by contribution in kind is generally the preferred option. In this case, an authorized auditor must check whether the assets acquired have the correct stated value. The best time for the conversion is at the beginning of the financial year, because documents such as the conversion balance sheet and the inventory list are already available based on the previous year’s financial statements, and therefore do not have to be prepared separately.
It is possible to directly convert a company’s legal form from that of a GmbH to an AG and vice versa. This may arise out of a change in a company’s situation or its future objectives. The process can be quite complex and costly in both cases, but with the right guidance and planning, it can be done without too much difficulty.
There are numerous possible reasons for converting a GmbH into an AG. Small- to medium-sized companies may opt to change to an AG to attract investment or facilitate succession planning. An AG is a more useful legal form if there is a greater need for capital, share rights are to be spread more widely, and new shareholders are to be involved. It may also simply be for the reason of improving the company’s prestige and credibility.
Although less common than the conversion from a GmbH to an AG, some stock corporations may decide to change their legal form to a limited liability company. An example where this may be suitable is when the group of shareholders in an AG reduces to a small number of major shareholders who are also responsible for the management of the company themselves. In this case, they may prefer the more personal and private nature of a GmbH. The process, and laws applying to such conversions, is effectively identical to that of converting a GmbH to an AG.
The Mergers Act (FusG) regulates which steps must be taken when a limited liability company is converted into a corporation with a different legal form, or vice versa. The following is required:
The legal provisions for a conversion of this type are set out in Art. 54 of the FusG. Art. 56 FusG must also be closely observed, which contains provisions for the protection of shareholders.
The merger law laid out in the FusG enables conversion between a GmbH and an AG without having to liquidate the former legal entity in a way that would be disadvantageous. The process is effectively a merger and demerger. It is important to consider any changes in the required minimum share capital and share structure when changing the legal form.
Tax implications play a crucial role in the decision-making process when converting a company’s legal form. The conversion may trigger tax liabilities, such as capital gains tax or transfer taxes. However, it can also present opportunities for tax optimisation arising out of the altered tax rules which apply to the new legal form.
It is advisable to seek professional tax advice before undertaking a change of legal form to understand the potential tax consequences and assess the most tax-efficient strategy. Additionally, it is important to consider any tax incentives or benefits offered by the jurisdiction where the company operates.
Converting a company into another legal form is a significant decision that requires careful consideration and planning due to the complexities involved. Whether it is changing from a sole proprietorship to a GmbH or AG, or undertaking conversions between different legal entity types, several factors need to be taken into account.
It is highly recommended to enlist the services of a qualified expert to help you in navigating the process of changing the legal form of your business. Nexova AG has the knowledge and skills to advise you on all matters related to changing legal form, and will walk you through the practicalities of the process at each step of the way.
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