Closing down a business and splitting a business when converting to a GmbH – tax traps for founders

Many IT founders, game developers and start-ups initially start out as sole traders or in a small partnership (GbR). The formation of a GmbH is then often an obvious choice – whether to limit personal liability, present a more professional image or bring investors on board. But be careful: converting an existing business into a GmbH is not just a formality, but can involve considerable tax pitfalls. In particular, there is a risk of the business being discontinued for tax purposes (Section 16 of the German Income Tax Act (EStG)) or a so-called hidden business split, which can arise unnoticed if the new GmbH takes over the operational business completely. These terms sound abstract, but for founders they mean the very real risk of a sudden tax burden on all previously untaxed hidden reserves – i.e. on the increase in value of your company – without any actual cash flow.

In this comprehensive guide, I take a detailed look at the circumstances under which it can be assumed that a business will be discontinued or split when a GmbH is founded, why this can have serious tax consequences (keyword: disclosure of hidden reserves and unbundling taxation) and how you can avoid or mitigate these pitfalls through forward-looking structuring. We pay particular attention to typical scenarios in the IT sector: What happens when an individual developer transfers his self-created games platform to a limited liability company? How are software, platforms, user data, patents, trademarks or other intellectual property (IP) transferred correctly? What contractual constructions – from simple transfer agreements to lease models and asset deals – can be used to avoid fictitious cessation of operations for tax purposes? And how can founders protect themselves at an early stage to avoid unpleasant surprises later on?

Liability versus taxes: Why startups switch to the GmbH

Before we dive into the tax shoals, let’s first take a quick look at why: there are good reasons for opting for a GmbH. As a founder, you bear full personal liability in a sole proprietorship. A mistake, a claim for damages or high liabilities can quickly become a threat to your private existence. A GmbH, on the other hand, offers a limitation of liability – private assets are generally safe, only the company’s assets are liable. Investors or business partners also often require a professional legal form before concluding contracts or providing capital. In addition, a GmbH can appear more reputable in business contacts and has advantages in IP management in the software sector, for example (intellectual property can be transferred to the company and held by it).

However, the change to a GmbH inevitably results in a break between the taxable entities: You change from a natural person (or partnership) to a corporation. For tax purposes, this transition is not automatically treated as a neutral change of legal form – rather, certain tax access mechanisms of the tax authorities are lurking here. Without clever structuring, the tax office could treat the process as if you had sold or given up your previous company – with the consequence that all previously untaxed capital gains(hidden reserves) are suddenly taxed. This would be a bitter blow for every founder, especially as the formation of the GmbH itself does not usually bring any money into the company’s coffers. On the contrary: you often set up a GmbH with little share capital, so you receive little or no cash – but for tax purposes it could be treated as if you had realized profits that did not end up in your account.

The following sections explain the central concepts of business closure and (hidden) business split in detail, show typical constellations and give you guidelines on how to avoid these pitfalls.

The invisible tax trap: Closure of a business (§ 16 EStG)

What does “cessation of business” mean for tax purposes?

In simple terms, the cessation of a business is the complete termination of a business by the entrepreneur. The moment a sole trader ceases to operate his business (or a co-entrepreneur in a partnership gives up his share), the tax office demands cash: it wants to tax the so-called abandonment profit. This discontinuation profit includes the hidden reserves of all assets belonging to the business assets, insofar as they have to be disclosed in the course of the discontinuation. In practical terms, the abandonment gain is calculated as the difference between the fair market value of all business assets and their book values, less any liabilities and certain costs. In other words, any value added to your company (e.g. self-developed software, customer base, trademark rights, machinery with depreciation, etc.) is realized for tax purposes at the time of business closure, even if you have not sold these assets.

The tax consequences of giving up a business are considerable. The entire hidden reserve potential is suddenly revealed and subject to income tax. For many founders, this means income taxation at the top tax rate on a fictitious profit. There are certain concessions: For example, entrepreneurs over the age of 55 or in the event of permanent occupational disability are entitled to a one-off tax-free allowance of €45,000, and reduced taxation (Section 34 EStG) can be considered under certain conditions. However, most startup founders are young and cannot take advantage of these benefits. They are fully taxed on the profit they give up – in addition to the current profit. Trade tax can also still be an issue (for natural persons, it is at least proportionately offset against income tax, but only up to a certain assessment rate). In short, giving up a business can result in an enormous tax burden.

Business closure vs. business interruption – and why the distinction is important

Important to know: Not every break in operations is the same as a cessation of operations. It is also possible to let a business rest or lease it out without immediately terminating it for tax purposes (more on this later under the lessor’s option). A genuine cessation of a business only occurs when the entrepreneur definitively removes all essential business assets, sells them or transfers them to private assets and ceases commercial activity. In practice, this is often done by selling the business or liquidating it. In connection with the conversion to a GmbH, however, it is often uncertain whether a cessation has already occurred or whether it is only a temporary interruption or continuation in another form. This is precisely the crux of the matter: if the transfer to a GmbH is deemed to be a cessation of operations, the hidden reserves are disclosed – in the worst case at a time when the founder has no liquidity at all to pay taxes.

In the case of a business disposal (sale of the entire business), the situation is clear: the sale price minus the book value equals the capital gain, which is taxed in a similar way to a discontinuation gain. On the other hand, if a business is given up without being sold, an abandonment balance sheet is drawn up in which all remaining assets are recognized at their partial value (market value). If, for example, a business asset is transferred to private assets, the market value is recognized as a fictitious sale. A typical example: As a sole trader, you have self-developed software that is practically €0 on your balance sheet (as self-created goodwill may not be capitalized). If you now give up the business and do not transfer this software to new business assets, but instead “keep” it, the tax office will recognize a market value for it – based on future earnings prospects, for example. This increase in value would be part of the profit on disposal. It is true that self-created goodwill is not to be taken into account for tax purposes when giving up a business, provided it is not sold for a fee. But as soon as you do realize it – e.g. by the GmbH giving you shares or money in return – it becomes relevant. We will come to this in a moment.

Key point: The formation of a GmbH can be considered a discontinuation of a business if you de facto close your previous business. This is particularly tricky if there are high hidden reserves (often in intangible assets such as software or user data), as there is then a high tax burden without a real inflow of profit. However, as we will see in a moment, this can be prevented by clever structuring.

Complete transfer to the GmbH – when does a business cease to exist for tax purposes?

Imagine you are a sole trader and have built up a flourishing software platform. Now you set up a limited company in which you hold a 100% stake and transfer the entire business to this limited company. From this point on, your sole proprietorship is no longer active and you may even register it with the trade office. From your point of view, you have simply changed the legal form. From the tax office’s point of view, however, you may have given up your business and “transferred” it to the GmbH – and thus realized a discontinued profit.

Whether a business has been discontinued depends on the circumstances. A complete transfer of all essential business assets to another legal entity (here: the GmbH) can be considered a discontinuation of the previous business. The decisive factor is whether or not you receive company rights (shares) in return. If the business is simply transferred to the GmbH free of charge without the GmbH granting new shares (for example, because you already owned the GmbH alone), the courts consider this to be a discontinuation of the business for tax purposes. The reason: The GmbH shares that you may already have owned may increase in value – but this increase in value does not count as consideration within the meaning of the Income Tax Act. It is then as if you had transferred your business for nothing, which from a tax perspective is equivalent to a withdrawal of all assets. Consequence: The GmbH must recognize the transferred assets at their going concern value (market value), a continuation of the book value is denied, and you are deemed to have sold/abandoned the business with all hidden reserves.

A practical example of this was provided by a ruling of the Baden-Württemberg tax court: A son initially founded a GmbH by way of a cash capital contribution (i.e. without a contribution in kind). Later, the father transferred his retail business to the son free of charge by way of anticipated succession, and the son contributed this business to “his” GmbH without new shares as a so-called hidden contribution. The tax office and tax court saw this as a discontinuation of the business in accordance with Section 16 (3) EStG – all hidden reserves were to be disclosed. The GmbH was not allowed to continue at book value, but had to recognize the acquired goods at market value; the son’s profit from the discontinuation was correspondingly high. The mistake here was: No new GmbH shares were granted for the contributed business, so the contribution was not made in the correct form. The increase in the value of his existing shares did not count as consideration.

Note: If you want to transfer your business to a GmbH without being taxed, this cannot simply be done informally. If the transfer is made without consideration or only against a credit to the capital reserve, this is considered a total withdrawal and abandonment for tax purposes. All hidden reserves would be taxable immediately – a potentially disastrous result for a founder who may not have made any profit at all, but merely changed legal form.

Fortunately, this can be avoided: In the section on structuring measures, we explain how you can make such a transfer tax-neutral (keyword: Section 20 of the German Reorganization Tax Act). First of all, it is important to note that you generally have to receive new company shares for the contribution and meet certain requirements so that the tax office does not treat the transaction as an abandonment. More on this in a moment – but let’s hold on:

• There is a risk of business cessation if the sole proprietorship/GbR disappears without replacement and all material assets are transferred to the GmbH without being compensated in the tax sense (e.g. through new shares).
• In case of doubt, the tax office will assume that the old business has been terminated and that there is a discontinuation gain (common value minus book value of all transferred assets).
• Particularly treacherous: many founders think that a 1:1 takeover into their own GmbH is just internal restructuring. However, this can be a taxable process if it is not structured correctly.

Tip: Even if you later decide to simply let your sole proprietorship rest after the transfer or to liquidate it informally, you should not make this decision thoughtlessly. This is because you would be manifesting the closure of the business. It is better to initially choose a structure in which no discontinuation is feigned – for example, by temporarily leasing the sole proprietorship to the GmbH, which we will discuss later. This means that the old business continues to exist for tax purposes and you can leave the hidden reserves frozen for the time being.

Let’s now take a look at the second important concept that often appears in parallel with the formation of a GmbH – sometimes unintentionally: the (hidden) business split.

Hidden business split: When the old company lives on in the background

What is a business split?

The business split is a construct developed by case law in German tax law. It exists when a company is split into two parts: a holding company (which holds important assets and rents/leases them out) and an operating company (which conducts operational business). Typically, this is the case, for example, of an entrepreneur who owns a GmbH (operating GmbH) and at the same time holds a property or machine in his private assets or in a sole proprietorship, which he transfers to the GmbH for use. This fulfills two conditions: personal interdependence (the same controlling party on both sides) and material interdependence (the transfer of an essential business asset to the operating GmbH). As soon as the same persons in both companies are able to assert their will and at least one essential business asset is transferred from the holding company to the operating company, this is referred to as a (tax) business split.

Important: It is not only land or machinery that can be considered an essential business asset, but any asset that is of central functional importance for the operating company. For example, licenses, software, patents or an entire customer base are also conceivable. In the case of IT companies in particular, intellectual property (source code, platform) or an important domain can therefore represent an essential operating basis. If the founder transfers these to his company, there is a material interdependence – and if he is also the controlling shareholder of the GmbH, there is also a personal interdependence. Consequence: There is a business split, even if it was perhaps not consciously planned – this is sometimes referred to as a hidden business split because the founder was not even aware of the structure.

Tax consequences of a (hidden) business split

Why is this business split relevant? Because it means that the previously supposedly “private” owner company (e.g. your sole proprietorship or your GbR, which now only holds one asset) continues to be regarded as a commercial enterprise for tax purposes. All income from the owning company – typically rental or leasing income from the transfer – is reclassified as commercial income (Section 15 (1) no. 2 EStG). The owning company therefore does not become a “normal” landlord with income from letting/leasing, but remains a commercial enterprise for tax purposes. However, this means that, above all, the transferred assets remain business assets of the owning company. And be careful: The shares in the operating GmbH are then also necessarily part of the business assets of the owning company! This often overlooked consequence has far-reaching consequences:

As long as the business split is intact, this may not be a problem – both parts are treated as interlinked for tax purposes (the profit of the owner company from the rental is subject to trade tax, but the trade tax allowance and credit may apply, and the GmbH shares are part of the business assets). However, if the business split breaks up, there is a risk of a tax explosion. The termination of a business split – for example, because the interdependence of personnel ceases or the essential operating basis is no longer transferred – regularly leads to the owning company giving up its business. At that moment, the owning company would have to transfer its GmbH shares and the transferred assets to private assets (so-called compulsory withdrawal), which in turn triggers the disclosure of all hidden reserves in these assets and shares. In other words: The dissolution of a business split has the same consequences as the discontinuation of a business – except that in this case there is a double charge, e.g. on the hidden reserve of the property and on the GmbH shares that were previously held as business assets.

The fatal thing about this is that the dissolution of a business split often happens unintentionally, for example when parts are sold or transferred without thinking about the interdependence. If, for example, the entrepreneur only sells the GmbH (operating company) to a third party, but keeps the GmbH or sole proprietorship with the property (perhaps as a retirement provision), then the personal interdependence is broken – there is no longer a business split. Result: The property is deemed to have been removed from the business assets and the hidden reserves in it are taxed, even though the entrepreneur has not sold the property. He may have to pay six-figure taxes “even though he has not received a single euro for it”. In the opposite case – property is sold, GmbH shares remain – the same applies: the GmbH shares would become private assets and their hidden reserves would be taxed, even though the shares were not sold. Even a gratuitous transfer of the GmbH shares (e.g. to the next generation) can end the business split and thus result in a compulsory withdrawal of both the shares and the remaining assets.

In short: a business split “sticks” to the company structures and makes the exit expensive. What is often deliberately used as an arrangement (separation of real estate ownership and operations to shield against liability) turns into a tax trap when it ends unplanned. In our start-up context, a business split is often “hidden” if the founder establishes a GmbH but deliberately does not transfer certain assets to the GmbH, but keeps them privately and only transfers them to the GmbH for use.

Example: A solo developer, let’s call him Max, has developed an online game as a sole trader. The software and server belong to him personally. He now founds “Max Games GmbH” and operates the platform to limit liability. The GmbH needs the software and server for this – Max provides them to the GmbH free of charge (or for a small fee) under a license agreement. Max holds 100% of the GmbH shares. Result: Max’s sole proprietorship (or his sole proprietorship) is now a proprietorship that transfers essential operating assets (software, server) to his operating company (the GmbH). There is personal interdependence (Max alone controls both), as well as material interdependence (software/servers are essential for business operations). There is a business split, even if Max did not plan it that way. For tax purposes, this means that Max’s sole proprietorship is deemed to be a continuing business; the software and the server remain his business assets, as do (surprisingly) Max’s GmbH shares.

As long as Max retains control, this will continue unnoticed. But now an investor wants to buy into Max Games GmbH and demands 60% of the shares. Max agrees and sells 60% of his GmbH shares to the investor. Now the personal interdependence ceases to exist – Max can no longer assert his will alone in the GmbH (the investor holds the majority). The business split thus ends abruptly. Consequence: Max’s sole proprietorship must transfer the remaining 40% GmbH shares to private assets, as well as the software and the server, as these were either also transferred or are now no longer used in a demerger constellation. All these withdrawals trigger tax: The increase in value of the software (difference book value – market value), the server and even Max’s GmbH shares are now realized. The GmbH shares suddenly have a specific market value as a result of the investor’s entry (whatever the investor has paid allows conclusions to be drawn) – these hidden reserves are taxed for Max, even though he has only sold part of them. This can lead to a considerable tax payment that Max has to make from the proceeds of the sale. If Max had even made a gift or issued shares in the form of a capital increase, it would be even worse, as there would then be no cash inflow, but tax would still be due.

The example shows that a hidden business split can be extremely dangerous for founders if the ownership and operating sides are later separated. Many start-ups bring in investors at some point or change ownership structures – this is precisely when the trap strikes if you are in a business split without perhaps knowing it.

Recognizing and avoiding business splits

As a founder, you should ask yourself: Do I still have significant assets outside the GmbH that I am making available to the GmbH after the GmbH has been founded? If so, check the criteria: Do you (or do you together with allied shareholders) continue to hold a majority stake in the GmbH? Is the property provided essential for the business operations? If both apply, you are probably in a (intentional or unintentional) business split.

This is not a bad thing per se – there are also structures that are deliberately chosen in this way, for example to keep real estate separate from the operating business. But you need to be aware of the consequences. In our context, it usually means that you have avoided having to give up your business for the time being by continuing to exist as an owner-operated company (the tax office allows you to continue operating commercially, so to speak, which prevents the immediate disclosure of hidden reserves). However, you are now in a structure that needs to be handled very carefully to avoid any nasty surprises later on. Any change – be it a sale of shares, a change in the transfer of use or a discontinuation of the owner company – can still bring the hidden reserves to light. There are ways to mitigate or avoid this (e.g. in the example, the software could be transferred to the GmbH before the sale of the shares in order to shift the disclosure there, or a different legal form could be established for the owning company from the outset, as discussed below). But all of this requires early planning.

If you have deliberately chosen to split a business (e.g. because you wanted to avoid the immediate tax when setting up a GmbH by keeping something outside), then you should think long-term: How do I get out of this interlocking structure later? In the family business sector, there are various ways of doing this, such as setting up an intermediate company (GmbH & Co. KG) to take on real estate and thus at least enable book value transfers if the demerger no longer applies. For start-ups, for example, it can make sense to also transfer the property to a partnership or to transfer it to a GmbH in good time before an investor arrives. Contractual precautions can also be taken, such as agreeing a reservation of tax rescission in participation agreements if a certain structure (such as a demerger) would otherwise have negative consequences. However, these points vary greatly from case to case. It is important to note that the safest way to avoid unwanted business splits is to transfer all key operating assets to the GmbH from the outset instead of keeping them private. If this does not happen for certain reasons, you should recognize the situation as a demerger case and have it accompanied for tax purposes.

Hidden reserves and unwinding taxation – What happens when transferring to a GmbH

I’ve talked a lot about hidden reserves. But what does this mean in concrete terms for an IT start-up? Hidden reserves are basically increases in value that are embedded in your company’s assets and have not yet been taxed. Typical examples for a developer startup:

• Software code: Self-developed software is usually carried on the balance sheet at € 0 (development costs may have been expensed). Nevertheless, the software can be valuable on the market – the delta is a hidden reserve.
• User base / platform: An established customer base or an online platform with a community has immense value (think of the data, the size of the community, sales potential). However, this value does not exist as an asset in your tax balance sheet.
• Brands and domains: If you have built up a brand or domain that is well-known and has a good reputation, this also represents an intangible asset that is not yet recognized for tax purposes (unless you have purchased the brand).
• Patents and licenses: Self-developed patented technologies usually only have the development costs as book value, but a much higher market value.

If you are now pondering: “Right, I have all this – what happens to it when I set up a GmbH?” – then you’re on the right track. These hidden reserves can come to fruition if the transition is structured incorrectly.

Entstrickungsbesteuerung – a word monster, but it describes the core principle: Whenever assets are withdrawn from domestic taxation, the hidden reserves contained therein must be disclosed (so-called unbundling). In the simplest case, this means that if something is removed from the business assets, it is treated as if it had been sold at market value. In the case of a discontinuation of a business, we had exactly this mechanism – total removal of all assets into the private sphere = unbundling of all assets, taxation of the profit from the discontinuation. We have also seen that the termination of a business split results in such an unbundling (compulsory transfer to private assets).

The principle is similar when transferring to a GmbH environment: If an asset is transferred to a GmbH (which is a separate taxable entity), there is a risk of being removed from your previous business assets – unless you manage to apply for tax neutrality or qualify for it. This is exactly what the German Reorganization Tax Act (UmwStG) makes possible in certain cases. Without these auxiliary constructions, any transfer of e.g. software from your sole proprietorship to the GmbH would be treated as if you had sold or withdrawn the software at market value, which would result in immediate income taxation.

Even more perfidious: Even if you do nothing, e.g. do not officially sell your platform to the GmbH, but simply allow the GmbH to use it free of charge, this cannot remain without consequences for tax purposes. Either – as described above – a business split occurs, which means that the platform remains in your ownership (then no tax exemption for the time being, but later risk), or (if no business split applies, for example because you do not control the GmbH) the tax office could argue that you have removed the platform from your business assets and transferred it free of charge. This would be a withdrawal (private withdrawal), also to be valued at market value and taxed accordingly. Intangible values in particular are critical here: Simply using your software in the GmbH without consideration or without clarification could be considered a hidden contribution – a contribution that leads to a withdrawal due to a lack of formalities (as happened in the case described with the father-son business contribution). A partially paid transfer (e.g. the GmbH only pays you a symbolic €1 for the platform) would also be divided into a paid and a free part; the free part is considered a withdrawal at partial value.

In short: When transferring your business to the GmbH, you need to take care of the hidden reserves issue. Either you deliberately tax the hidden reserves (if they are small or you accept this), or you choose structures that allow for temporary tax neutrality. The following sections show the possible options. It is important to realize that an unstructured transfer = tax access now or later. There is no free ride “change of legal form, no tax” unless special rules are used.

Before we come to the solutions, a word on international aspects: The term “Entstrickungsbesteuerung” is also frequently used in connection with cross-border transactions – e.g. if a company is relocated abroad, Germany requires exit taxation on hidden reserves (see Section 4 (1) sentence 3 EStG, Section 6 AStG). This is often not directly relevant for founders, but is analogous: If, for example, you are considering transferring your IP to a foreign company, even stricter unbundling rules apply. In Germany, on the other hand, the UmwStG at least provides tools to cushion the transfer to a GmbH.

Conclusion of this part: Hidden reserves in your startup can be considerable – don’t underestimate them. Think of prominent examples: The programmer who works for years on a game has created an intangible asset that can be worth millions. This remains undetected for tax purposes until a triggering event occurs. The formation of a GmbH can be such an event, but it doesn’t have to be if you plan it correctly.

Options for structuring: How to achieve a tax-neutral or tax-optimized conversion

After all the pitfalls, the question arises: how can founders convert their sole proprietorship or GbR into a GmbH without falling into the tax trap? Fortunately, there are tried and tested ways to avoid or at least minimize the risks described above. Here are the most important strategies:

1. founding the GmbH in good time (time of conversion)

Timing is everything. The earlier you plan to become a GmbH, the lower the hidden reserves that have accumulated by then. Many founders delay the conversion until the business is flourishing – but by then considerable value has already been created (goodwill, IP, customer base). Incorporating early means that you may be able to switch to a GmbH before the major increase in value and either no taxation takes place at all because there are no significant hidden reserves yet, or the taxable amounts remain manageable.

An example: Imagine a game developer who has just completed the first beta version of his game. There are still no or few users, hardly any sales. The value of the company is mainly based on the idea and perhaps a bit of code – difficult to quantify externally. If he were to found a GmbH now and contribute the project, the partial value (market value) of the contributed business would probably still be low, possibly close to zero (one could argue that there is no marketable product yet, hence no significant goodwill). Even if minor hidden reserves were taxed, the tax burden would be minimal. However, one year later, after launch and 100,000 users, the goodwill could already be immense. The transition would then be much more expensive or only feasible with conversion tax neutrality (and thus lock-up periods etc.).

Of course, you have to weigh up the costs/disadvantages against early incorporation – a GmbH involves some effort and fixed costs. Nevertheless, if you can foresee that the project will scale, you should consider not remaining in “tax limbo” for too long. A UG (haftungsbeschränkt) – the mini-GmbH – can also be an interim solution, but this makes no difference in terms of conversion tax, as a change of legal form also takes place here (the UG is already a corporation). So it is more of a consideration of liability and capital costs.

Remember: Early change = lower hidden reserves = lower risk. But sometimes you have already realized the increase in value before you decide on the GmbH. Then other measures are needed.

2. conversion in accordance with the German Reorganization Tax Act (§ 20 UmwStG): Contribution in kind in exchange for new shares

The ideal way for a tax-neutral transfer is to transfer your sole proprietorship or GbR to a GmbH in accordance with § 20 UmwStG. This paragraph allows – under certain conditions – a business, part of a business or co-entrepreneurial share to be transferred to a corporation (e.g. GmbH) at book value. This means that the hidden reserves do not initially have to be taxed; the GmbH continues the book values as if nothing had changed for tax purposes. The highlight: In return, you receive new shares in the GmbH (a so-called contribution in kind in exchange for company rights). This is precisely what distinguishes this variant from the taxable case described above – here there is a formally correct consideration in the form of GmbH shares, which enables tax neutrality.

Most important requirements for § 20 UmwStG:

• Qualified object of contribution: You must contribute an entire business, a part of a business (a self-contained part of the company) or a co-entrepreneur share (GbR share). Contributing individual assets is not sufficient for § 20 para. 1 UmwStG. In startup practice, this means that if your sole proprietorship only consists of one large asset (e.g. software), the whole thing still counts as a business as long as it contains all the functions of the business. However, make sure that you really do transfer all essential business assets. If you retain an essential asset in order to perhaps not contribute it, you jeopardize the recognition of tax neutrality. The BFH ruled, for example, that the retention of an essential business asset excludes the transfer of the book value because no complete business is transferred (the object of the contribution is then incomplete).
• Granting of new shares: The GmbH must give you new shares in return for the contribution. This can be done either as part of a non-cash formation (the GmbH is formed directly with the non-cash contribution) or through a non-cash capital increase in an existing GmbH. There are no new shares, for example, in the case of a pure transfer to the capital reserve – that would be exactly the mistake from the case above. However, there is room for maneuver: a “premium model” is possible, i.e. you can also use a mixed form, such as founding the GmbH partly with a cash contribution and also contributing the business as a contribution in kind to equity (premium). The decisive factor is that this somehow increases or establishes your share in the GmbH. The BFH and the tax authorities recognize that a business contributed as a premium (Agio) can also be a contribution in kind within the meaning of Section 20 (1) UmwStG. In other words: For example, you set up a GmbH with € 25,000 share capital in cash, and you also undertake in the articles of association to contribute your existing business as a contribution in kind. Although there is no increase in the share capital, the share capital is allocated to you in full and the contribution in kind flows into the capital reserve account (premium). According to the prevailing opinion, this construction also fulfills the requirement of “granting new shares” – in practice, it was solved in such a way that part of the contribution is paid as a share transfer and the rest as other additional payment. Legal advice is important here so that it is set up correctly under commercial law.
• Right of application or option: The book value transfer is not automatic, it must be applied for at the tax office. In the tax return of the transferor (i.e. you), the so-called transfer profit must be declared and, if necessary, an application must be made to set the valuation in accordance with Section 20 (2) UmwStG at a lower value than the fair market value (up to the book value). The contribution agreement itself often refers to the fact that the transfer is to be made at book value in accordance with the UmwStG, but formally it is usually part of your tax return for the year.
• Observe the blocking period: Tax neutrality does not come for free. § Section 22 UmwStG provides for a seven-year blocking period. If you sell or dispose of the GmbH shares received within 7 years of the contribution (more precisely: 7 years from the contribution date), you will still be taxed retroactively – at least proportionately. This is known as contribution gain I. Specifically, if the deadline is not met, the profit deferred for tax purposes at the time will be subject to tax retrospectively, reduced by 1/7 for each full year since the contribution. Example: You contribute your sole proprietorship to a GmbH in 2025 at book value. In 2028, you sell all your GmbH shares to an investor. This is only a holding period of 3 full years. Result: 4/7 of the initially untaxed contribution profit is now taxable retrospectively – as income from business operations for you (even if it is formally a sale of shares, this part is taxed separately). After 7 years, the lock-up period would have expired and you could then sell your shares without jeopardizing the original book value transfer. This is an important point for founders: if an exit is planned, you need to keep an eye on the 7-year period. Otherwise, you could be in for a nasty surprise when you sell your shares and still have to pay tax on the original profit. There is also a contribution gain II (§ 22 Para. 2 UmwStG) in the event that the GmbH itself sells the transferred business assets within 7 years – but that goes too far here. Similar in principle: no short-term sales after the contribution, otherwise retroactive tax.
• Continuation of the book values: The GmbH recognizes the acquired assets at the previous book values. This naturally also results in hidden reserves in the GmbH (because it continues the low old values). As a result, you have shifted the tax burden into the future – either the GmbH pays it later when the assets are sold, or you pay it when the shares are sold (whereby the partial income method may apply, but after a blocking period).

The contribution in accordance with Section 20 UmwStG is the method of choice if there are high hidden reserves involved and you still want to make a clean transition to a GmbH. Example: Our developer Anna ran a successful app as a sole trader. Her balance sheet shows hardly any equity, but the app has a de facto market value of €500,000 (based on turnover, user numbers, etc.). She would now like to set up an Anna-App GmbH. If she simply founds it and hands over the app, she would have to pay tax on €500,000 in profits – fatal. Instead, she agrees a contribution with her tax advisor: Anna-App GmbH is founded with €25,000 share capital, Anna subscribes for all the shares. At the same time, she concludes a contribution agreement, according to which she contributes her individual business “app development” with all rights, databases, user contracts, etc. to the GmbH. In return, the GmbH grants a capital increase of e.g. €1 share capital plus a premium of €499,999 (or the share capital is increased accordingly, which would be more complex, however, as valuation reports etc. are required; the premium model partially avoids the valuation hurdles). For tax purposes, Anna declares the contribution at book value and applies for book value recognition. Result: No immediate taxation – the € 500,000 hidden reserves are “locked up” in the GmbH. However, Anna must wait at least 7 years after the contribution before she can sell shares, otherwise there is a risk of subsequent taxation.

Even after a successful book value transfer, be careful with the conditions! If the tax office discovers during a subsequent tax audit that the conditions were not met after all – e.g. because no entire business was transferred or something was formally missing – it can reject the book value approaches. Taxation would then be levied retroactively (with interest on top). Such mistakes happen, for example, if an important asset is inadvertently left out (e.g. all customer contracts are transferred, but the domain is not – and this was essential), or if you thought a sole trader could convert via a change of legal form (a registered trader can change legal form in accordance with the UmwG, but if no new shares may be created in the process, Section 20 UmwStG does not apply). A clean structure must also be ensured for a GbR: If necessary, all shareholders must contribute their shares pro rata so that everyone receives new GmbH shares. Alternatively, the German Reorganization Act can be used (e.g. the spin-off of a partnership into a GmbH), which can also be tax-neutral, but places the same requirements on the transferred business.

For most founders, Section 20 UmwStG is probably the most viable option if you already have an ongoing, valuable business. However, bear in mind the practical effort involved: it is a notarial process (non-cash formation or non-cash capital increase usually requires a non-cash formation report or valuation), and experienced tax advisors should be involved to check the plausibility of the values. You can’t just make up a fantasy value to save share capital or something – the values have to be correct, otherwise there will be trouble at the registry court or later at the tax office.

3. leasing the business instead of giving up the business (lessor’s option)

Suppose you do not want to (or cannot) take the step in accordance with § 20 UmwStG – perhaps because it is too time-consuming for you or because you see certain uncertainties. An alternative strategy could be to initially continue the business, but in a different form: namely by leasing the entire business to the GmbH.

The so-called lessor’s option allows a trader who leases out his business as a whole to still be treated for tax purposes as if the business were continuing as long as he does not expressly declare that he is giving up the business. In concrete terms: You (as a sole trader) conclude a lease agreement or transfer of use agreement with your newly founded GmbH, which includes all the essential operating bases – ultimately the entire business. From now on, the GmbH will run the day-to-day business and pay you a monthly rent, for example. You yourself do not deregister the business, do not declare its abandonment to the tax office, but exercise the lessor’s option. The following then applies: The income from the lease continues to count as your commercial income and your business continues to operate for tax purposes, only in “retirement” or leased out. There is no immediate taxation of the hidden reserves – no abandonment balance sheet, no abandonment profit taxation. Only when you actively declare the cessation of your business at some point (or in fact sell all the main assets) will you be taxed.

That sounds ideal at first: you elegantly avoid having to give up your business. But of course there are a few catches:

• Business split vs. business lease: As we saw in the previous chapter, if you lease to your own GmbH, a business split occurs at the same time, as there is a personal and material interdependence. According to case law, the business split takes precedence over a simple lease. This means that in the case of a lease to a related company (which you control), the transaction is more likely to be classified as a business split – but the bottom line is the same: The business is deemed not to have been discontinued. It is interesting to note that if the personal links cease to exist at a later date (demerger ends), you can still decide to continue the business as a leased business as long as you do not declare that you are giving it up. BFH case law has confirmed that the lessor’s right of choice also applies after the end of a “non-genuine” business split. In practice, this means that even if your shareholding decreases at some point (and there is no longer a division), you could then decide “I will simply continue to lease out my remaining holding and not declare abandonment” in order to avoid having to pay tax immediately. This gives you leeway.
• Intention to make a profit: The lessor’s option presupposes that the business is leased as a whole. This means that all essential operating bases must be leased and the business must be leased as such, not just individual parts. There should also be an intention to make a profit – i.e. you should agree a reasonable rent that at least covers costs. If you give everything to the GmbH free of charge, it could be argued that there is no intention to make a profit and that there may be a (partial) abandonment after all. However, there is often no problem with a free transfer to your own corporation as long as you benefit indirectly through profit distributions. Nevertheless, it is advisable to stipulate a clearly regulated contractual lease or usage fee in order to underpin the seriousness of the lease.
• Trade tax aspect: If your business is still commercial due to the lease, the lease income is subject to trade tax (minus an allowance of €24,500 if you are a sole trader). If the lease income is high, this could lead to trade tax that is not fully credited against income tax (because crediting is only possible up to an assessment rate of 400%). Example: If you lease a very valuable asset for €100,000 per year, you would probably have to pay trade tax on it, which could become a real burden. In many cases, however, the lease payments are manageable or you can manage them in such a way that the bottom line is that not much profit remains in the holding company (e.g. because you recognize expenses, depreciation on leased assets, etc.). This is a complex point, but should not be overlooked.
• No conclusion without conclusion: The lessor’s option is a delay, not a waiver. At some point you may want to “clean up” – e.g. close the old individual business for good (e.g. on retirement or if the GmbH has acquired the leased property itself in the meantime). You will then have to make up for the closure of the business. However, you can choose the timing and perhaps arrange it so that tax allowances can be used (e.g. if you are then over 55, the 45k allowance, etc.). Or you can find an arrangement that is still possible in a neutral way (e.g. you can transfer to a partnership later, see below, or withdraw the leased asset if it no longer has any hidden reserves – for example because it has been written off).

In practical terms: the lessor model is suitable for gaining time. It prevents everything from being taxed as soon as the GmbH is founded. It is comparatively simple to set up: a lease agreement, a letter to the tax office “I hereby declare that I am not giving up my business, but am making use of the lessor option”. This gives you peace of mind on the tax front for the time being. But you then live with a rather complicated double structure: you have your GmbH and still have a “dormant” sole proprietorship (or partnership), which may have to submit annual tax returns (profit from business operations – even if the profit only consists of rent). In addition, if the constellation applies, you must consider the implications of splitting the business (e.g. your GmbH share is actually part of the business assets of the owner company – which becomes important in the event of a sale, for example).

Example continued: Max, our platform developer, decides to found “Max Online GmbH” in 2025, but keeps his platform as a sole proprietorship and leases it to the GmbH for an annual license fee. He does not declare any abandonment to the tax office. Result: His sole proprietorship generates e.g. € 30,000 in rental income per year, which is income from business operations. There is no trade tax because there is nothing left after offsetting (notional trade tax ~1-2k, is offset up to the marginal rate). Max’s GmbH can deduct the 30k as a business expense. This goes on for a few years. In 2028, an investor wants to buy 60% of the GmbH shares. Caution: This is where the personal interdependence ends. Formally, this would end the business split. But Max can decide now: After all, he has never declared abandonment to date. According to the BFH, he may continue to exercise his lessor’s option despite the discontinuation of the personal interdependence. His sole proprietorship then receives rent from a GmbH in which he is no longer the majority shareholder – this is a “normal” business lease (no more demerger, as there is no identity of control). He could therefore continue to run his business even after the sale of the shares and only declare the termination later (e.g. when selling the remaining 40% or when the contract expires). He would then pay tax on the discontinuation gain – but by then he could, for example, be 55 years old and use the tax-free allowance, or the platform could have lost value, or he could still contribute the platform to the company. He has gained flexibility. Of course, he would have to clarify with the investor whether the platform should remain leased by him or whether it would be better for the GmbH to buy the platform outright (which would be a new taxable transaction). As you can see, the matter becomes complex in terms of coordination – but from a tax perspective, Max can control when he realizes the reserves.

Conclusion on the lessor’s option: A valuable option for achieving tax deferral. It is particularly suitable for founders if they do not want to or cannot pay tax on the immediate increase in value, but also do not (yet) have the prerequisites or the will for the major conversion tax solution. However, it should only ever be an interim solution, not a permanent solution without an exit plan.

4. transfer of software, user data, IP – note special features

In the IT sector, the core values of a company often consist of intangible assets. Transferring these from a person to a limited liability company not only raises tax issues, but also legal and data protection issues. Here is an overview of what you should look out for:

• Software / source code: If you have developed software as an individual, you are the author or rights holder. A limited liability company does not automatically acquire the full rights of use or ownership just because you are a shareholder. You must transfer the rights contractually. This can be done as part of the contribution agreement (all IP rights will be included in Section 20 UmwStG contribution). Alternatively, you can conclude a license agreement between yourself and the GmbH. It is important to define clear conditions (exclusive, worldwide, unlimited? For a fee or free of charge?). Please note: Free licensing to your own GmbH could be considered a hidden contribution for tax purposes – in other words, it is as if you have contributed the software after all (see intention to make a profit above). Symbolic licenses or time-limited transfers of use are often chosen if you are unsure where the journey will take you. But it is better to go either-or: Either complete transfer to share capital (with valuation if necessary) or official lease for a reasonable license fee. The latter underpins the operating lease solution.
• User data / customer data: This is where data protection law (GDPR) comes into play. If a new legal entity (the GmbH) takes control of personal data, this is a data transfer. Legally, you need a basis for this in accordance with Art. 6 GDPR. In the context of an asset deal – which is ultimately the transfer from a sole proprietorship to a GmbH – Art. 6 para. 1 lit. f GDPR (legitimate interests) is often used as the basis. It is argued that the transfer of customer data to the acquiring company is necessary in order to continue operating the service and that there are no overriding interests of the data subjects to the contrary. However, this requires consideration on a case-by-case basis. In practice, you should stipulate early on in your general terms and conditions or terms of use that, in the event of a transfer of the business, the user data will also be transferred to the legal successor – this increases transparency and acceptance. If necessary, users must be informed (Art. 13, 14 GDPR) about the new controller, especially if the data is transferred without the direct involvement of users. Even more caution is required for sensitive data (e.g. health data or special categories), but this is not the case for most IT start-ups. Important: If you do a share deal instead of an asset deal (e.g. you convert your e.K. into a GmbH by changing its legal form, which would be universal succession under civil law, or you set up a GmbH & Co. KG and contribute), then the data controller formally remains the same economic entity – it can be simpler because there is no “data sale”, just a change of legal form. But in the classic way (individual>GmbH as a new entity), it is like selling the data.
• Patents, trademarks, domains: these rights must be transferred. Patents and trademarks require written contracts and ideally an entry of the transfer in the register (DPMA etc.) so that the GmbH appears as the new owner. In the case of domains, this is done via the registrar conditions; here the domain owner must be changed. Make sure that these transfers are carried out promptly, preferably as part of the overall transaction, so that nothing falls apart (e.g. the founder forgets to transfer the domain and years later it is unclear who has the rights). For tax purposes, these transfers are considered part of the transfer of business assets if you bring them in together. If you do it separately, e.g. transfer the trademark later, it could be a partial sale.
• Contracts with customers and suppliers: An often overlooked point: your existing contracts must be transferred to the GmbH. A sole proprietorship has concluded contracts in your name. These cannot simply be “sold along” without further ado, as there is no universal succession as in the case of a merger. You either need the consent of the contractual partners to take over the contract (§§ 414, 415 BGB) or you can arrange it so that you provide the services in the name of the GmbH from now on and the old contracts are canceled/newly concluded by mutual agreement. This is particularly relevant for rental agreements, loan agreements, etc. This legal act is not tax-related, but it is crucial to success – if your most important partner does not agree to the transfer of contracts, you have a problem. Therefore, in the planning phase: explore all important contracts and make contact.
• Employees: If applicable, Section 613a BGB (transfer of business) applies in the event of conversions. In the case of a sole proprietorship that transfers its business to a GmbH, there is usually a transfer of business, so that employees are automatically transferred, but with the right to object. Employees must be informed of this in writing. For start-ups with employees, this must be taken into account – but the topic is too broad here.
• Warranty and liability: If the sole proprietorship ceases to exist, you as the owner are still personally liable for 5 years (§ 25 HGB analogously, or if deleted from the HR; and § 197 BGB for tax liabilities etc.). There are other deadlines for changes of legal form. In any case, becoming a GmbH does not mean that old liabilities are automatically gone – these must either be taken over by the GmbH (assumption of contract) or remain with you and expire. This is a legal issue that should be clarified with creditors.

Essentially, you should transfer everything that has value or is operationally necessary in writing. Estimate the values realistically and treat yourself and the GmbH like third parties, even if you are the sole shareholder – because the tax office will look at it with exactly this view (keyword arm’s length comparison). Proper documentation helps to avoid conflicts later on. And if you deliberately withhold certain IP (e.g. because it is unclear whether the GmbH will be successful and you want to keep a loophole open), be aware of the consequences discussed above (business split, etc.) and plan for them.

5. contract design: transfer agreement, lease, asset deal – which way is right?

Let us compare and classify the possible contractual constructions again, depending on your situation:

• Asset deal (sale/transfer of assets to the GmbH): By this we mean the genuine sale or transfer for consideration of all the assets of your sole proprietorship/GbR to the GmbH. This could be done, for example, by the GmbH paying you a purchase price (perhaps financed by an investor or loan). Advantage: As a private individual, you would then have received money with which you could pay the taxes on the capital gain. Disadvantage: It is a taxable capital gain – all hidden reserves are due. An asset deal is only worthwhile if there are either no large hidden reserves or you consciously say “I’ll pay the tax now and then have peace of mind”. This is rather rare in startup practice, as founders don’t like to pay taxes straight away and the GmbH usually has no money to buy the assets (often the founder would have to lend the GmbH money for this – absurd). Therefore, the real asset deal for cash is rarely chosen. One variant is the asset deal against a loan claim: the GmbH takes over everything and owes the founder, for example, €100,000, which it pays later. For tax purposes, this is the same as a sale, but the founder has no money yet – unattractive. Therefore not recommended.
• Contribution in kind in exchange for company shares (contribution): We have covered this in detail. Contractually, this is a contribution agreement, often in combination with a partnership agreement or capital increase agreement. In this case, the founder does not receive a cash purchase price, but shares as consideration. There is therefore no cash flow – which is why we need the tax book value rules, otherwise we would say “no consideration = withdrawal”. With an application in accordance with § 20 UmwStG, there is no tax immediately. An estimate of value must be made for the contract (you have to determine what is being contributed and at what value, even if the book value is recognized for tax purposes, you need realistic values for the GmbH balance sheet, especially if share capital is covered by it). Advantage: no immediate tax, disadvantage: more complicated and long-term commitment (blocking period, formalities). Nevertheless, this is usually the method of choice for valuable companies.
• Transfer agreement (rent/lease/license): Here, the founder retains ownership of the assets and only allows the GmbH to use them. There is a contract for this, which can be either a rent/lease (for material goods or the entire business) or a license/use agreement (for IP, software). In this case, the company usually pays ongoing remuneration to the founder. This keeps the structure flexible: if the GmbH fails, the founder keeps the assets; if it flourishes, the assets can still be transferred later. From a tax perspective, the business remains with the founder (business lease). Disadvantage: The GmbH has an ongoing burden (it has to pay the rent/license) and the founder has to pay tax on this income (commercial income). It can also be tricky in discussions with investors: Investors don’t like to see that core IP is not owned by the company. They usually want all essential rights to be held by the company so as not to make it dependent on the founder. Therefore, the transfer solution in the start-up context can only be a transitional solution until perhaps financing makes it possible to “buy in” the assets to the company. Options can also be built into the contract here: e.g. that the GmbH has the right to buy the software at any time for a fixed amount X (then you would plan this purchase when there is enough liquidity and then pay taxes). Or that a contribution is made later if an investor joins the company.
• GmbH & Co. KG / dual company: A special structure that is sometimes used is the formation of a GmbH & Co. KG, whereby the GmbH carries out the operational business and the KG (whose general partner is the GmbH and limited partner is the founder) holds certain assets. This is similar to a “demerger” in the broader sense, but is often used to achieve a tax-neutral structure. For example, a sole proprietorship can also be transferred to a GmbH & Co. KG in a tax-neutral manner (Section 24 UmwStG) if this is more suitable for some reason (e.g. you want to keep the property). This is rather over-engineering for start-ups, unless you have very specific goals (e.g. an investor should be able to join the KG): Investor should be able to join the KG, or founder wants to allow variable profit allocations). A simple GmbH is usually sufficient.
• Change of legal form according to the Transformation Act: For completeness: If your sole proprietorship is entered in the commercial register as an e.K. or your GbR is an oHG/KG, you could theoretically make a change of legal form directly into a GmbH (§ Mergers/UmwG). Such a change of legal form is considered a universal succession under civil law – i.e. all contracts, data and assets are automatically transferred. Sounds perfect, but: For tax purposes, a change of legal form of a sole proprietorship into a corporation is treated similarly to a contribution. According to § 25 UmwStG, book values can be used, but the requirements of § 20 UmwStG must be met. And here comes the crux of the matter: according to the Transformation Act, no new shares may be issued when changing the legal form to a GmbH – the owner simply becomes a shareholder, no new shares are created. This means that the requirement of Section 20 (1) UmwStG is actually missing. There was such a case, and the tax authorities denied the continuation of the book value for precisely this reason. This means that a direct change of legal form from e.K. to> GmbH poses a tax problem (unless the legal situation has recently changed; this has long been a point of contention). In the case of partnerships (GbR to GmbH), a change of legal form was previously not possible at all, but the MoPeG (2024) could make it possible if the GbR is in the register. You will then also have to look very carefully to see whether Section 20 is applicable for tax purposes. In cases of doubt, it is better to take the spin-off route: The partnership establishes a GmbH and spins off its business to it (Section 123 UmwG), which in turn corresponds to a contribution for tax purposes and Section 20 can be applied (new shares are created here, namely the partnership partners’ shares in the GmbH). However, this goes beyond the scope of this article – it should only be mentioned that conversions under the UmwG are not automatically tax-neutral. They require the same applications.

To summarize:

• If there are hardly any hidden reserves and simplicity counts: a direct transfer (asset deal) can be ok – you pay the few euros tax, done.
• If there are significant values: Contribution in kind according to § 20 UmwStG is top, but requires formalities and patience (holding period).
• If you are not sure or do not want to involve a tax advisor at first: choose the lease solution, but know that you will have to dissolve it later.
• Be sure to talk to the contractual partners: Many points (e.g. the agreement to take over the contract) must be clarified in parallel, regardless of which option you choose.

Early protection and planning for founders

A clear recommendation from practice is: Get tax and legal advice at an early stage if you are planning to switch to a GmbH. Many problems can be avoided by anticipatory structuring. Here is some final advice on how you can protect yourself as a founder to avoid problems later on:

• Planning horizon 3-5 years: When founding your start-up, think about where you want to be in a few years’ time. If you can foresee that investors will come on board or an exit is planned, then structure accordingly at an early stage. It may be better to set up a GmbH right away (even if it’s more work at the beginning) instead of starting as a GbR/EU and then laboriously reorganizing everything later. Or at least place all IP in a separate holding company from the outset in order to have flexibility.
• No “wild” back and forth: Avoid moving assets back and forth without a plan. Every unplanned withdrawal or transfer can trigger taxes. It’s better to make one big move with a system (e.g. a planned contribution date) than constantly shifting around. The tax office looks at such sequences and can tax every single step in case of doubt. A clean, one-off restructuring is easier to communicate than a piecemeal approach.
• Documentation and valuation documents: If you are valuing your company (whether for the contribution agreement or internally), prepare supporting documents. This can be an expert opinion from a tax consultant, a company valuation, or at least a written explanation of why value X was used. In the case of IP, you should document, for example, what development costs are involved, what turnover is generated, etc. These documents can be worth their weight in gold later if the tax office disputes the valuation. Example: You may have a 1 million valuation from an investor’s point of view, but contribute at book value – the tax office could ask whether the hidden reserves were really 0. Then you show that without the investor there was no real market value and that the 1 million was only made possible by the investor’s capital.
• Contracts with yourself: Many founders find it difficult to conclude written contracts between themselves and their own GmbH (“this is my company, why a contract?”). From a tax and legal perspective, however, this is essential. You and the GmbH are different legal entities. A contract (lease, license, loan, management contract) creates clear conditions and helps to pass the arm’s length test – i.e. to show that you are not making a hidden profit distribution or hidden contribution. Pay attention to standard market conditions as far as possible. This is mandatory anyway, especially for limited liability companies with several shareholders, where contracts protect both sides.
• Worst-case protection: Think through what will happen if you don’t manage to use a tax-neutral solution. Do you have reserves or options for settling a tax burden if, for example, the tax office assumes that your business has been closed? Sometimes you can negotiate (deferral, payment by installments), but don’t rely on it. If in doubt, it is better to invest a little more effort in the design than not being able to raise the liquidity later.
• Tax clauses in contracts: If you make deals with third parties (e.g. co-founders, investors), include clauses that take tax consequences into account where possible. For example, an investment contract could stipulate that the investor knows that you still have a holding company and that the structure must be left as it is, or that he will indemnify you if his claims (e.g. after the purchase of shares) trigger the closure of the company. Of course, no investor will be happy to pay taxes for you – more realistically, he will demand that such legacy issues are cleared up before he gets involved (i.e. he wants all IP to be in the company). But at least you can create transparency and find solutions together before any action is taken.
• Training: In the agile IT world in particular, tax issues are often neglected. Familiarize yourself with basic terms (this article is a start). Talk to other founders about how they have transformed. Many mistakes are not new – there are success stories and failures from which you can learn.

Ultimately, each case must be considered individually. A seemingly trivial change – e.g. your spouse joining as a co-partner in the owner’s GbR or the exchange of a leased asset – can have a major impact on the structure. Therefore, holistic planning with a tax advisor and lawyer is the best protection.

Conclusion: Successfully becoming a GmbH – no problem with planning

Converting a sole proprietorship or a GbR into a GmbH in Germany is not rocket science, but it needs to be well prepared. For founders, start-ups and IT entrepreneurs, this means above all knowing the tax and legal pitfalls: An ill-considered transfer can be considered a discontinuation of operations and reveal all of your young company’s hidden reserves – a risk that can jeopardize livelihoods. A hidden business split can also occur if assets are held back, which can lead to unwanted tax consequences later on when the interlinking ends. Every founder planning a GmbH should be familiar with the terms “discontinuation of operations” and ” business split”, as these are the key points at which the tax office takes a close look.

Fortunately, there are tried and tested strategies for making the transfer tax-neutral or at least tax-optimized: The contribution pursuant to Section 20 UmwStG enables a book value transfer in return for shares – this allows the tax burden to be postponed to the future (and perhaps avoided altogether if the shares are sold after the lock-up period has expired). The lessor’s option makes it possible to continue the old business and thus avoid the immediate disclosure of hidden reserves, albeit at the cost of a more complex structure. It is also important to regulate all IP and data transfers in a clean and legally sound manner – in addition to taxes, there are also legal pitfalls (data protection, contract law). But with good advice, these points can be mastered.

A practical tip: Always think from the perspective of the tax office. Ask yourself: “What does it look like from the outside? Have I taken something, given something away, transferred something too cheaply? Does my story add up?” If you can answer these questions conclusively and your documentation is correct, you are more likely to be followed. Quotes from case law show that the courts are quite understanding of constructive transfers – you just have to play by the rules: For example, the BFH emphasized that a contribution can be tax-neutral even if it is made as a share premium, while in another case it clarified that a transfer without genuine consideration is considered a cessation of business. These guidelines actually provide us with a clear path.

In conclusion, it should be emphasized that for many start-ups, becoming a GmbH is the right and important step towards growth and success. Don’t be discouraged by the tax stumbling blocks – with forward-looking planning and competent support, you can defuse the pitfalls. Then, in a few years’ time, your blog post may even come across as a testimonial from a founder who has mastered the change with confidence, rather than as a cautionary tale. With this in mind: good luck with the planning – it’s worth it, because if you have the closure and splitting of a business under control, you can concentrate on the essentials: the growth of your business.