Can I transform my business form?

The letters after your company name are not necessarily permanent. What made sense at the foundation may no longer be the best thing for the company. It is, fortunately, an option to change the form along the way. We know what legal requirements and matters you need to consider. We are ready for both advice and execution when you want to change your company form.

If you have a sole proprietorship and are considering transforming it into a limited liability company, then the conversion can be done before June 30th of that year. Perhaps the conversion can advantageously be done tax-free.

What is conversion?

A business conversion is transforming a personally owned and operated business into a limited liability company. The proprietor of or stakeholder in the personally owned and operated business then becomes a shareholder in the limited liability company. As the business now takes the form of a limited liability company, it must therefore now comply with the rules of the Danish Companies Act.

In the event of a conversion, the legal entity in which business is conducted is changed. In practice this means that you get a new CVR number. The conversion will most likely have an impact on the company’s contracts. Therefore, these must be examined before the conversion is completed. It will, e.g. be particularly relevant to check the company’s most important supplier contracts, leases, and the banking facilities to ensure that these are not adversely affected by the conversion.

Conditions for a conversion

Some of the main conditions that must be met before a conversion can take place are found in section 2 of the Business Transformation Act:

  • All assets and liabilities belonging to the personally owned and operated business must be transferred (real estate can be kept out of the conversion).
  • The total consideration for the business must be provided in the form of shares.
  • The nominal value of the shares or shares granted as consideration for the business corresponds to the total share or share capital.
  • The acquisition price of the shares is not negative, and any negative capital account has been settled before the conversion.
  • The conversion must be completed within six months after the end of the previous financial year.

Why convert a business into a company?

The most common reasons for converting a company into a company are typically:

Risk minimization

If the company is run as a limited liability company, then creditors’ claims and claims for damages can only be made against the company. If the business is run personally, then the business owner is personally liable with all his assets, which could potentially have severe consequences for both the owner and his family.

Change of ownership / generational change

If the business is to be sold at some point, there can be significant benefits of having a company structure with both an operating company and a holding company. Firstly, the holding structure provides an opportunity to slim down the operating company before divestment. As such, the new owners do not have to pay for profits saved from previous years in the operating company. Secondly, the possibility of tax-free divestments may mean that a much smoother and less liquidity-demanding generational change can be implemented than if there is no company structure with a holding company. If there is no such holding structure, it is the owner who sells the business/company. The entire profit will therefore be taxed.

More owners

Another advantage of a conversion and having a holding structure is that it provides flexibility in situations where there are several owners. The owners may have different needs to withdraw money for themselves privately. However, the owners of an operating company must always agree on how much dividend is to be distributed from the operating company to the owners / holding companies. After this, the individual owners can decide how much they want to withdraw from their respective holding companies to themselves privately.

What is tax-free business conversion?

A tax-free business conversion means that you can invest your entire personal business in a company without paying taxes.

Before a tax-free business conversion begins, it is essential that a lawyer and an accountant thoroughly investigate the tax consequences of the changes to the business.

As a starting point, the conversion entails an ordinary tax on the transfer of the assets and obligations, as the business’ assets and obligations are transferred to a new legal entity (the company established by the conversion), which is actually considered a sale of the assets and obligations.

However, In the Danish Business Transformation Act there is legal basis for such business conversions to occur without this triggering taxation in connection with the conversion. As such a tax deferral takes place in stead.

The company then enters into the personally owned and operated business’ tax position, also called tax succession. Roughly speaking, this means that the tax is deferred until you sell the shares in the newly formed company. This is regulated by determining a purchase price for the shares in the company during the conversion.

The purchase price is found by calculating the value of the personally owned and operated business’ assets and obligations. However, the taxable profit that would have been triggered if the business had instead been sold at market value is deducted. This ensures that the gains not taxed at the conversion will instead be taxed when the shares are sold.

The conversion is thus only tax-free in the actual company conversion, as the tax is deferred until the company is sold.

Remember concrete advice from experts

Before setting a conversion in motion, it is essential to seek the advice of a lawyer. Whether a conversion will lead to advantages legally, fiscally and/or commercially depends on the particular circumstances of the business and its owners.

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