Change of legal form - What needs to be considered when converting a company into another legal form?

There are many potential reasons to consider converting a company into another legal form. Some of the most common motivations for doing so include:

1. To enhance credibility and improve access to capital: Generally speaking, the credibility of a company increases as one moves from sole proprietorship to a limited liability company (GmbH), and finally to a stock corporation (AG). This can help in accessing more capital through increased investor confidence, greater access to credit, and more ways of funding the business. The increased reputability can also help attract clients and business partners.
2. Limited liability protection: Most individuals who begin as self-employed freelancers or small business owners opt to function as a sole proprietor. It is the default legal form and is also the simplest and cheapest. However, a major disadvantage is that it doesn’t offer limited liability protection to its owner, which means that you are entirely liable for the debts and obligations of the company. On the other hand, both a GmbH and an AG offer limited liability protection to their owners. You are only at risk of losing the amount you have invested in the company. Therefore, as your business activities expand and you are faced with increased risk, it may be a good idea to convert your sole proprietorship to one of these legal forms which offers greater asset protection.
3. Can help to accommodate growth and expansion: A sole proprietorship is most appropriate for very small and individually owned businesses, a GmbH for small- to medium-sized businesses, an AG is the best option for larger businesses. This is due to various features of the structure and most importantly the company’s means of raising capital. Converting to a legal form that allows for a larger number of investors/shareholders can enhance the company’s ability to raise capital and can therefore support the company’s long-term objectives..
4. Tax benefits: Different legal forms have varying tax implications, and a conversion can be a strategic move to optimise tax planning and reduce the company's overall tax burden.

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:

1. Legal requirements: It is important to understand the legal requirements for changing the company’s legal form in the specific jurisdiction/canton where the company is registered.
2. Objectives: You should be clear about the strategic objectives and reasons for changing your company’s legal form. How does the new legal form better support the company’s long-term goals, such as attracting investors, facilitating growth, and optimising its tax situation?
3. Shareholder/member approval: If the company has multiple shareholders/members, as is often the case with a GmbH and AG, you will need to get approval from these stakeholders before converting the legal form of the company.
4. Capital structure: Assess the capital structure and requirements of the new legal form. It may be necessary to make changes in the share capital, ownership structure, and capital contributions to meet the new legal and operational requirements. You should plan such changes in advance and know whether you are able to handle them all.
5. Contracts and agreements: Review existing contracts, agreements, and obligations of the company, and identify any provisions which may be impacted by the change in legal form. Assess whether there is a need for renegotiation or termination of any of the contracts.
6. Tax implications: Consider how the conversion may impact the company’s tax liability and obligations. This may include capital gains tax, transfer taxes, changes in corporate income taxes, and VAT, among others. It is advisable to consult with tax experts to find out how best to optimise the company’s tax situation and minimise its tax liability while remaining fully compliant.
7. Impact on employees: It is important to assess what kind of impact the conversion will have on the employees and staff of the company. In doing so, you should consider any required alterations to employment contracts, benefits, or pension schemes.
8. Regulatory compliance: consult with a legal expert to ensure compliance with regulatory requirements and obligations associated with the new legal form. This may include registering the new entity, updating licenses and permits, and fulfilling reporting and disclosure obligations.
9. Communication with stakeholders: Clearly communicate with relevant stakeholders about the conversion plan. These include employees, customers, suppliers, and business partners. It is good to address any concerns they may have, and provide transparent information about the planned conversion process, updating them as the process unfolds.

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.

Converting a GmbH to an AG

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.

Converting an AG to a GmbH

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.

Practical considerations

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:

• Preparation of an interim balance sheet, not older than 6 months.
• Written conversion plan with the approval of the general meeting or the shareholders.
• Creation of a written conversion report.
• Examination of the conversion plan and report by an approved auditing expert (small and medium-sized companies can waive the examination provided that all shareholders agree).
• Preparation of the conversion resolution by the general meeting or the shareholders' meeting.
• Public certification of the conversion decision.
• Entry in the commercial register.

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.