With the transformation of companies, the legal form of companies changes. The conversion makes it possible to convert a partnership into a corporation. This will keep the company going.
In addition to the conversion of companies, the conversion law also provides for mergers and spin-offs. The corporate structure of the company owner is changed with the conversion. Restructuring can be carried out within groups or previously competing companies can merge.
After a sole proprietorship is founded and a business is started, after a certain period of time there is often a need to change the legal form. A sole proprietorship is quickly established. A start of business activity and a registration are usually sufficient. However, there are great liability risks. The sole proprietor is generally liable with all of his assets. The same applies to the commencement of an activity with several people in a company under civil law, which is also possible without a written contract.
The sole proprietorship can be brought in by converting it into a GmbH. According to the conversion law, this is possible through an outsourcing, which is a type of division. The advantage of converting a company according to the Transformation Act is the so-called universal succession. This means that contracts with the previous company are transferred to the receiving company.
The reasons for using the conversion law are tax law. The tax consequences in Germany are regulated in the conversion tax law. In principle, a conversion of companies is equivalent to a sale. The result is that hidden reserves are uncovered, which leads to taxation. With the conversion of partnerships into corporations, the conversion of corporations into partnerships, as well as with the incorporation of a sole proprietorship into a corporation, there is the possibility that the conversion is tax neutral. This prevents hidden reserves from being discovered.