Conversion Of Existing Legal Form
As a company grows, its team expands, or new investors join a change in legal form is unavoidable. That is why, once you have successfully mastered the start of entrepreneurship, you may find yourself facing structural changes. This article explains when a conversion of an existing company structure makes sense and how to go about it.
The only constant in life is change. Even an existing company cannot avoid it. Change need not be a bad thing, though: Often it is a sign of growth or the admission of new people, such as investors or co-founders. In such cases, the Swiss Merger Act (FusG) permits a conversion of a company’s legal form. Its aim is to replace a company structure that has become unsuitable with one that is more suitable and, in doing so, to avoid a liquidation that would entail some disadvantages in terms of tax law.
Some bad news: Converting a company’s legal structure is often more costly than setting up a new company. Nonetheless, with proper preparation and support, the task can be completed quickly and without complications. And as always, we at Atlanto are here to help.
Depending on the current legal form and the desired new legal form, various processes come into question. Let us take a close look at the various combinations.
From Sole Proprietorship to Limited Liability Company (LLC) or a Public Liability Company (PLC)
A sole proprietorship is actually a natural person, i.e., the owner or proprietor. A corporation (LLC or PLC), on the other hand, is a legal entity. A direct conversion from sole proprietorship to LLC or PLC is therefore not possible.
In this case, we speak of a takeover instead, meaning that a legal entity (the newly founded corporation) takes over components of the previously existing sole proprietorship. For such a takeover, there must be a current balance sheet with the assets and liabilities to be transferred to the newly founded company. Subsequently, the sole proprietorship is dissolved and its cantonal Commercial Register entry, if any, is deleted.
Such a conversion is called a “qualified incorporation” in Switzerland. The legal requirements and thus also the costs are higher for such a conversion than for a foundation with a pure cash contribution.
The conversion of the sole proprietorship can take place in two ways:
- Acquisition in kind
If the company is registered in the Commercial Register, an acquisition in kind, or transfer of assets, may take place. The new company (PLC or LLC) can directly take over all assets and liabilities of the sole proprietorship. Various documents are needed for this process. For example, the sole proprietorship must keep double-entry accounting and prepare annual accounts that are not older than 6 months and have been audited. If the last annual financial statement is too old, an interim balance sheet can be used.
All or only a few components of the sole proprietorship can be transferred to the LLC or PLC. When all components are transferred, the sole proprietorship ceases to exist. Therefore, if you want your sole proprietorship to remain, only transfer part of it.
- Contribution in kind
In the case of a contribution in kind, property of the company is used to meet the capital requirements of the new LLC or PLC, instead of using cash. Objects like machines, vehicles and the like of a company are brought into the new company. In this case, an auditor must ascertain the value of these objects, which on the one hand means more costs and, on the other hand, requires more documents (receipts, sales contracts, pictures, identity cards, etc.).
From General Partnership to a Limited Liability Company (LLC) or a Public Liability Company (PLC)
A general partnership consists of two natural persons. The conversion into a legal entity (LLC or PLC) is therefore analogous to the sole proprietorship into an LLC or PLC above.
From a Limited Liability Company (LLC) to a Liability Company (PLC)
The conversion of a Limited Liability Company (LLC) into a public limited company (PLC) is somewhat complex, as several more steps are necessary:
- Planning of the conversion and redaction of a conversion report
- Audit of the conversion report by a licensed auditor
- Ratification of the conversion resolution by the general meeting or shareholders’ meeting
- Public notarisation with a capital increase, if necessary, by a notary public
- Application for publication in the Commercial Register Office
Why then dare this conversion at all? Although there may no longer be any significant differences between the legal structure of the LLC and the PLC, the PLC offers a number of advantages, especially when integrating additional investors. The future share distribution does not have to be updated at the Commercial Register, which simplifies the share assignment and brings the advantage of anonymity.
The conversion process may be arduous, but it is worth it. The online portal of the IFJ (Institut für Jungunternehmen) helps you make your planned conversion online.
Our promise is valid: When your success goes through the roof – Atlanto simply grows with you. Atlanto can withstand any change in your business, through any legal form. For more information, read our blog post on the different legal forms.
