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Conversion and restructuring of limited liability companies: Legal pitfalls and liability risks
Specialist article in corporate law
Lawyer specializing in the conversion and restructuring of limited liability companies – minimizing liability risks, utilizing available options
The German Transformation Act (UmwG) defines three essential restructuring instruments for limited liability companies (GmbHs): mergers (§§ 2 ff. UmwG), divisions (§§ 123 ff. UmwG), and changes of legal form (§§ 190 ff. UmwG). Each of these transformation instruments serves different economic purposes and is subject to specific legal requirements. The choice of the appropriate transformation form significantly influences tax consequences, liability risks, and the continuation of contractual relationships. A lawyer will analyze your specific situation and develop a legally sound transformation strategy that minimizes the liability of management and shareholders.
In a merger pursuant to Sections 2 et seq. of the German Transformation Act (UmwG), the assets of one or more legal entities are transferred to another legal entity by way of universal succession. The transferring company ceases to exist without liquidation proceedings, while the acquiring company assumes all rights and obligations. The capital contribution rules are particularly critical: In a merger by acquisition, the acquiring GmbH (limited liability company) must legally implement the capital increase and accurately represent the capital contribution obligations of the shareholders. Violations of Section 19 Paragraph 4 of the German Limited Liability Companies Act (GmbHG) can result in personal liability for the management.
A division allows for the transfer of assets from a limited liability company (GmbH) to existing or newly formed legal entities (Sections 123 et seq. of the German Transformation Act (UmwG)). A distinction is made between split-up (the transferring company ceases to exist entirely), spin-off (the transferring company continues to exist), and demerger (asset transfer without issuing shares to the shareholders). Particular risks arise from liability for existing debts: According to Section 133 of the German Transformation Act (UmwG), the participating legal entities are jointly and severally liable for debts incurred before the division, unless the division plan stipulates otherwise. This continuation of liability is often insufficiently considered in practice.
Converting a GmbH (limited liability company): Which forms of conversion are regulated by the Transformation Act?
The Transformation Act definitively establishes the options available to a limited liability company (GmbH) for changing its legal form or asset structure. The choice of the specific option has a decisive impact on future liability, as the various forms differ considerably, particularly with regard to asset transfer and responsibility for existing liabilities. The Act provides for four basic forms:
- Merger: Several legal entities merge to form a single entity. The transferring legal entity ceases to exist, while the acquiring legal entity assumes all rights and obligations through universal succession, including all liabilities.
- Cleavage: Assets are distributed among one or more legal entities. In a demerger, the transferring legal entity ceases to exist, whereas in a spin-off or demerger, it continues to exist. In this context, the practically relevant post-transaction liability pursuant to Section 133 of the German Transformation Act (UmwG) comes into play.
- Change of form: The company changes its legal form, for example from a GmbH (limited liability company) to a GmbH & Co. KG (limited partnership with a limited liability company as general partner) or vice versa. The legal entity remains unchanged; no transfer of assets takes place, which is why different liability issues arise.
- Asset transfer: An independent form of conversion intended for certain legal entities and used less frequently in practice than the three variants mentioned first.
In addition to these legally standardized conversion options, another possibility is the so-called asset deal, in which individual assets are sold through individual legal succession. This approach also carries liability risks, because if the company continues to operate, the buyer is liable for existing debts according to Section 25 of the German Commercial Code (HGB), and furthermore, the acquirer may be subject to tax liability under Section 75 of the German Fiscal Code (AO).
Which conversion method carries the lowest risks for your specific project depends on your individual circumstances. Have a lawyer compare the available options before making a binding decision.
Post-merger liability: Five years of liability according to § 133 of the German Transformation Act (UmwG).
The most significant liability risk in a restructuring is the demerger. Many companies assume that a precise allocation of liabilities in the demerger and acquisition agreement will definitively release them from previous debts. This assumption is incorrect. According to Section 133 of the German Transformation Act (UmwG), all legal entities involved in the demerger are jointly and severally liable for those liabilities that arose before the demerger became effective. This applies regardless of which legal entity the respective liability was contractually assigned to.
This subsequent liability is subject to a time limit to preclude unlimited liability. For the legal entity to which the liability was not assigned, there is a period of five years from the date of public notification of the registration. If the claim becomes due and is adjudicated or enforced within this period, this legal entity is also liable, but only up to the value of the net assets transferred to it. For pension obligations under the German Occupational Pensions Act (Betriebsrentengesetz), the period extends to ten years. Important: Liability under Section 133 of the German Transformation Act (UmwG) does not protect creditors from insolvency-related challenges, which is why a spin-off during a corporate crisis entails additional risks.
A division of the company does not reliably release one from liability for pre-existing debts. Before the notarization, have it reviewed which liabilities fall under subsequent liability and how this risk can be contractually minimized.
Creditor protection and security: Liability risks in mergers and changes of legal form
Regardless of whether a division takes place, the German Transformation Act (UmwG) guarantees comprehensive creditor protection. In a merger, all liabilities are transferred by universal succession to the acquiring entity, which then becomes liable for all debts of the dissolved entity. Furthermore, according to Section 22 of the Transformation Act, creditors are entitled to security if they come forward within six months of the registration and credibly demonstrate that the transformation jeopardizes the fulfillment of their claims. This right to security can significantly restrict the liquidity of the transformed company.
Cross-border conversions are particularly complex from a legal perspective. Since March 1, 2023, the German Transformation Act (UmwG) has, for the first time, uniformly regulated cross-border mergers, divisions, and changes of legal form of corporations within the EU and the European Economic Area in Book Six, Sections 305 et seq. The reform, implemented through the Transformation Directive, has expanded creditor protection and enabled commercial registers to monitor for abuse. While this has increased the legal certainty of cross-border projects, it also necessitates greater time and consultation. Realistically, a period of at least six months should be planned for the corporate law implementation.
A legitimate claim for security can delay or increase the cost of your project. Have your creditor structure assessed by a lawyer in good time to avoid being surprised by unexpected demands.
Transfer of undertaking pursuant to Section 613a of the German Civil Code (BGB): Employment law consequences of the restructuring
As soon as a business or part of a business changes ownership in a demerger, spin-off, or asset deal, Section 613a of the German Civil Code (BGB) applies. All existing employment relationships, with all rights and obligations, transfer to the new legal entity. In contrast, the employer's status remains unchanged in the case of a change of legal form, while in the case of a merger, the transfer results directly from universal succession. Dismissal solely on the basis of the business transfer is legally inadmissible; dismissals for operational reasons remain possible in principle, but require legally sound justification.
Employees must be informed in writing about the timing, reasons, and consequences of the transfer before it takes place. They have the right to object to the transfer of their employment relationship within one month. If the information provided is inadequate or incomplete, this one-month period does not begin, meaning that objections remain possible even considerably later. For liabilities incurred before the transfer that become due within one year, both the previous and the new employer are jointly and severally liable. If a works council exists or other co-determination regulations apply, supplementary participation rights must be respected.
Inadequate employee information can lead to months of legal uncertainty. Have both the notification letter and the employment law consequences reviewed by a lawyer before the transition takes effect.
Tax risks: Reorganization Tax Act, retroactive regulations and holding periods
If the requirements of the German Reorganization Tax Act are met, a reorganization can be carried out tax-neutrally at book value, without the disclosure and taxation of hidden reserves. However, this tax neutrality does not occur automatically but requires the fulfillment of strict conditions. The transferring company must prepare a final tax balance sheet, and the application for carrying forward the book values must be submitted within the prescribed time limit. If the deadline is missed or the legal requirements are not met, the disclosure of hidden reserves will result in a significant tax burden.
An additional risk lies in the holding periods. If the contributing party sells the shares received as part of the contribution within seven years, a capital gain is taxed retroactively. The retroactive tax effect itself is also subject to time limits: The tax transfer date must not exceed eight months before registration in the commercial register, thus corresponding to the commercial law deadline for the closing balance sheet. If real estate is part of the company's assets, real estate transfer tax may also be triggered. Anyone implementing corporate law measures without consulting a tax advisor exposes themselves to avoidable and, in some cases, potentially ruinous burdens.
Tax and corporate planning must be coordinated; otherwise, you risk jeopardizing the tax neutrality of the conversion. Have your project prepared in a coordinated manner with legal and tax advisors before taking any binding steps.
Personal liability of managing directors and shareholders during the conversion
In the case of a conversion, the liability risk is not limited to the companies involved – it can also extend to the individuals acting on their behalf. According to Section 43 of the German Limited Liability Companies Act (GmbHG), managing directors are obligated to act with the diligence of a prudent businessperson. If they disregard this duty, for example by submitting a defective conversion report, providing false information during the registration process, or inadequately examining assets, they are liable to the company for any resulting damages. If the GmbH is experiencing financial difficulties, the obligation to file for insolvency under Section 15a of the German Insolvency Code (InsO) and the prohibition on distributions under Section 15b InsO also apply. A conversion must never be used as a means to conceal an existing obligation to file for insolvency.
Shareholders are not protected from potential liability. In the case of a change of legal form to a GmbH (limited liability company) or a capital increase through contributions in kind, the regulations governing contributions in kind apply. If a contribution in kind does not correspond to its assessed value, the shareholders are liable for the resulting shortfall through the principle of liability for the difference. If a conversion is clearly intended to disadvantage creditors, there is also the risk of clawback in insolvency proceedings and, under certain circumstances, liability for actions that threaten the company's existence. Such risks can only be mitigated through meticulous documentation and a realistic valuation.
In your role as managing director, you are personally liable for any improperly executed conversion. Have valuations, required reports, and the registration application reviewed by a lawyer before making any legally binding declarations to the commercial register.
How to legally convert your GmbH
A conversion is not a one-time event, but a multi-stage process in which each individual phase must be carried out correctly and within the prescribed time limits. Failure to comply with the procedure, formal requirements, or substantive requirements usually results in rejection by the commercial register. The typical conversion process includes the following steps:
- Inventory and target structure: Analysis of the existing situation, debts, contracts and tax consequences, as well as determination of the appropriate form of conversion.
- Conversion agreement or conversion plan: Preparation of the merger, demerger or change of legal form agreement with all mandatory information, including the distribution of assets and liabilities.
- Conversion report and audit: Preparation of the necessary report and, where legally required, an audit. Certain reports may only be waived under restrictive conditions.
- Final summary: Preparation of the final balance sheet, which must be no more than eight months old at the time of registration with the register.
- Notarization and shareholder resolution: Notarization of the contract and obtaining the necessary majority for approval.
- Registration and entry: Registration with the commercial register. The conversion only becomes legally effective upon registration and triggers the deadlines for the protection of creditors and employees.
At the same time, employee information, potential co-determination rights, and tax coordination must be ensured. Careful planning that integrates corporate, tax, and labor law aspects from the outset provides the most effective protection against liability and delays.
The earlier you seek legal advice, the lower the risk of formal errors and liability issues. Have your conversion project structured by a lawyer from the outset, rather than having to correct individual steps later.
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Frequently Asked Questions:
The Transformation Act defines transformation as a change in the legal form or asset structure of a legal entity. This includes mergers, divisions, changes of legal form, and asset transfers. Separate procedures with specific formal and protective requirements are provided for each of these forms. The suitability of a particular option depends on the economic objective and the existing initial structure.
The law distinguishes four basic forms: merger, division, change of legal form, and asset transfer. Division is further subdivided into split-up, spin-off, and demerger. As an alternative to these legally regulated transformations, an asset deal is a possible method of individual legal succession. Your choice of a specific form directly impacts your future liability situation.
A merger combines several legal entities into a single entity, whereby the transferring entity ceases to exist and all its assets are transferred by universal succession. A division transfers assets to one or more legal entities, while the transferring entity may continue to exist, depending on the chosen form. Furthermore, a division leads to special post-merger liability pursuant to Section 133 of the German Transformation Act (UmwG).
Pursuant to Section 133 of the German Transformation Act (UmwG), all legal entities involved in the demerger are jointly and severally liable for liabilities that arose before the demerger became effective. For any legal entity to which a liability was not assigned in the demerger agreement, a limitation period of five years applies, beginning with the publication of the registration in the commercial register. If the liabilities are pension obligations within the meaning of the German Occupational Pensions Act (Betriebsrentengesetz), this period is extended to ten years. The mere contractual assignment of a liability does not eliminate the statutory liability.
Yes. Both the conversion agreement or conversion plan and the shareholders' resolution authorizing it must generally be notarized. Without this formality, the process is invalid and registration with the commercial register will not occur. Similarly, registration with the commercial register is subject to strict formal requirements. Therefore, thorough preparation for the notarization is absolutely essential.
When a business or part of a business is transferred, the employment relationships, including all rights and obligations, transfer completely to the new legal entity in accordance with Section 613a of the German Civil Code (BGB). Any dismissal issued as a result of the transfer is legally invalid. The affected employees must be informed in writing beforehand and have the opportunity to object within one month. The original employer remains jointly liable for certain obligations incurred before the transfer for a limited period.
If the requirements of the German Reorganization Tax Act are met, a reorganization can be carried out tax-neutrally at book value. This generally requires submitting an application within the prescribed time limit, and certain holding periods must be observed, such as a seven-year period for contributions in kind. If the requirements are not met, hidden reserves are disclosed and subject to taxation. Therefore, timely consultation with a tax advisor is essential.
The closing balance sheet on which the application is based must not be older than eight months at the time of registration with the commercial register. This period is aligned with the retroactive tax implications under the German Reorganization Tax Act. If the period is exceeded, a new balance sheet must be prepared, which delays the entire process. The eight-month period should therefore be factored into the planning from the outset.
Yes, personal liability is possible. According to Section 43 of the German Limited Liability Companies Act (GmbHG), managing directors are obligated to exercise the due diligence of a prudent businessperson and are liable for damages in the event of breaches of this duty. False information provided during registration, inadequately prepared reports, or failure to file for insolvency during a corporate crisis can lead to personal liability. Thorough documentation and auditing significantly reduce this risk.
Legal counsel is recommended as soon as you consider a conversion, because the crucial decisions are made during the selection of the conversion form and its valuation. Timely advice ensures compliance with all formal and deadline requirements, prevents subsequent liability risks and tax burdens, and protects the individuals involved from personal liability. Legal support is particularly essential for a successful outcome in demergers, cross-border restructurings, or in challenging economic situations.
