What are the tax consequences of converting a partnership into a corporation in terms of corporate tax?
April 24, 2023 | 50,00 EUR | answered by Mia Köhler
Dear tax consultant,
My name is Georg Helbig and I have been running a successful business as a partnership for several years. Now I am considering converting my company into a corporation in order to benefit from the advantages of such a legal form. However, I am concerned about the tax consequences, especially regarding the corporate tax.
Currently, as a partnership, I pay income tax on the profits of the company. Through the conversion, my tax situation would fundamentally change. I wonder how the corporate tax compares to income tax and whether this would be financially beneficial for me.
I am aware that converting a partnership into a corporation comes with various tax implications and I want to make sure I fully understand all the consequences before making a decision.
Could you please explain to me what the tax implications of the conversion on the corporate tax would be and if there are any tax benefits that I should consider? Are there any specific deadlines or requirements that I need to adhere to in order to avoid tax disadvantages?
Thank you in advance for your help and advice.
Sincerely,
Georg Helbig
Dear Mr. Helbig,
Thank you for your inquiry regarding the conversion of your company from a sole proprietorship to a corporation and the associated tax implications, especially regarding corporate tax. I understand your concern about the financial consequences and would like to provide you with detailed information on this matter.
In general, sole proprietorships such as sole proprietorships or partnerships (GbRs) tax their profits at the level of the partners, while corporations such as GmbHs or AGs tax their profits with corporate tax. Corporate tax is a tax on the income of corporations and is currently 15% plus the solidarity surcharge.
Compared to income tax, which is levied individually on the profits of a sole proprietorship depending on the partner, corporate tax for a corporation may be lower. However, this depends on various factors, such as the amount of profits, the legal form, and the individual tax situation.
There are some tax aspects to consider when converting your sole proprietorship to a corporation. Firstly, you may need to uncover and possibly tax the hidden reserves of your assets. Additionally, you may have to pay income tax on the previous profits of the sole proprietorship if they have not been distributed yet.
However, there are also potential tax benefits to converting to a corporation. For example, you can benefit from the option of retaining profits and distributing them tax efficiently later. Additionally, corporations may have tax advantages in loss offsetting or certain depreciations.
It is important to seek comprehensive advice before converting to understand all tax consequences and avoid potential pitfalls. There are specific deadlines and requirements that must be met to avoid tax disadvantages. A tax advisor can assist you and help you develop the best tax strategy for your conversion.
I hope that this information has been helpful to you. If you have any further questions, please feel free to contact me.
Best regards,
Mia Köhler
