Safeguarding a successful company for future generations is essential to maintain prosperity and entrepreneurial growth in the long term. Therefore, careful succession planning should always be kept in mind. If the business succession is not carefully planned, there is a considerable risk of financial losses, in which part of the family’s and your security can be lost. Careless dissolution of hidden reserves can also result in income tax losses.
To enable our clients to implement the desired succession planning in the best possible way, Schlun & Elseven Rechtsanwälte offers comprehensive legal assistance. Our German inheritance, corporate and tax lawyers ensure that all requirements for a successful business succession are met and work with you to develop an economically viable solution that is precisely tailored to the goals and specifics of your business and ensures its prosperity across generations.
Execution of Wills to Secure the Succession of the Company
Since the legal succession often does not correspond to the testator’s wishes, regulating the succession in advance in the event of the entrepreneur’s death is advisable. It is of particular importance that the entrepreneur’s will creates clear conditions for inheritance by specifying who will succeed the entrepreneur. In this way, disputes among the heirs can be prevented.
Careful preparation is required to comprehensively secure the succession of the business in the will. Therefore, not only the regulations under German inheritance law should be considered. In particular, the articles of association must also be comprehensively examined and, if necessary, adapted to the testator’s will. For example, it may be required to insert a succession clause.
However, it is not possible for every heir to immediately assume responsibility for the inherited company share. This is the case, for example, if the heirs are minors. Furthermore, it is not uncommon for disputes among the heirs to stand in the way of an orderly company succession. In such cases, execution of the will is often ordered over the company share. The executor is supposed to enforce the testator’s will and thus ensure the company’s succession. The execution of the will can be limited to a short time and only serve to settle the estate (settlement execution). However, it can also be permanent and serve the administration of the estate (administrative execution). In this case, the heirs are deprived of their power of disposal over the estate for a certain time.
The admissibility of the arrangement of an execution of a will depends on the legal form of the business. Furthermore, the execution of a will can be excluded by the articles of association. However, alternative possibilities exist for such cases, such as the so-called trust or power of attorney solution. The German lawyers at Schlun & Elseven Rechtsanwälte will be happy to outline which arrangements for the execution of a will or the trust or power of attorney solution should be made. They will support you in every further step.
Business Succession through Inheritance
Business succession in the event of inheritance depends above all on the corporate form of the respective company, as the inheritability of company shares is regulated differently for partnerships and corporations in Germany.
The inheritability of shares in a corporation is generally unproblematic in Germany. For example, shares in a limited liability company (GmbH) can be inherited without further ado (Section 15 para. 1 of the German Act on Limited Liability Companies, GmbHG). The same applies to shares in a stock corporation (AG), a partnership limited by shares (KGaA) or a European Company (SE).
Shares in a partnership are, in principle, not inheritable. However, this principle can be deviated from using succession clauses in the partnership agreement. For example, a partnership under civil law (GbR) is dissolved by the death of a partner unless the partnership agreement provides for a deviating regulation, a so-called continuation clause (Section 727, paragraph 1 of the German Civil Code, BGB).
In the case of a general partnership (OHG), only the deceased partner ceases to exist (Section 131 paragraph 3 No. 1 of the German Commercial Code, HGB). The deceased partner’s share then passes to the remaining partners, who are obliged to pay the heirs a corresponding settlement (Sections 738, 740 BGB, Section 105 para. 3 HGB). However, deviating contractual provisions (succession clause) may also apply here.
If a general partner of a limited partnership (KG) dies, the partnership (as with a general partnership) is continued among the remaining partners. However, the partnership is dissolved if they are the only general partner. If a limited partner dies, the KG is continued with their heirs (Section 177 HGB).
Participation in a partnership company is not inheritable in principle (Section 9 paragraph 4 sentence 1 of the German Act on Partnership Companies of Members of Independent Professions, PartGG). The death of a partner leads to their withdrawal. The remaining partners receive the partnership share proportionately. Succession clauses only apply to persons with the required professional licences (Section 9 para. 4 sentence 2 PartGG).
Succession in Sole Proprietorship
n the case of intestate succession, the sole proprietorship is included in the estate as a tangible entity. If there are several heirs, it passes into the joint assets of the community of heirs (Section 2032 BGB). The heirs can then continue the business as a community of heirs.
Succession Regulations in the Articles of Association
For good succession planning, it is essential to deal with the company’s partnership agreement, if one exists. Since the deceased partner usually retires, a succession clause in the partnership agreement is necessary to continue the partnership with the heirs.
The simple succession clause merely stipulates that in the event of the death of a partner, the partnership share will pass to their heirs. If there are several heirs, the share is divided among them based on the so-called special succession so that each heir becomes a partner. It, therefore, does not pass to the community of heirs. If only certain heirs are to succeed the deceased partner, this can be regulated in a qualified succession clause. However, it is essential to ensure that the heirs named in the partnership agreement are also heirs within the meaning of the statutory law of succession or the testamentary disposition.
In general, it is essential to coordinate the articles of association and the inheritance law regulations and agreements. Our German inheritance and corporate lawyers will check the articles of association and help you to adapt them to your wishes for company succession.
Business Succession Planning: Essential Considerations
Successful business succession planning enables you as an entrepreneur to make long-term strategic decisions for the business to know it is in safe hands for the future. Our lawyers will support you in making these important decisions.
Early Planning
Early planning ensures you find the right person in the family or employee circle to continue running your business. Otherwise, it would be best if you considered selling the business. If there are some suitable candidates, appointing them to strategically essential positions with more responsibility may be advantageous. In this way, their professional competencies and their values for the company’s future management can be established.
Document the Business Succession Plan
Careful documentation of the succession plan provides you with the necessary security. Working with our German inheritance and corporate law lawyers guarantees that all aspects relevant to German insurance and tax law, company structures, and bank accounts are accurately documented. We support you in your company’s succession planning and ensure that it complies with all legal requirements.
Company Succession: Inheritance Tax in Germany
From a tax perspective, there are several things to consider regarding business succession by inheritance. For example, some special regulations provide preferential inheritance tax treatment for the inheritance of business assets. Under certain conditions, the transfer of a share in a business can be exempted from inheritance tax as a transfer of so-called productive assets with a tax rate of 85 % (exemption discount; §§ 13a, 13b of the German Inheritance Tax and Gift Tax Act, ErbStG). The business assets can even be completely exempted from tax (option exemption) if necessary.
If you have any questions about the taxation of business assets in the context of business succession, please do not hesitate to contact our German lawyers. For more information on preparing your inheritance tax return or transferring an inherited property, please visit our page “Inheritance Tax Law in Germany“.
Choosing the Successor
Choosing the proper successor for the business is often challenging, complex, and determined by many factors. For example, it must be decided whether the company should remain in the family, be handed over to a business partner or even be sold. The entrepreneur may leave the company’s management to a particularly committed employee. It is not uncommon to find the person with the best qualifications to take over the company’s management within the company itself.
Keeping the Business in the Family
Many businesses in Germany are family-run, so keeping them in the family regarding business succession can make sense. The advantage of appointing a family member as heir is that business owners can prepare their family members to run the business. They get a more detailed insight into the heir’s plans for the company’s future. In addition, the loyalty and determination of the successor to maintain and develop the family business is another argument for keeping the business in the family.
In families with several possible successors, decisions must be made about who the successor is or how the succession should take place. Early planning and open discussions are essential here, as late planning or the lack of a clear plan can significantly disrupt business operations. Clarify with trusted advisors which family members have the necessary skills and aptitude to take over your business and continue it successfully. Our lawyers advise you on all the options for succession planning within the family.
Handover to a Business Partner
Founding partners have already proven their qualities and skills in running the business and, therefore, appear to be a safe choice for future business success. With close business partners, the advantage is that you trust them and know their plans for the business in the future.
Let our legal team advise you on the critical considerations involved in such a move and assist you in drafting the necessary agreements with the business partner. We recommend that you communicate clearly with family members and people who may be potential heirs to ensure that the reasons for the decision are openly stated.
Selling the Company
If you do not find/have a suitable successor for your business, you should consider selling the business. However, this requires thorough preparation and careful planning. Our lawyers can provide you with expert advice when selling a business. Our team will conduct the necessary due diligence to determine the value of your business and thoroughly examine prospective buyers. The valuation of your business will consider important aspects such as intellectual property, premises, and brand.
Remember that plans can change even after a sale option has been considered. The entrepreneur can certainly implement alternative options if a suitable successor is found during the preparations.
Practice Group: German Succession Planning
Practice Group:
Business Succession Planning
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