Company succession

Anyone who owns a business or is a partner in a company must give specific thought to their estate and organise it in the best possible way – especially with regard to the company – according to their own ideas.

After all, if nothing is organised and an entrepreneur or shareholder dies, the statutory succession usually leads to less than ideal constellations, for example if spouses and (minor) children inherit – or if neither is present: Parents or siblings. This can also be expensive in terms of tax.

There are therefore a number of reasons to take an active approach to company succession.

Company succession at any age

Owners of (medium-sized) companies in particular should think about what will happen to their company in the event of their death or what should happen to it.

This does not only apply to older business owners: young and middle-aged entrepreneurs should also ensure their succession in the event of their own death professionally and in good time – in the interests of the company, but also in the interests of their own, possibly still young, family.

Succession for entrepreneurs: Entrepreneur’s will

Company succession can be regulated in a will or, for example, with the help of an inheritance contract. Sole proprietors of companies in particular should use this method to appoint a person to continue the company. This can be achieved, for example, by means of a division order or an advance legacy in the will, with which assets of the estate are allocated to individual heirs.

If the company is the largest part of an inheritance, it may be sensible to appoint only one person as heir and merely leave bequests to the other family members. However, such an arrangement in the will prevents (disputed) communities of heirs from paralysing the company, for example if the statutory succession applies and children and spouse inherit the company.

At the same time, there are various ways of creating a balance between the company heir and the remaining heirs, e.g. in the form of a waiver of a compulsory portion with financial compensation. If good solutions are found at an early stage – also with regard to a possible claim for equalisation of gains – this prevents disputes between the heirs later on and thus effectively secures the future of the company.

Entrepreneurial power of attorney

Anyone who is thinking about business succession in the event of death should also think about issuing a so-called business power of attorney to a trusted person. This power of attorney serves as a precautionary measure in the event that an entrepreneur is no longer able to run the company due to illness or accident.

You can find out more about business power of attorney here.

Inheriting company shares

Likewise, people who hold shares in companies – partnerships such as GbR, OHG or GmbH & Co. KG or capital companies – should regulate their business estate individually. This applies above all to people who are majority shareholders in a company and thus have influence on the company’s fortunes.

In principle, the inheritance of shares in a GmbH initially seems uncomplicated because the heirs acquire the shares by way of universal succession. Shares in a GmbH are therefore generally held by the community of heirs in their entirety. But even in this case, unregulated inheritance of, for example, majority shares can lead to problems if the community of heirs is not in agreement. Last but not least, the partnership agreement can contain different provisions that inheritance to several people is not possible. In this respect, it is also important and sensible for the inheritance of GmbH shares to regulate the succession individually in such a case.

In terms of inheritance law and taxation, things are more complicated for partnerships such as GbR, KG, OHG or GmbH & Co. KG because there are/can be special inheritances: the share is not transferred to the community of heirs as one share, but the heirs become partners in proportion to their share of the inheritance. This often leads to considerable problems with the company’s ability to make decisions when the inheritance occurs.

Comparison: Entrepreneur’s will, partnership agreement and applicable legal situation

It is always crucial that the succession under company law and inheritance law are in harmony with each other – that is, that the individual testamentary provisions do not contradict the provisions under company law or the partnership agreement.

Before an entrepreneur’s will is drawn up, the partnership agreements must be analyzed carefully. This is because it is not uncommon for there to be succession clauses in the partnership agreement to protect the company from uncontrolled and uncontrollable “inherited” co-partners.

But even if an entrepreneur’s will has already been drawn up, there should be regular comparison/coordination between the partnership agreement and the entrepreneur’s will. This is because

• personal changes (divorce, remarriage, children, etc.),
• adjustments to the partnership agreement over the years and
• legal changes, including, for example, the reform of partnership law (MoPeG),

can have an influence and lead to the need to adjust the will. And of course, the tax consequences of the company succession must always be kept in mind to protect heirs and companies.

Alternative: Transfer of company during lifetime / anticipated inheritance

Transferring a company during one’s lifetime by way of anticipated inheritance can be an alternative to the inheritance law company succession arrangement.

On the one hand, a transfer during one’s lifetime leads to an “orderly” handover. On the other hand, the company transfer can be more tax-efficient and lead to less outflow of liquidity. However, the financial security of the donating company owner and, for example, the spouse is also important here. And as with any company succession, careful attention must be paid to the compulsory inheritance rights of those involved in order to avoid unpleasant surprises.

Alternative: Selling the company

If no suitable successor is available, a lifetime sale of the company should be considered. However, finding a buyer is often difficult because experience shows that there are very different ideas about the value/purchase price.