The choice of legal form has far-reaching tax consequences. Whether sole proprietorship, partnership or corporation -- each legal form brings its own advantages and disadvantages.
Choice of Legal Form as a Strategic Decision
The choice of legal form is one of the most important business decisions. It determines not only liability issues and organisational structure but also has a significant impact on the tax burden.
Taxation of Sole Proprietorships and Partnerships
Transparency Principle
Sole proprietorships and partnerships are subject to the transparency principle. Profits are taxed directly at the level of the partners. Income tax is levied at the progressive rate (§ 32a EStG), with a top rate of 42 per cent or 45 per cent on taxable income exceeding 277,826 euros.
Trade Tax Credit
Traders are additionally subject to trade tax. However, this is offset against income tax on a lump-sum basis pursuant to § 35 EStG. At a municipal multiplier of up to approximately 400 per cent, the trade tax is fully compensated.
Retained Earnings Relief
Since 2008, unincorporated businesses can make use of the retained earnings relief pursuant to § 34a EStG. Retained profits are taxed at a reduced rate of 28.25 per cent. A subsequent tax charge applies upon withdrawal.
Taxation of Corporations
Separation Principle
The GmbH and AG are taxed as independent tax entities. Profits are subject to corporate income tax of 15 per cent (§ 23 KStG) plus solidarity surcharge and trade tax. The overall burden at company level is approximately 30 per cent, depending on the municipal multiplier.
Distribution Tax Burden
When profits are distributed to natural persons, either the flat-rate withholding tax of 25 per cent or the partial income method applies. The overall burden, including both the company and shareholder levels, reaches approximately 48 to 50 per cent depending on the specific circumstances.
Special Legal Form Structures
GmbH & Co. KG
The GmbH & Co. KG combines the limited liability of the GmbH with the transparent taxation of a partnership. This model is particularly suitable for family businesses and real estate companies.
Holding Structures
An upstream holding GmbH can offer substantial tax advantages for participation income. Dividends and capital gains from participations are 95 per cent tax-exempt at the holding level pursuant to § 8b KStG.
Conversion of Existing Businesses
A change of legal form is possible under the Umwandlungsgesetz (UmwG). Mergers, demergers and changes of form can, under certain conditions, be carried out on a tax-neutral basis pursuant to the Umwandlungssteuergesetz (UmwStG).
Conclusion
There is no universally optimal legal form. The best choice depends on numerous individual factors: profit levels, withdrawal behaviour, investment planning, liability considerations and succession planning. At compleneo, we analyse your situation holistically and recommend the tax-optimal legal form for your business.
