Converting a Sole Proprietorship to a GmbH in Germany 2026

Your sole proprietorship is doing well, profits are rising, and so are your tax bill and your personal liability. At some point the question comes up: is it worth switching to a GmbH? The good news: you can convert your existing Einzelunternehmen into a GmbH without starting from scratch, and, under certain conditions, even tax-neutrally.

"Converting" is the everyday term. Legally, you transfer your business to a new GmbH, either by spinning it off under the German Transformation Act (Umwandlungsgesetz) or by contributing it in kind. Which route fits depends mainly on whether your sole proprietorship is entered in the commercial register (Handelsregister).

This guide shows you when the move is worth it, the three available routes, how § 20 UmwStG lets you avoid taxing hidden reserves, and what to watch for with share capital, the notary and your bookkeeping.

Key points at a glance

• "Converting" means transferring your business to a new GmbH. There are three routes: spin-off (e.K. only), contribution in kind, or cash formation followed by a sale.
• § 20 UmwStG makes the move tax-neutral. If you contribute the entire business for new shares, you may carry forward the book values; hidden reserves are not taxed immediately. The application to carry forward book values must be actively filed with the tax office.
• Seven-year lock-up (§ 22 UmwStG): If you sell the shares earlier, the contribution gain is taxed retroactively, reduced by one-seventh for each full year that has passed.
• Share capital of €25,000: With a contribution in kind, the value of your business counts toward it; you don't have to pay in cash if the business is worth enough.
• Requirement: The contribution balance sheet must show positive equity. If liabilities exceed assets, a tax-neutral contribution at book values is not possible.
• Costs realistically €4,000–12,000, and about 4–6 weeks from the first notary appointment. From day one, the GmbH must keep double-entry books.

When converting to a GmbH pays off

The switch is not an end in itself; it tends to pay off in these situations:

• Liability: As a sole proprietor you are personally liable without limit. The GmbH limits liability to the company's assets.
• Tax on high profits: A GmbH taxes retained profits at roughly 15% corporate income tax plus solidarity surcharge plus trade tax, together around 30% depending on the municipal rate. A sole proprietorship is taxed at your personal income tax rate of up to 42% (45% top rate).
• Reinvestment: If you leave profits in the company instead of withdrawing them, you benefit from the lower corporate rate.
• Credibility and investors: Banks, large clients and investors often take the GmbH form more seriously, and shares are easier to transfer.

Rule of thumb: once you have a consistently high five-figure annual profit that you don't fully spend privately, a GmbH starts to make sense tax-wise. Still, run the exact numbers with your tax advisor or in Norman; the conversion has costs that only amortize over the years.

Sole proprietorship vs. GmbH: the tax comparison

The tax heart of the decision: how heavily are profits that stay in the business taxed?

So the GmbH advantage shows up mainly with retained profits: leaving profits in the company means paying noticeably less than at the top personal rate. If you withdraw most of it privately anyway, part of that advantage is offset again by dividend taxation.

Three routes: spin-off, contribution in kind, or cash formation

There isn't one path but three. Which one applies depends mainly on whether your sole proprietorship is entered in the commercial register.

• Spin-off under the Transformation Act (§ 152 ff. UmwG): Only possible if your business is registered as a registered merchant (eingetragener Kaufmann, e.K.) in the commercial register. The advantage: contracts, accounts and employees pass to the GmbH automatically by universal succession; you don't have to ask each counterparty individually.
• Contribution in kind (Sachgründung): The standard route for sole proprietors not in the register. You form a new GmbH and contribute your business as a contribution in kind. Each asset and contract is transferred individually (singular succession), and key contracts need the other side's consent.
• Cash formation plus sale: You form the GmbH the classic way with €25,000 in cash, then sell your business assets to it. Easier to value, but it can immediately expose hidden reserves to tax.

Tax-neutral thanks to § 20 UmwStG

The key lever: if you contribute your entire business in exchange for new shares, § 20 UmwStG lets you carry forward the book values. The hidden reserves (the value above the book value of your fixed assets, client base and goodwill) are then not taxed immediately.

Important: carrying forward book values does not happen automatically. You must actively apply to the tax office, at the latest with the GmbH's first tax closing balance sheet. A late application cannot be cured; without it the tax office applies the fair market value and the hidden reserves become immediately taxable.

Three things to keep in mind:

• Positive equity required: The contribution balance sheet must show positive equity: assets must exceed liabilities. If the business is balance-sheet insolvent, a tax-neutral contribution at book values is not possible.
• Seven-year lock-up (§ 22 UmwStG): If you sell the GmbH shares within seven years, the contribution gain is taxed retroactively, reduced by one-seventh for each full year that has passed.
• Retroactivity up to 8 months (§ 20 (6) UmwStG): The contribution can be backdated for tax purposes to a reference date up to eight months in the past, for example to an existing year-end balance sheet.

Watch out for property: if real estate is part of the business, the transfer can trigger real estate transfer tax (Grunderwerbsteuer).

Share capital and the contribution-in-kind report

A GmbH needs share capital of €25,000. With a contribution in kind, the value of your contributed business counts toward this capital, so you don't have to pay in extra cash, provided the business is worth enough.

In return, the registry court requires a Sachgründungsbericht (contribution-in-kind report) proving the value of the contribution. If the business is worth less than the share capital claimed, you are liable for the difference (Differenzhaftung). A clean valuation of your fixed assets and a look at the opening balance sheet are decisive here.

Step by step

1. Inventory & valuation: Closing balance sheet of the sole proprietorship; value fixed assets, inventory and goodwill.
2. Choose the route: Spin-off (e.K. only), contribution in kind, or cash formation.
3. Notary appointment: Articles of association, contribution agreement, contribution-in-kind report if applicable, notarization.
4. Commercial register: Registration and entry of the GmbH.
5. Opening balance sheet: The GmbH prepares its opening balance sheet as of the transfer date.
6. Organize the handover: Move contracts, business account, insurance and ongoing obligations to the GmbH; re-register your trade.

From the first notary appointment, the whole process usually takes about 4 to 6 weeks until the GmbH is entered in the commercial register. The GmbH formation itself runs like any new formation, except your contribution is your existing business rather than cash. If you're coming from a UG instead of a sole proprietorship, the path is different: see converting a UG into a GmbH.

What does the conversion cost?

Costs depend heavily on how complex your business is and whether you need tax advice. Realistically they run between €4,000 and €12,000:

The costs amortize through the tax savings and limited liability, which is why the move only pays off above a certain profit level. Weigh the GmbH's ongoing tax saving against the one-off conversion costs and the higher ongoing bookkeeping cost.

What changes in your bookkeeping

The biggest operational jump: as a sole proprietor you could often use the simple cash-basis income statement (EÜR). A GmbH is always required to keep double-entry bookkeeping with a balance sheet, profit-and-loss statement, annual accounts and publication in the Federal Gazette, from day one. The GmbH, as a new legal entity, also gets its own tax number; the sole proprietorship's number is not carried over.

That means more obligations, but with the right software no slowdown. Norman's AI bookkeeping captures receipts automatically, posts them under the SKR03/04 chart of accounts and prepares your VAT returns and annual accounts, built for the new GmbH structure.

Frequently asked questions

How long does converting a sole proprietorship into a GmbH take? From the first notary appointment it usually takes about 4 to 6 weeks until entry in the commercial register. Preparation (valuation, contribution balance sheet, tax structuring) can add several more weeks depending on complexity.

Is the conversion really tax-free? Not tax-free, but tax-neutral: under § 20 UmwStG you carry forward the book values and the hidden reserves are not taxed immediately. But if you sell the shares within the seven-year lock-up, the contribution gain is taxed proportionally after the fact.

Can I contribute my sole proprietorship with debts into a GmbH? Only as long as the contribution balance sheet shows positive equity: assets must exceed liabilities. If the business is balance-sheet insolvent, a tax-neutral contribution at book values is not possible.

Does the GmbH take over my business name and contracts? With a spin-off (e.K.), contracts pass automatically. With a contribution in kind, you must transfer contracts individually and list them in the contribution agreement; key contracts need the other side's consent. The business name can usually be continued as the GmbH's name.

Do I need €25,000 in cash for the conversion? No. With a contribution in kind, the value of your contributed business counts toward the share capital. You only pay in cash if the business is worth less than €25,000 or you choose the cash-formation route.

Conclusion

Converting a sole proprietorship into a GmbH is very doable, and thanks to § 20 UmwStG even without an immediate tax hit, as long as you contribute the whole business for shares and keep the seven-year period. What matters is choosing the right route (spin-off, contribution in kind, or cash formation), a clean valuation for the share capital, and the switch to double-entry bookkeeping. Run the tax advantage carefully beforehand; then the move becomes a real growth step rather than an expensive end in itself.