Concept and Fundamentals of Business Succession
Business succession refers to the change of ownership and management relations in a company, while it remains an independent economic entity. It constitutes a crucial process both from an entrepreneurial and legal perspective, especially for small and medium-sized enterprises. Business succession can occur within the family, to employees, external buyers, or in the context of company mergers. The legal framework for business succession is complex, as various areas of law such as corporate law, inheritance law, tax law, labor law, and trade law are involved.
Legal Principles of Business Succession
Corporate Law Aspects
Corporate law plays a central role in business succession. Depending on the company’s legal form (e.g., sole proprietorship, GbR, OHG, GmbH, AG), different requirements and procedures apply:
Sole Proprietorship
In the case of sole proprietorships, succession can be effected through transfer, lease, or inheritance of the business. The transfer requires a purchase agreement or a gift, subject to any approval requirements, particularly for registered commercial enterprises.
Partnerships
For partnerships (GbR, OHG, KG), partnership agreements and statutory provisions regulate how shares may be transferred or inherited. There are often pre-emption rights in favor of the remaining partners. The succession of an heir or a third party as successor usually requires the approval of the other partners. The continuation of the company after the death of a partner is governed by §§ 727 et seq. BGB (GbR) and §§ 131 et seq. HGB (OHG, KG).
Corporations
For corporations (GmbH, AG), succession generally takes place through the transfer of shares. The transfer of shares in a GmbH must be notarized (§ 15 GmbHG). A share purchase agreement sets out the details of the succession. In the case of an AG, the transfer of shares takes place within the framework of the Stock Corporation Act, achieved by delivery and endorsement (for registered shares).
Inheritance Law Aspects
Inheritance law is particularly significant for internal family successions. The business’s value is part of the deceased’s estate and subject to the statutory or testamentary succession. The following points, among others, must be considered:
- Testamentary Dispositions: Succession can be regulated by a will or an inheritance contract. Business-specific forms of testament, such as the entrepreneur’s will, take into account the preservation of the business and the provision for other heirs.
- Compulsory Share Law: Beneficiaries of compulsory portions may demand compensation payments even if the business is not transferred to them, which can affect the liquidity of the successor company.
- Pre- and Subsequent Inheritance: The arrangement of pre- and subsequent inheritance can be used to ensure the continuation of the business.
Tax Law Aspects
Business succession triggers a variety of tax consequences. The most important include:
- Inheritance and Gift Tax: Succession cases due to death or lifetime transfers are generally subject to inheritance and gift tax. Business assets may benefit from tax reliefs if certain conditions are met (§§ 13a, 13b ErbStG).
- Business Split-Up and Hidden Reserves: Transferring the business can reveal hidden reserves, resulting in capital gains subject to income tax.
- Real Estate Transfer Tax: Transferring real estate in the context of succession may trigger real estate transfer tax.
- VAT Implications: When transferring the total assets as a whole, the transaction is not subject to VAT under § 1 para. 1a UStG (so-called transfer of a business as a whole).
Labor Law Aspects
In the case of business succession, labor law provisions, particularly § 613a BGB, apply:
- Transfer of Employment Relationships: In the event of a transfer of business, employment relationships are transferred to the acquirer with all rights and obligations.
- Duty to Inform: Employees must be informed in a timely, written, and comprehensive manner about the transfer of the business.
- Right to Object: Employees have the right to object in writing to the transfer of their employment relationship within one month of being informed.
- Protection Against Dismissal: Dismissals made solely due to the business transfer are invalid.
Commercial and Trade Law Aspects
The continuation of the company name after a business succession is regulated in the German Commercial Code (HGB). According to § 22 HGB, the company name may be continued with the successor’s consent; rights and obligations arise under §§ 25 et seq. HGB. If the successor continues the business under the previously used name, they may also be liable for old debts under certain circumstances.
Trade law, based on the Trade Regulation Act, determines whether the succession requires notification of the business, a new or amended registration with the authorities.
Forms of Business Succession
Internal Succession
With internal business succession, the company remains in the hands of the existing owner family (family succession) or is transferred to employees (especially as part of management buy-outs). Here, family ties, inheritance and corporate law regulations, as well as tax issues, play a central role.
External Succession
External business succession takes place by selling the company or through mergers and acquisitions (Mergers & Acquisitions). Legally, purchase agreements, warranty provisions, liability issues, and antitrust reviews must all be considered.
Liability Issues in Business Succession
A frequently underestimated issue in business succession is the assumption of liability:
- Existing Debts: Upon taking over the business and continuing the existing name, the acquirer is liable under § 25 HGB for all obligations of the predecessor established in the business.
- Tax Liability Risks: For outstanding taxes or social security contributions, liability may arise for the business continuation under § 75 AO or § 25 SGB IV.
- Warranties and Guarantees: Purchase agreements often contain provisions on liability, specifying its nature and scope.
Succession Planning and Company Valuation
A key component of business succession is legally secure succession planning, which often includes a company valuation. Legal provisions determine to what extent fair market value, income value, or asset value should be used, especially for tax calculations and compulsory portion claims.
Business Succession in an International Context
Cross-border scenarios are common for internationally operating companies and corporate groups. Here, foreign legal systems, double taxation treaties, and EU law must also be considered. Complexity is increased significantly by country-specific regulations, especially in corporate and tax law.
Summary
Business succession is a legally complex process that touches on a wide range of legal fields. The secure and sustainable transfer of a company requires a comprehensive analysis of corporate, tax, inheritance, labor, commercial, and trade law issues. Early and structured succession planning ensures the continuation of the company and helps prevent legal and financial risks for successors and the company.
Frequently Asked Questions
What legal requirements must be observed in a business succession?
A business succession requires a careful review of numerous legal requirements. First, it must be clarified whether the company operates as a sole proprietorship, partnership (e.g., GbR, OHG, KG), or corporation (GmbH, AG), as different succession rules, approval requirements, and registry entries apply depending on the legal form. Key aspects concern the review and, if necessary, amendment of partnership agreements, compliance with formalities such as notarization (e.g., for share transfers in a GmbH), as well as consideration of approval reservations, such as consents from other shareholders. For family internal succession, inheritance law comes into play, especially statutory inheritance and third-party compulsory portion claims. In addition, labor law aspects (duty to inform employees, transfer of employment relationships under § 613a BGB) must be observed. Trade and tax law provisions (VAT, real estate transfer tax, inheritance or gift tax issues) must also be complied with.
What role do partnership agreements and articles of association play in business succession?
Partnership agreements and articles of association form the legal foundation of many companies and are particularly relevant in succession. They regulate, among other things, how shares can be transferred to successors or external buyers, whether pre-emption rights exist, and whether approval requirements (e.g., from existing shareholders) apply. They also often include regulations regarding the withdrawal and indemnification of shareholders or their heirs. It is especially important to review the contract for succession clauses—such as entry, continuation, or qualified consent clauses—as these decisively determine who can become a successor and under what conditions. Unclear or outdated articles can make succession significantly more difficult or even void, so timely revision before a generational change is recommended.
What legal aspects must be considered when transferring company shares?
There are both formal and substantive requirements for transferring company shares. Depending on the legal form, for example, shares in a GmbH must always be notarized, whereas interests in a partnership can generally be transferred informally, but are usually subject to the partnership agreement. The validity of the transfer further depends on the existence of pre-emption, approval, or forfeiture rights under the partnership agreement. Following the transfer, entries in the Commercial Register or the Transparency Register must be made. In an asset deal (transfer of individual assets), all contracts with third parties, permits, or licenses must be reviewed for transferability. The transfer of company shares can also have tax consequences, such as triggering gift, inheritance, or real estate transfer tax if real estate is involved.
How does business succession affect existing employment relationships?
Employee rights are specially protected in a business succession by § 613a of the German Civil Code (BGB): When a business or part of a business is transferred, all employment relationships are automatically transferred to the acquirer with all rights and obligations. The successor assumes all existing employment contracts. Termination of employment solely due to the business succession is invalid (“prohibition of dismissal”). The workforce must be informed in a timely and comprehensive manner, especially about the timing, reason, and legal consequences of the takeover. Exceptions may apply if the business is not transferred as a whole or if specific contractual provisions apply in employment contracts. Successors should also carefully review existing collective bargaining agreements, works agreements, and possible partial retirement agreements.
What publication and notification obligations exist in a business succession?
Depending on the legal form and type of succession, there are different formal notification obligations to registers, authorities, and contractual partners. The most common concern the entry in the Commercial Register for corporations and partnerships, the amendment in the Transparency Register, and notification to the trade office (§ 14 GewO) if the owner or managing director changes. Banks and other business partners (e.g., lessors, landlords) should be notified regularly and often for contractual reasons in writing about the succession. For certain professions (e.g., craftsmen, pharmacists), governmental approvals and their transferability must be clarified in advance.
What tax aspects must be observed in the legal context?
Business succession involves significant tax issues, especially regarding inheritance and gift tax. The Inheritance and Gift Tax Act provides particular exemptions for so-called business assets if certain requirements (e.g., continuation over a minimum period, payroll clause) are fulfilled. Ongoing taxation issues must also be considered, such as income tax on capital gains or VAT in the context of an asset deal. In addition, the transfer of real estate in the business assets may trigger real estate transfer tax. Changes to tax numbers, VAT identification numbers, and notifications to the tax office—especially in the case of a complete change of owner or shareholder—should not be overlooked.
What are the risks of inadequate legal structuring in business succession?
An inadequately regulated business succession can have serious legal and economic consequences. This starts with ambiguities or contradictions in the partnership agreement that can completely block the succession process. Neglected inheritance and compulsory share claims can trigger disputes that, in extreme cases, may result in the dissolution of the company. Failure to comply with register or notification obligations in a timely manner can render the transfer ineffective and lead to significant liability risks. Additional tax burdens or even tax penalties threaten if the special tax regulations of succession are not observed. Employment law disputes can also arise if employee rights are insufficiently protected. Therefore, comprehensive, legally sound planning and early involvement of specialist lawyers and tax advisors are essential.
