Transformation of sole traderships

Quite often, entrepreneurial activity starts as a sole tradership. According to statistics, there were about 1.9 million sole traderships (i.e. companies with fewer than 10 employees) in Germany in 2020 and just over 500,000 companies limited by shares with fewer than 10 employees.

Over time, many sole traders will ask themselves whether the legal form of sole tradership still suits both the size of their business and their business activities. Reasons usually are an increased liability risk, fiscal requirements or simply positioning vis-à-vis business partners.

Since at this point the sole tradership usually has created assets, concluded long-term contracts with customers or suppliers and formed a customer base, the two most important questions are:

  • How can I easily transfer all of my assets to a new company?
  • Will I have to pay taxes or rather how can the transformation be performed in a tax-efficient way?

A very good option is a hive-down (“Ausgliederung”).
But what exactly is a hive-down?

According to the German Transformation Act (Umwandlungsgesetz), a hive-down technically is a type of division into several companies. With a hive-down, the assets of of a sole trader can be transferred to a new company (usually a GmbH, i.e. a German limited liability company, or a GmbH & Co. KG, i.e. a German limited commercial partnership consisting of a general partner and a limited partner) either for purposes of the formation of a new company (“Neugründung”) or for purposes of absorption (“Aufnahme”) into an existing company. In the case of a GmbH & Co. KG, the latter is the only option available. This means that the company must have been formed already.

Like all cases that fall under the German Transformation Act, a hive-down offers two main advantages when compared to, for instance, a contribution (“Einbringung”).

  • First of all, a hive-down triggers universal succession (“Gesamtrechtsnachfolge”), i.e. the automatic passing on of all assets (intangible rights, inventory, bank accounts, customer and supplier contracts, rental and leasing contracts, etc.). A restriction may apply if a “change of control” clause has been agreed or in the case of special rights pertaining to an individual person such as authorisations or admissions.
  • The transfer of the assets is tax-neutral. However, if assets are sold, the proceeds are usually taxed. According to the German Tax Conversion Act (Umwandlungssteuergesetz), assets may be valued at book value. In this way, there will be no proceeds and therefore no taxes payable, the only requirement being that the sole trader is granted either shares in the acquiring company or additional shares.

If a hive-down is not feasible, the assets of the sole tradership can be transferred to the new company by way of contribution. Like a hive-down, contribution is tax-neutral but it does not trigger universal succession. This means that contractual relationships cannot be passed on without the permission of the other contracting party, which often leads to problems when there are a lot of contracts to be passed on.

How does a hive-down work?

First of all, a hive-down requires that the sole trader is registered as “eingetragener Kaufmann” (registered merchant) in the commercial register. Following registration, the sole trader will bear the suffix e. K. This means that a hive-down is available to all persons engaged in a commercial activity. However, this does not apply to freelancers, who according to current legislation may not change their legal form by way of a hive-down.

If the intention is to operate the company as a GmbH in the future, a hive-down for purposes of new formation is available. In this case, the share capital of the GmbH is to be provided in kind, i.e. in the form of the sole tradership’s assets. The disadvantage of this option is that the sole tradership has first to be evaluated by an auditor in order to be able to prove to the register court that the assets transferred are worth at least EUR 25,000.00 (i.e. the minimum capital requirement for a GmbH).

Such an evaluation is expensive and often not the desired option. Therefore, I always recommend forming a GmbH with the contribution provided in cash (if applicable, only to the amount of EUR 12,500.00). Once the GmbH has been registered in the commercial register, the hive-down for the purpose of absorption is possible. In the case of an absorption, the capital of the GmbH is increased by a small amount (e.g. by EUR 100.00) and at the same time the sole tradership’s assets are transferred to the GmbH. With the right contractual provisions, the need for comprehensive and expensive proof of value can be avoided.

What else needs to be considered when hiving down?

A hive-down is a notarial process. The formation of a new company and (if applicable) the registration of the sole trader as “eingetragener Kaufmann” (registered merchant) in the commercial register requires two appointments with a notary. This means additional costs, which are determined based on the value of the sole tradership.

Moreover, a hive-down at book value is possible only if the sole tradership is not over-indebted and if there have been no over-withdrawals. Due to the applicable accounting requirements, transformations are always performed in close collaboration with the company’s tax advisor.


Since a hive-down is complex both in legal and fiscal terms, there is no one-size-fits all approach. I will be happy to answer your questions and advise you on your individual situation. Please do not hesitate to contact me!