This thesis seeks to present a descriptive and analytical perspective of the possibilities and consequences when a general partnership is converted into a limited company. The subject seems highly relevant due to the fact that many personal owned companies in Denmark and approximately 1,500 general partnership are established annually, but also as the general partnership evolves, the owners have to consider if the structure of a private limited or limited company is a more suitable company structure in the future. This thesis will consist primarily of the tax related matters in relation to a conversion.
First of all, this thesis will present the different characteristics and significant rules and regulations in doing business as a general partnership or as a limited company. The contrast of not being regulated in general partnership as to being regulated according to the Danish business/commercial law for limited companies is one of the significant difference between these two business structures. Other differences include liability, capital, administrative and registration requirements and tax related issues etc.
In relation to the tax related issues, the general partnership is a transparent tax subject according to the Danish Tax Law, hence the stakeholders can choose three different tax-payable methods; The Ordinary Personal Taxation, the Danish Business Tax Scheme or the Danish Capital Gains Scheme. In this thesis it was only found relevant to work with the former tax-payable methods.
Furthermore, we found it necessary to show how taxation for a private limited company works, in order to compare the results between the two business structures, to be able to assess whether it will be advantageous to convert and we found that the Danish Business Tax Scheme was the most suitable tax-payable method under the based assumptions.
Further, this thesis presents considerations in relation to admission of new partners, generational change, and company sale. These sections provide information about the topics and considerations which are both applicable by private limited companies and general partnerships in relation to a conversion into a private limited company. Challenges in this connection are the mutual relations, for example the consent of the stakeholders and the requirement for a minimum of two participants at all time in a general partnership construction making it less flexible in comparison to a private limited company.
There are several methods of converting a general partnership into a private limited company. The possibilities include:
Taxable Business conversion
Tax-free Business conversion
Addition of assets
The application of these methods depends on whether the owners of the general partnership are physical or legal person. The conversion methods are examined and calculated through a case example in order to compare advantages and disadvantages. The Taxable Business transformation and the Tax-free Business transformation are basically identical in several areas, but the difference is the strict conditions and the possibility for the owners to postpone the taxation in one of the transformation methods. The Taxable Business conversion requires a larger amount of liquidity, as shown in the case example, but where all the tax is calculated, creating new purchase prices and depreciation basis. In the Taxable Business conversion a founder receivable is possible reducing the taxable gains. It is therefore recommended that if using the Taxable Business conversion, a founder receivable is established.
The Tax-free Business conversion makes it possible for the owners to postpone the tax calculated as shown in the case example, making it more preferable, because it is less cash intensive, at the time for the conversion. The share acquisition price was reduced by the stakeholders accumulated profit, and the private limited company obtains a tax obligation in form of a not payable deferred tax.
Addition of assets is a vertical division of a company, where the general partnership is owned by legal persons, and where it is converted into a holding company for the receiving company due to the injection of assets and liabilities downward in a group structure. The method can be subdivided in a tax payable and tax-free addition of assets. As shown in the case example both methods can be appropriate.
The conclusion based on this thesis’ assumptions whether to what conversion methods should be chosen therefore depends on the specific company, ownership structure etc. It is very difficult to make a final conclusion whether which method of conversion is the most suitable. It solely depends on the purpose. It may be preferred to defer the tax in several cases and in others not to.
|Educations||MSc in Auditing, (Graduate Programme) Final Thesis|
|Number of pages||149|