Conversion of a Personally Owned Company: Conversion Based on a Real Life Case

Sinisa Novakovic & Stefan Andersen

Student thesis: Master thesis


Today the Danish tax authorities estimate that up to 50-60% of all corporate restructurings are not prepared in accordance with the current legislative framework resulting in restructurings containing a higher amount of errors. The purpose of this master thesis is to present the two different options available to an individual when faced with the choice of converting a personally owned company into a limited company. The thesis provides a theoretical walk through of the different legislative requirements and conditions of each method. Secondly, this thesis outlines the differences between the two options and includes pros and cons of each method. In order to make the process realistic, we have decided to use a real life case where we have followed the conversion process and have thereby been able to provide a hands-on perspective to the discussion of the different methods. There are two methods to convert a personally owned company into a limited one: the taxable conversion and tax-free conversion. The taxable conversion is based on a principle of abstention, which means that tax will be triggered as if an ordinary sale of the company had taken place resulting in all assets being assessed at fair market value. This type of conversion usually requires more cash on hand as the tax has to be paid. The other method, the tax-free conversion, is on the other hand based on the principle of succession, where the corporation enters into the tax position of the previous owner. Tax in this case in deferred and only triggered once the shares of the company are sold. In order to put the two methods into perspective, a real case study has been included in this thesis based on the conversion on an actual company, which we for reasons of anonymity have named ‘Billy Transport’. ‘Billy Transport’ is characterized by the fact that most of the company’s assets are financially leased and due to a few acquisitions of other companies goodwill takes up a lot of the balance sheet. The Danish tax authorities have published a guide regarding the assessment of goodwill during a conversion be it taxable or tax-free. In this case, the calculated goodwill is rather high which will affect the result of the company significantly in the future years. How to treat this in practice is a sub-purposes of this thesis. This thesis shows that the results of comparing the pros and cons for a personally owned company and a corporation, the primary differences should be found in terms of capital requirement, liability, taxation, disclosure of the annual report and statutory audits. As the size of the personally owned company matters, one should consider a conversion when the company has reached a certain size. Kandidatafhandling, CMA 2016 Omdannelse af en personlig virksomhed Sinisa Novakovic og Stefan Andersen 5 This master thesis concludes that the choice of which type of conversion to make depends on the tax amount triggered in the conversion. It will be an advantage to perform a taxable conversion when the tax triggered is a smaller amount, while a tax-free conversion will be preferred at higher amounts. The counselor and the self-employed person therefore have to consider the liquidity requirements compared to the requirements stated in the legislation for a tax-free conversion. They have to be careful and ensure that all requirements are met, as failure to comply with the requirements will result in a tax-free conversion becoming taxable instead.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2016
Number of pages98