The planning and structuring of a company succession is the supreme discipline of succession planning. Inheritance law, company law, and tax law issues are so closely intertwined that they require a holistic consideration. In some cases, not only German inheritance law’s applicability comes into question, but also foreign law rules about company succession.
Different ways of a Company Succession
Starting and developing an own company is the “life’s work” of many entrepreneurs. They want to protect and maintain this life’s work also for the time after their death.
A lifetime transfer to one of the family members, while making sure to hedge the transferor’s retirement provision, can be an appropriate solution. In individual cases, however, it may be better to hand over to an executive employee or even to sell the company to an external party.
Prior to a company succession, answering the following questions is mandatory:
- Are there possible successors in the family who could successfully maintain the company?
- Should the company be transferred in lifetime to the successor?
- How can liquidity be safeguarded despite inheritance tax and compulsory portion claims?
- How will the retirement provision of the transferrer and his/her spouse be hedged?
- Has the entrepreneur set up any precautionary dispositions (Durable Powers of Attorney etc.)?
- Is it possible to transfer the company without or with reduced German inheritance tax?
Reasons for a timely Company Succession Planning
Irrespective of your answers to these questions in your individual case, an entrepreneur should invest into his succession planning in due time, for his own interest and for the interest of his company. The reasons for this are manifold. Succession planning is an important criterion in the granting of loans. If the entrepreneur has reached a certain age, the lack of succession planning for the company may lead to the refusal of a loan, even though it may be excellently secured.
Many pitfalls of a company transfer without a professional succession planning are not adequately known. How many shareholders of a so-called one-man (single-person) limited liability company know, that their company shares are hereditary in the case of their death, but that the shareholder-to-be neither automatically becomes managing director of the limited liability company, nor that he qualifies as acquirer of the company shares only after his registration in the shareholders’ list? For both aspects, forehandedness is urgently required, also to avoid any future corporate litigation.
Dr. Hosser as a specialist inheritance lawyer and on top of that Certified Advisor for Company Successions (zentUma e.V.) can also provide suitable advice how to avoid the need for an estate litigation in Germany, as far as legal questions about any inheritance of shares etc. is concerned.
Company law-related reasons for professional Company Succession
In companies with several shareholders, who are often not of one mind or have fallen out, an unregulated succession in the company may even threaten the continued existence of the company and, at the same time, put the entrepreneur’s life’s work at risk. The existing conflicts are not alleviated by the death of one of the shareholders, but very often the situation escalates. The shareholder-heir will have to bear the economic consequences of such a delayed or missing company succession planning.
From our experience we know about cases in which such a failure lead to a burdensome and with all regularity rather expensive estate litigation in Germany, with the estate litigation procedure’s focus on a the company or corporation, for which an appropriate succession planning was missing.
We can only list a small number of catastrophic cases of the tax pitfalls of an unprepared company succession which can occur relating to companies: termination of a company split, withdrawal of extraordinary operational assets, taxation of all hidden reserves, are just some examples for potentially enormous tax liabilities which could endanger the continued existence of the company and the economic existence of the successor. Often, these consequences outweigh the burden of the inheritance tax. Thomas Paine’s quote: “Nothing, they say is more certain than death, and nothing more uncertain than the time of dying” also applies to entrepreneurs.
When should I start the Company Succession Planning Project?
Generally, it is not a good entrepreneurial decision to wait with succession planning until one’s age is above 70 or even much older. As entrepreneur one should take enough time for dealing with the succession as well as with the company itself – and at an early stage. Usually, company succession planning is a longer project which requires good preparation.
If you cannot imagine currently to actively envisage your own death and thus, your future retirement or withdrawal from your company, you are not the only one. This applies to the majority of entrepreneurs, but is of little use for their successors and acquirers of shares. He will have to carry the can for that.
Why should I assign Dr. Hosser for the Company Succession?
Through our practice to illustrate German inheritance law for foreigners, we are experienced with the client’s need for an empathic advisor as well as for high class legal advice, not only in the field of inheritance law and/or German inheritance tax law.
Maybe it is easier for you as an entrepreneur to think about making provisions for the case of an accident or a sudden severe illness or a longer incapacity to work. In these cases, forehandedness also and in particular on the company level is even more important than making corresponding provisions in the private area.
Specialist inheritance lawyer Dr. Hosser can consult you on making special precautionary provisions for companies, for example on company-related advance directives to avoid an otherwise possible lack of leadership in your company. Most of the legal regulations for such situations do not fit to entrepreneurs and their companies. Precautionary dispositions are possible, but also urgently recommended by us.
We develop tailor-made concepts for you and your company regarding succession and making provisions.