The legal form describes the legal framework a business operates within. It defines who is liable for debts, how the business is taxed and which accounting duties apply. For a business succession it also decides how the business can be handed over at all.
With small and micro businesses you will most often meet three forms. The sole proprietorship is run by one person who is liable with all of their private assets. The partnership consists of several people who are also personally liable. Limited companies such as the German GmbH or UG (a GmbH in Austria, a GmbH or AG in Switzerland) separate private assets from company assets. Here liability is limited to the company's own funds.
For a succession, one distinction matters most: whether a business has shares that can be sold. A sole proprietorship has no shares. Legally it consists of individual assets, such as machines, customer base and stock, which are transferred one by one. That is why the sale almost always runs as an asset deal.
A limited company, by contrast, is its own legal person with company shares. These shares can be sold, which makes a share deal possible. The buyer takes over the whole company, with all its contracts and its familiar name. This can make a business transfer noticeably smoother, but it carries different tax and liability consequences.
The legal form is therefore not a mere formality. It shapes early on how a handover is arranged and which taxes on a business sale apply. This entry does not replace tax or legal advice. For your specific case you should bring in professionals.
For business sellers
Check early which legal form your business has. It decides whether your succession runs as an asset deal or a share deal, and the two feel very different to a buyer.
If you run a sole proprietorship, assets are transferred individually. Clarify in good time which contracts and permits must pass to the successor, so the business transfer does not stall.
For corporate buyers
Ask early about the business's legal form. With a GmbH you can take over the whole company including its contracts through a share deal. With a sole proprietorship you have to review each asset one by one.
The legal form also affects the taxes on a business sale and liability. Factor this into your price negotiation, because buying shares carries different risks than simply buying the assets.
Example
Marie wants to take over Mr Berger's accounting practice. His business is a sole proprietorship with no shares, so the purchase runs as an asset deal. She takes on the client base, the software licences and the office equipment for a total of 210,000 EUR. The existing client contracts have to be transferred to her individually.
FAQ
What is a legal form in simple terms?
The legal form is the legal shell of your business. It governs who is liable, how it is taxed, and how a business succession can take place, that is, whether you sell shares or individual assets.
Which legal forms exist for small businesses?
The most common are the sole proprietorship (one person, full private liability), the partnership (several people, personal liability) and limited companies such as the GmbH or UG with limited liability.
Why does the legal form matter so much for succession?
Because it sets the sale route. A sole proprietorship has no shares, so it is transferred as an asset deal. A GmbH has shares, so a share deal is possible.
What is the difference between an asset deal and a share deal?
In an asset deal you buy individual assets such as machines and the customer base. In a share deal you buy the company's shares and take it over as a whole. This is only possible with limited companies.
Does the legal form affect taxes on the sale?
Yes, clearly. The legal form has a strong effect on the taxes on a business sale. What is more favourable depends on the individual case. It is worth talking to a tax adviser.
Can I still change the legal form before selling?
In principle yes, for example by converting a sole proprietorship into a GmbH. But that takes time and advice and is not always worthwhile. Plan such steps early so the business transfer is not delayed.
Buy instead of start, does the legal form play a role?
Yes. When you buy instead of starting up, you take over a running business with a fixed legal form. With a GmbH you step straight in as owner through a share deal, often faster and simpler than building a new company from scratch.
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