Can an Ltd. Acquire a Sole Proprietorship?

Acquiring an existing sole proprietorship is generally an interesting consideration. If it's your own company and merging the two business segments seems sensible, it's a good way to grow both your sole proprietorship and your Ltd. at the same time. Additionally, unlike a sole proprietorship, an Ltd. has several tax advantages.

But even acquiring a third-party firm can have a positive impact on your existing Ltd. After a thorough examination of the sole proprietorship, particularly regarding its current market value, market development, customer analysis, and past revenues, experienced entrepreneurs can assess the future potential of a company. Your shareholders also need not worry about establishing a market presence, as they would with a startup. If the sole proprietorship has proven profitable over several years, the concern about further growth is also alleviated – at least initially.

Of course, a comprehensive analysis of the company and its owner is the essential basis for such a decision. If necessary, involve specialist experts, institutes, or authorities in this process.

You've already decided and want to acquire a specific sole proprietorship? Perfect. Below, we've analyzed the legal situation for you. We've also compiled some of the most important provisions to consider.

Right from the start: A sole proprietor cannot simply sell or transfer the business. This would legally mean the end of the business. However, there's another way to sell a sole proprietorship to a capital company: transferring the assets and liabilities to an existing Ltd. Here, you must differentiate whether it's your own sole proprietorship or a third-party business.

Acquiring a foreign sole proprietorship is relatively straightforward. This usually happens in the form of a simple cash transfer. When transferring assets of your own sole proprietorship to an Ltd., it's called an intended contribution in kind. The process is somewhat more complex compared to acquiring a third-party company. Legal founding regulations similar to those of a new company must be adhered to.

For the acquisition of assets or businesses of sole proprietorships in the form of a transfer of assets and liabilities to other private law entities, the Merger Act (FusG) is responsible. The management itself must adhere to the guidelines of the competent Swiss Commercial Registry Office.

The Founding Report

One of the most important aspects of an intended contribution in kind is the preparation of a founding report. A founding report must always be prepared in writing. You must thoroughly and objectively describe the contributions you are making in terms of type, scope, and condition. The contributions must be freely available, meaning they must fully belong to the owner and must not be pledged.

The report is then submitted to an authorized auditor. Their task is to verify its completeness and correctness (according to Art. 635a CO). If satisfied, they issue a written confirmation. The auditor's review aims to minimize the risk of asset transfers. Thus, both companies benefit from it.

There are several things to consider regarding contributions in kind. Below, we've compiled the most important points.

Definition

For your Ltd. to acquire your sole proprietorship, contributions in kind are required. Contributions in kind must have a certain initial value. For example, they can be real estate, motor vehicles, machinery, or other movable assets of similar magnitude. Shares or securities also count as contributions in kind. Another option is the contribution of intellectual property rights, such as registered patents or product trademarks.

The most important requirement for contributions in kind is that the owner must be the full owner and not, for example, just a partial owner of a property. Contributions in kind must be assessable. If you contribute land or real estate, it must be publicly certified beforehand.

The Contribution in Kind Agreement

Based on the definition and possible notarized certifications, another important part of acquiring a sole proprietorship can now be created: the contribution in kind agreement. This includes the company's data and the owner's name, as well as the date of acquisition, a complete inventory list, and the acquisition price. A contribution in kind agreement must always be drawn up in writing.

Other Provisions on Contributions in Kind

A list of contributions in kind must be published within the articles of association. Once again, a description and valuation of the contributions are necessary. This is followed by the names of the sole proprietorship's shareholders (sellers) and Ltd's shareholders (contributors), and a description of the consideration provided by the Ltd.

Possible Legal Consequences for Non-Compliance

The effort involved in complying with all the above-mentioned provisions, especially regarding contributions in kind,  an be extensive and require significant time. However, keep in mind the legal consequences if you fail to comply, attempt to circumvent them, or falsify information.

A violation or manipulation not only results in the contribution in kind transaction being declared void. If you are involved in the offense, you will be held liable under Article 753 CO for the founding liability. In the worst-case scenario, you could face criminal prosecution with a prison sentence of up to 3 years (Article 153 SCC). The offenses could include forgery of documents, false statements to commercial register authorities, or obtaining a false notarization.

Before being acquired by the Ltd., the sole proprietorship still has several obligations. It's essential, among other things, that it maintains double-entry bookkeeping. Furthermore, only an ordinary annual financial statement.

The acquisition of a sole proprietorship by an Ltd. is indeed possible, and the benefits and prospects for success are generally positive. However, the legal regulations surrounding business acquisitions are complex. A lawyer specializing in corporate law can advise you on the pitfalls specific to your case and what to watch out for. GetYourLawyer is ready to assist you in finding a suitable specialist. Once you've described your issue, you'll receive offers from suitable attorneys.