Contribution of a business

What it means

Contribution of a business is the transfer of an entire business, or an independent part of it, into a company as an in-kind contribution. It is most often used by sole traders moving to an s.r.o. who want to transfer everything belonging to the business at once: assets, stock, receivables, liabilities and contracts with customers and suppliers.

Unlike a sale of a business, where the buyer pays cash, here the contributor receives an ownership stake in the company in exchange. The contribution’s value is set by an expert valuation of the business as a whole. The business passes to the company on the day it comes into existence or the capital increase is registered.

Contributing a business is one route to changing the legal form of an enterprise. Its advantage is that contracts and relationships transfer together and need not be renegotiated. Under statutory conditions, the company can continue with the sole trader’s tax values, for example in depreciating assets.

How it works in practice

When a sole trader moves to an s.r.o., we first compare with the client whether contributing the business is worthwhile or whether a simpler route is better: setting up a new company and gradually moving activity into it, or contributing only selected assets. Contributing the business suits cases with substantial assets, employees and long-term contracts.

Preparation involves an inventory of assets and liabilities at the contribution date, an expert valuation, a contribution agreement and Commercial Register filings. A sole trader who kept tax records must adjust the tax base at the contribution date, for example for receivables and payables, and file a return.

For VAT, under certain conditions the contribution of a business is not treated as a supply of goods or services, and the company takes over the contributor’s rights and obligations. Employees’ rights and obligations transfer to the company, and employees must be informed in advance.

What to watch out for

Liabilities often cause complications. Creditors must be informed of the transfer, and some contracts, such as loans or leases, require the other party’s consent. If this is overlooked, certain contracts may not pass to the company.

Incorrect valuation is another risk. A high expert valuation gives the company higher share capital and asset values, but for tax the difference in acquisition value may be treated differently. The tax consequences should be assessed before the agreement is signed, not afterwards.