Separating lines of business
When two businesses inside the same company have different logic, risks and prospects.
Companies · Extraordinary transactions
Company conversion, merger and demerger in Turin
Company conversion, merger and demerger, in other words changing a company's legal form, joining two companies together or splitting one into two: Italian company law allows all of this in continuity, without liquidating anything. The hard part is not the deed itself but deciding whether you really need it.
01 · The distinction
What each transaction does
They are three different legal instruments that share the principle of continuity: the company is not wound up or liquidated, it carries on in a new form or with a new structure.
| Transaction | What it does |
|---|---|
| Conversion (trasformazione) | Changes the type of company while keeping the same legal entity: from SNC (general partnership) to SRL (limited liability company), from SRL to SPA (joint-stock company), and the other way round |
| Merger by absorption | One company absorbs another, which ceases to exist |
| Merger by formation of a new company | Two or more companies cease to exist and a new one is created |
| Total demerger (scissione) | A company splits into two or more and ceases to exist |
| Partial demerger | A company transfers part of its assets to another and carries on |
| Cross-type conversion | A change between a capital company and a body of a different nature, with its own rules |
The principle of continuity is what makes these transactions preferable to winding up and then forming a new company: legal relationships carry on, contracts remain in force, permits are kept, and you avoid the tax consequences of liquidation.
02 · Changing form
When a company is converted
Conversion is the most frequent transaction among small businesses, and it almost always goes in one direction: from a partnership to a capital company.
- The most common reason is limited liability: in an SNC the partners are liable without limit, with their own personal assets.
- Next comes taxation: in a partnership the income is attributed to the partners on a transparency basis, whether or not it is distributed.
- The continuity of relationships is complete: contracts, licences, employees and the partita IVA (Italian VAT number) all stay.
- A valuation report on the assets is required when converting a partnership into a capital company.
- The deed is drawn up by a notary and must be entered in the Registro delle imprese (the Companies Register).
- Members who did not take part in the decision may have a right of withdrawal. See shareholder withdrawal.
- The partners' liability for earlier obligations does not fall away automatically: the creditors must consent.
- Regressive conversion, from a capital company to a partnership, is possible but needs careful assessment.
- The change brings a change of accounting regime and often the obligation to keep ordinary accounts.
- The obligations change: financial statements, filing them, adequate organisational structures.
03 · Joining
How a merger works
The procedure follows mandatory steps, designed above all to protect creditors.
The merger plan
Drawn up by the directors, it sets out the companies involved, the exchange ratio and the articles of association of the resulting company. It must be entered in the Companies Register.
The reports
The directors' report on the exchange ratio and, where required, the report of independent appraisers on whether the ratio is fair.
The resolutions
Each company approves the plan at a shareholders' meeting, by notarial deed.
Creditors' opposition
Existing creditors have a set period in which to object. Once it expires with no objections, the deed can be signed.
The merger deed
Drawn up by a notary and entered in the Register. From that moment the transaction takes effect.
The exchange ratio
It is the economic heart of the transaction.
- It determines how many shares in the resulting company each member receives
- It is based on the economic values of the companies involved, not their book values
- It is the point minority shareholders most often dispute
- It does not arise in mergers between wholly owned companies
04 · Dividing
When a demerger is used
It is the tool for separating activities, assets or members who no longer want to carry on together.
Separating the property
Placing the buildings in a separate company, to shield them from business risk and make future transfers easier.
Dividing the members
When the members want to go their own ways, each with part of the business, without liquidating.
Preparing a sale
Isolating the line of business you intend to sell, so that it can be transferred on its own.
Generational handover
Assigning separate lines of business to children with different inclinations or roles.
Liability
The companies involved remain jointly liable for earlier debts, within the limits set by law.
A demerger is often the neatest solution to a dispute between members: instead of paying one of them out with money the company does not have, you assign them part of the business. It does require the lines of business to be genuinely separable, and the value given to each one to be defensible.
05 · Neutrality
The tax treatment
The general principle is neutrality: extraordinary transactions do not in themselves create taxable income, because nothing is realised.
- Conversion, merger and demerger are tax-neutral transactions: tax values carry on with no break.
- Latent capital gains do not come to the surface, unless you opt to realign values where this is allowed.
- Past tax losses follow specific carry-forward rules, with anti-avoidance limits.
- Reserves keep their nature and the distribution rules that go with it.
- Registration tax (imposta di registro) is charged at a fixed amount.
- The conversion of a partnership into a capital company means moving from taxation on a transparency basis to taxation of the company itself.
Neutrality does not mean there are no consequences: the way income is taxed changes, as do the position of the members and the treatment of reserves. These effects must be mapped out first, because they decide whether the whole transaction is worthwhile.
06 · The assessment
What to assess before a conversion or merger
These transactions carry significant costs (notary, valuations, time) and should only be undertaken if the goal justifies them.
- Define the goal precisely: limited liability, separating risks, bringing in a new member, generational handover, a sale.
- Check whether the same goal can be reached with simpler tools: a transfer of shares, a contribution of assets, leasing the business.
- Map the effects on contracts, permits, licences and banking relationships.
- Check the position of minority members and any right of withdrawal.
- Consider the timescale: between the plan, the resolutions and the period for creditors' opposition, months go by.
- Assess the effect on past tax losses, which can be a significant part of the value.
The costliest mistake is starting from the transaction instead of the goal. Many conversions have been carried out to obtain limited liability when a different contractual structure and an insurance policy would have solved the problem for a tenth of the cost.
Frequently asked
The questions that keep coming up
I have an SNC. Is it worth converting it into an SRL?
It depends on why. If the issue is the partners' unlimited liability, conversion solves it for the future, but not for earlier obligations, which remain unless the creditors consent.
If the issue is tax, the comparison has to be made on the figures: in an SNC the income is attributed to the partners on a transparency basis, while in an SRL it is taxed in the hands of the company and dividends are taxed separately. There is no answer that fits everyone.
Does a merger mean losing tax losses?
Not necessarily, but carrying them forward is subject to anti-avoidance limits: there are tests on the net equity and on the economic vitality of the company that built them up.
It is one of the points to check beforehand, because past losses can be a significant part of the value of the transaction, and losing them changes completely whether it is worthwhile.
How long does a merger take?
Several months. The sequence is fixed: drafting and registering the plan, the reports, the shareholders' resolutions, the period for creditors' opposition, the notarial deed.
The period for creditors' opposition is the step that adds the most time. It can be shortened with the creditors' consent or by depositing the sums owed, but this has to be organised.
Can I separate the property from the operating company?
Yes, with a partial demerger that transfers the property to a newly formed company, leaving the operating business in the original company.
It is a tax-neutral transaction, but it must be built carefully: without sound economic reasons beyond tax, it is open to challenge for abuse of law.
Let's talk
The right question is not how, but why
The goal can almost always be reached in more than one way, with very different costs and timescales. That is where we start.