Converting a sole proprietorship into a limited liability company

Differences between a sole proprietorship and a limited liability company

One of the main differences between a limited liability company and a sole proprietorship is liability. As the name suggests, a limited liability company is characterized by limited liability. The partners of a limited liability company, unless they are members of the management board, are generally not liable for the company’s debts with their personal assets. Consequently, they risk nothing more than the contributions they have made to underwrite the company’s share capital. In the case of a sole proprietorship, the person running the business, and if married under the community property regime, also his or her spouse (as regards the joint property of the spouses) is liable for the debts.

A person operating a sole proprietorship is subject to the obligation to pay ZUS contributions, including the health insurance contribution. Until now, the amount of the latter has remained fixed, with the vast majority of entrepreneurs paying a total of around PLN 1,500 each month.

Currently, from January 1, 2022, if an entrepreneur opts for linear taxation (i.e. 19% regardless of the amount of gross income received during the tax year), the health insurance contribution will amount to 4.9% of gross income per month, but no less than 9% of the minimum wage. In the case of lump-sum taxation (ryczałt), the health insurance contribution will amount to 9% of the calculation base, which will depend on the taxpayer’s gross annual income. For those opting for the progressive tax scale (17% and 32%), the monthly health insurance contribution will be 9% of gross income. People who have opted for taxation at a fixed amount, independent of income received (karta podatkowa), will pay the health insurance contribution corresponding to 9% of the minimum wage.

A partner in a limited liability company, insofar as it is not a one-person company (i.e. if there are several partners), is not obliged to pay ZUS contributions. However, from January 1, 2022, the health insurance contribution is calculated and paid in the case of members of the management board of a limited liability company, receiving remuneration by virtue of a resolution of the partners (until now, this remuneration had never been subject to social security contributions) and amounts to 9% of the remuneration paid in respect of the appointment.

Options for “converting” a sole proprietorship into a limited liability company

In order to “convert” a sole proprietorship into a limited liability company, one of the following options must be chosen:

• “terminate” the sole proprietorship and ‘create’ a new limited liability company from scratch; this is not a transformation in the literal sense; in order to conduct business as if it were a continuation of the previous activity, it is necessary to sell the company’s assets and assign its contracts;
• set up a limited liability company and transfer a sole proprietorship to it, i.e. de facto transfer a sole proprietorship as a contribution in kind to a new company; it is important to note, however, that the possibility of benefiting from the reduced rate of corporation tax (9%) is reduced if the company’s entire branch of activity or its component parts have exceeded a total PLN equivalent of at least EUR 10,000;
• convert a sole proprietorship into a limited liability company. This option is associated with the absence of any limitation on the entrepreneur’s liability for a period of 3 years from the time of conversion and, as in the case of company formation and the contribution of a sole proprietorship as a contribution in kind, with the limitation of the possibility of benefiting from a reduced 9% corporation tax rate. However, this is the only option that allows the legal continuation of the entrepreneur’s activity in the full sense of the term (e.g., the continued use of permits and approvals obtained, concessions, contracts concluded, etc.) without additional formalities, with the exception of those closely linked to the transformation itself.

The first two options involve submitting a standard application to the KRS National Court Register, in compliance with other formalities that must be completed, such as, for example, the conclusion of the aforementioned asset sale agreement, the assignment of contracts or even deletion from the CEIDG register of entrepreneurs.

Converting a sole proprietorship into a limited liability company is a slightly more complicated process. The conversion procedure includes:

• preparation of a transformation plan for the sole proprietorship, accompanied by appendices, which by law must be drawn up in the form of a notarial deed,
• verification of the conversion plan by a statutory auditor, subject to the filing of an application for the appointment of a statutory auditor with the clerk of the commercial court of registration,
• preparation of a declaration relating to the transformation of the sole proprietorship,
• appointing the members of the transformed company’s governing bodies – a management board with a single manager or several managers,
• conclusion of the partnership agreement, which must be drawn up in notarial form,
• registration of the company with the KRS, with an application for registration to be submitted within 6 months of the conclusion of the partnership agreement,
• deletion from the CEIDG company register, with application for deletion to be made within 7 days of submission of the application for registration.

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Summary

Converting a sole proprietorship into a limited liability company may seem a complicated process, but it can be worthwhile. Before opting for conversion, however, it’s worth considering a few details, such as how many partners would be best suited to a given type of business, since single-member limited liability companies are subject to significant restrictions, which you can read about here (https://milewska.legal/fr/societe-a-responsabilite-limitee-unipersonnelle/).