Two people are not one – a groundbreaking resolution concerning two-person limited liability companies

On 21 February, the Supreme Court issued a landmark resolution regarding the obligation of a partner in a two-person limited liability company to be covered by social security, in a case where one of the partners holds a dominant position. In this case, the shareholding structure was divided in a 99% to 1% ratio. The Supreme Court ruled that: “A partner in a two-person limited liability company holding 99 per cent of the shares is not subject to social security under Article 6(1)(5) in conjunction with Article 8(6)(4) of the Act of 13 October 1998 on the Social Security System.”

The resolution in question, case no. SN III UZP 8/23, was issued in proceedings to determine whether there was an obligation to be covered by social security. The starting point was the judgment of the District Court in Lublin of 19 October 2022, which dismissed the partner’s appeal against the decision of the pension authority. In the challenged decision, the Social Insurance Institution (ZUS) held that, as an employee of the contribution payer, i.e. the limited liability company, the partner was not subject to compulsory pension, disability and sickness insurance during the disputed period. The pension authority argued that the appellant held 99 per cent of the company’s shares and should therefore be treated as a sole shareholder. As such, the authority considered that the appellant, as the sole shareholder, could not be covered by employee insurance based on an employment contract. The partner disagreed with the ZUS decision and the judgment of the court of first instance, and the case was referred to the second instance. The Court of Appeal in Lublin stated that there is no predetermined legal criterion which makes it possible to determine that a given company is a single-member limited liability company. Having serious doubts, the second-instance court referred a question to the Supreme Court: “Does a partner in a two-person limited liability company holding 99 per cent of the shares, enabling them to freely shape the content of resolutions at the shareholders’ meeting and make decisions regarding the company’s operations, fall under the social security system pursuant to Article 6(1)(5) in conjunction with Article 8(6)(4) of the Act of 13 October 1998 on the Social Security System?”

As a result, the Supreme Court issued a resolution clearly stating that a partner in a two-person limited liability company holding 99 per cent of the shares is not subject to social security on the same basis as persons conducting non-agricultural business activity.

The Supreme Court justified its decision primarily with a strict interpretation of Article 8(6)(4) of the Social Security System Act, which indicates that a person conducting non-agricultural business activity includes a sole shareholder in a limited liability company, and partners in a registered partnership, limited partnership or professional partnership. Therefore, Judge Zbigniew Korzeniowski explained in the oral justification that the resolution is a direct application of the provision of Article 8(6)(4) of the Social Security System Act. Thus, one cannot speak of a single-member limited liability company if there are two partners. In such a situation, the issue of one partner holding a dominant position becomes secondary. It is irrelevant how the shares are distributed – one of the partners may even hold 99 per cent. What matters is the existence of two shareholders. Consequently, Article 8(6)(4) of the Social Security System Act does not apply to a limited liability company with two partners, regardless of the shareholding ratio.

For years, the Social Insurance Institution (ZUS) applied an interpretation of these provisions that was disadvantageous to dominant shareholders. The authority treated majority shareholders of limited liability companies as persons conducting non-agricultural business activity. ZUS based its practice on the concept of the “illusory minority partner,” i.e. one holding less than 10 per cent of the shares. This concept was justified by the limited rights of such a partner within the company and the complete control of the dominant partner over its operations. However, these arguments did not convince the court.

This resolution should be viewed positively. The judgment breaks with the previously applied practice of the Social Insurance Institution of treating company partners as entrepreneurs for the purposes of contribution obligations. It also clarifies the doubts surrounding such cases. It is to be hoped that the resolution will prompt a change in the pension authority’s approach.

Case reference: SN III UZP 8/23