Transformation of a sole proprietorship into a limited liability company

A limited liability company (spółka z o.o.) is one of the most popular forms of conducting business activities in Poland. Entrepreneurs choose limited liability companies mainly because they limit personal liability for the company’s obligations. Even those who already run a sole proprietorship often consider converting it into a limited liability company. This is an especially optimal solution since the transformed company inherits all the rights and obligations of the transforming entrepreneur. Therefore, business activity can continue seamlessly without the need to liquidate the sole proprietorship or to assign or amend contracts concluded with existing clients.

What succession of the business entails and the entrepreneur’s liability

Commercial law stipulates that the transformed company becomes the entity entitled to, among other things, permits, concessions, and reliefs granted to the transforming entrepreneur, except in rare cases where the law or the decision granting a permit, concession, or relief excludes such transfer of rights. Meanwhile, the transforming entrepreneur becomes a shareholder of the transformed company.

The transformation itself does not release the sole proprietor from liabilities that transferred to the transformed company. The transforming entrepreneur is jointly and severally liable together with the transformed company for obligations incurred before the date of transformation, for a period of three years starting from the transformation date. Joint and several liability means that the creditor may pursue the debt, at their discretion, from either the transforming entrepreneur, the transformed company, or both. The limitation of liability, therefore, applies “prospectively,” meaning only the company is liable for debts incurred after the transformation. However, if the transforming entrepreneur also serves as a member of the management board of the transformed limited liability company, they are liable for the company’s obligations if enforcement against the company proves unsuccessful. The management board member may avoid this liability, for example, by timely filing for the company’s bankruptcy.

Upon transformation, the existing business name may be retained by adding only the designation “limited liability company” (spółka z ograniczoną odpowiedzialnością). Alternatively, the business name may be changed entirely. In the latter case, the transformed company must indicate the former name in parentheses alongside the new name, with the word “formerly,” for a minimum of one year from the date of transformation.

The procedure for transforming a sole proprietorship into a limited liability company consists of several stages:

1. Preparation of the transformation plan of the sole proprietorship along with annexes and an auditor’s opinion – the plan must be drawn up in the form of a notarial deed and must include at least the determination of the book value of the transforming entrepreneur’s assets as of a specified date in the month preceding the preparation of the plan. Annexes include drafts of: the entrepreneur’s transformation statement and the articles of association of the transformed company; the valuation of the transforming entrepreneur’s assets; and the financial statement for transformation purposes. The plan is subject to review by an auditor appointed by the relevant registration court. The auditor has up to two months from appointment to prepare their opinion. The registration court sets the remuneration for the auditor, which depends on the size of the transforming sole proprietorship.
2. Submission of the entrepreneur’s transformation statement – this statement must also be made in a notarial deed and should include, for example, the share capital of the limited liability company (minimum PLN 5,000) and the names of the company’s management board members (which may be one person).
3. Appointment of the organs of the transformed company.
4. Creation of the company’s articles of association – also in the form of a notarial deed.
5. Entry of the transformed company into the National Court Register (Krajowy Rejestr Sądowy, KRS) and deletion of the transforming entrepreneur from the Central Registration and Information on Business (CEIDG).

The transformation becomes effective upon registration in the National Court Register. In addition to these formalities, it is important to notify business partners of the transformation to ensure, for example, that invoices are issued to the limited liability company.

Transformation of the business and social security contributions (ZUS)

The status of a shareholder in a sole-member limited liability company constitutes a basis for social insurance. Therefore, the transforming entrepreneur should deregister from the previous insurance title related to the sole proprietorship and register for health insurance based on their status as a shareholder of the single-member limited liability company. These actions must be taken within 7 days from the date of registration of the company in the National Court Register. From the transformation date, the entrepreneur becomes the sole shareholder but may subsequently sell part of their shares. In such a case, shareholder status in the limited liability company does not constitute a basis for social insurance.

It is also important to remember the tax obligations arising from the transformation, such as paying the civil law transaction tax (PCC) of 0.5% of the company’s share capital, and the requirement to maintain full accounting records. After transformation, there may also be reporting obligations to the tax office, e.g., deregistering and registering as a VAT taxpayer or registering new fiscal cash registers.

Transformation without PIT

There had been doubts as to whether the transformation triggers a taxable income event for the transforming sole proprietor. On 25 October 2021, the Director of the National Tax Information issued a tax interpretation stating that transforming a sole proprietorship into a single-member capital company does not generate income subject to personal income tax (PIT). This is because the process constitutes a change of the legal form of the enterprise, with the same entity merely changing its legal structure, rather than two separate entities emerging. Consequently, for PIT purposes, transforming a sole proprietorship into a limited liability company is tax neutral, meaning no income tax is due.

Costs of transforming a sole proprietorship into a limited liability company

The costs involved in transforming a sole proprietorship into a limited liability company typically include the following expenses:

1. Remuneration for determining the book value of the company’s assets – the amount depends on the size of the assets;
2. Cost of preparing the transformation plan in the form of a notarial deed – the notarial fee is up to PLN 200 plus VAT;
3. Fee for the application to appoint an auditor by the registration court – PLN 300;
4. Remuneration for the auditor reviewing the transformation plan, which also depends on the size of the enterprise – the registration court sets the fee and approves expenses;
5. Cost of preparing the entrepreneur’s transformation statement in the form of a notarial deed – notarial fee up to PLN 200 plus VAT;
6. Cost of drafting the limited liability company’s articles of association in the form of a notarial deed – notarial fee depends on the company’s share capital;
7. Civil law transaction tax of 0.5% of the company’s share capital;
8. Fees related to registration of the company in the National Court Register: PLN 500 for the registration application and PLN 100 for publication in the Court and Economic Monitor.

The entire procedure takes about half a year. Note that the auditor has up to two months to issue their opinion on the transformation plan, and the registration in the National Court Register depends on the court’s workload.

Limited liability companies continue to gain popularity

Both in terms of protecting private assets by limiting liability for business obligations and reducing social security contributions (in cases of multiple shareholders), transforming a sole proprietorship into a limited liability company appears to be the most advantageous choice. This explains its growing popularity among Polish entrepreneurs. Given the complexity of the procedure and the formalities involved, it is advisable to seek professional legal advice before undertaking the process independently.