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The transformation of a sole proprietorship into a limited liability company. - Super Księgowy
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The transformation of a sole proprietorship into a limited liability company. - Super Księgowy

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  • The transformation of a sole proprietorship into a limited liability company.

Sole proprietorship is currently the most popular form of conducting business. However, in light of the changes brought about by the Polish Deal, many entrepreneurs are seeking solutions to avoid unfavorable regulations. One of them is transforming a sole proprietorship into a limited liability company. Opting for this solution requires dealing with numerous challenging formalities and additional obligations, as well as incurring costs associated with both the transformation process and subsequent company management.

The transformation plan

The most important step in transforming a sole proprietorship into a limited liability company (LLC) is to prepare a transformation plan and gather all necessary documents. When preparing the plan, it is important to remember that it should be in the form of a notarial deed. The plan should include at least the determined balance sheet value of the assets of the transforming entrepreneur on a specific day of the month preceding the preparation of the transformation plan.

Therefore, if the documents determining the value of the entrepreneur’s assets were prepared on March 1st, the notarial deed with the transformation plan should be prepared no later than March 1st. The transformation plan should also include a number of attachments.

The necessary attachments to the transformation plan

The basic attachments to the transformation plan include the valuation of the assets and the financial statement for transformation purposes. Typically, sole proprietorships do not maintain full accounting records but rather simplified revenue and expense records. Therefore, the financial statement can be prepared based on entries in the revenue and expense records or other tax records, inventory lists, or other documents that allow its preparation. In addition to the valuation and financial statement, the transformation plan must also include the articles of association of the LLC and a statement of transformation by the entrepreneur.

The statement should include all information about the LLC into which the entrepreneur intends to transform, such as the type of company, the amount of share capital, the rights of the entrepreneur as the sole shareholder, and the names of the members of the management board of the company. Meanwhile, the articles of association must contain information about the name, registered office, subject of activity of the company, the amount of share capital, the number of shares held by the shareholder, and the duration of the company if specified. The transformation plan must be verified by an expert appointed by the court, for which a fee of PLN 300 must be paid. Additionally, the cost of the expert’s work is also significant. After receiving the expert’s opinion, the company can be registered in the National Court Register (KRS), and the business activity can be deregistered from the Central Register and Information on Economic Activity (CEiDG).

What does transforming a sole proprietorship into a limited liability company (LLC) offer?

The primary benefit of transforming a sole proprietorship into a limited liability company (LLC) is the limitation of liability for the company’s obligations. In a sole proprietorship, the entrepreneur is personally liable for the business’s obligations with their entire assets. In an LLC, however, this liability is limited to the amount of the contributed capital, although the entrepreneur remains liable with their entire assets for obligations incurred before the transformation for up to 3 years.

Transforming the business into an LLC also opens up new opportunities to raise capital necessary for conducting business, such as by admitting partners and increasing the share capital. Additionally, the transformation brings reputational benefits. Some business partners may view an LLC with greater trust and prestige compared to a sole proprietorship, as it can signify business growth and increased stability. The transformation will also be advantageous for many entrepreneurs following the implementation of the provisions of the Polish Deal.

Furthermore, as a result of the transformation into an LLC, all permits, concessions, and incentives granted to the entrepreneur before the transformation are transferred to the company.

For whom will the transformation be profitable from 2022 onwards?

The Polish Deal includes changes in the health insurance contribution, among other things. Instead of a fixed amount of contribution for everyone, it will now depend on income and will be 9%. It will also not be possible to deduct a portion of it from the tax. This will affect sole proprietors, especially those who calculate tax based on the tax scale or linearly. Entrepreneurs earning more than 4242.38 PLN per month will lose out. Linear tax payers will be additionally unaffected by the increase in the tax-free allowance or the second tax threshold, making them feel these changes even more.

For them, transforming into an LLC will be much more advantageous, despite the double taxation of the company, as the company must pay both personal income tax (PIT) and corporate income tax (CIT). However, the decision to transform should not be made hastily, and fear of negative changes should not play the main role in making such a decision.