Conversion of a limited partnership into a limited liability company

Pursuant to Article 12(1) of the aforementioned Act, the amending provisions which provide for the subjection of limited partnerships to CIT apply from 1 January 2021, and in relation to limited partnerships  which have decided to defer the application of CIT from 1 May 2021.

Statistics confirm that, until 2021, the limited partnership was one of the most frequently chosen forms of business organisation in Poland. A particularly optimal structure was a limited partnership in which the partner bearing unlimited liability for the partnership’s obligations (the general partner) was a limited liability company, whilst the other partners, who were natural persons, bore limited liability up to the amount of the limited partnership sum, which defined the upper limit of their liability (limited partners). This structure primarily allowed the risk of business operations to be minimised and, above all, involved the single taxation of the partnership’s profits. The only income tax payers were the partners of the partnership, who accounted for the income tax generated through the partnership as part of income from non-agricultural business activities.

With the entry into force of the above tax changes, limited partnerships became CIT taxpayers, with the income of limited partnerships being taxed at a rate of 9% or 19% depending on the size of their turnover. CIT at the 9% rate is payable by companies whose turnover in the previous tax year did not exceed EUR 2 million gross, and EUR 2 million net in the current financial year. Other limited partnerships are subject to a CIT rate of 19%.

These tax changes have led partners in limited partnerships to seek new solutions aimed at tax optimisation and reducing other business operating costs.

One of the available solutions is the conversion of a limited partnership into a limited liability company. This is permitted under Article 551(1) of the Commercial Companies Code, pursuant to which a general partnership, a professional partnership, a limited partnership, a limited joint-stock partnership, a limited liability company, a simple joint-stock company and a joint-stock company (the company being converted) may be converted into another commercial company (the converted company).

Undoubtedly, one of the greatest advantages of a limited liability company is the limited liability of the shareholders. This is because the shareholders are not liable for the company’s obligations with their own assets. Their liability is limited solely to the amount of their contributions towards the share capital. A limited liability company is a legal person, which means that it may acquire rights and incur obligations in its own name. It should also be emphasised that a limited liability company allows for a change in ownership structure through the sale of shares, whereas in a limited partnership, a partner’s rights and obligations are indivisible and may only be disposed of by the partner in their entirety.

The conversion procedure

The conversion procedure can be divided into the following stages:

1. 1. Preparatory phase,
   2. Management phase,
   3. Registration phase.

1. PREPARATORY PHASE

Pursuant to Article 571 of the Commercial Companies Code, the conversion of a partnership into a capital company takes place if**,** in addition to the requirements referred to in Chapter 1 (general provisions on conversions), all partners have voted in favour of the conversion of the partnership into a capital company, provided that, in the case of a limited partnership, it is sufficient if, in addition to all general partners, the limited partners representing at least two-thirds of the total limited partnership capital vote in favour of the conversion, unless the partnership agreement provides for stricter conditions.

The first step in the process of converting a limited partnership into a limited liability company is to draw up a conversion plan together with its annexes, which must be in writing on pain of nullity. Its preparation is the responsibility of all partners managing the company’s affairs. In accordance with Article 558 § 1 of the Commercial Companies Code, the conversion plan must contain at least:

1. 1. a determination of the balance sheet value of the assets of the company being converted as at a specified date in the month preceding the submission of the conversion plan to the partners;
   2. in the case of the conversion of a capital company into a partnership, a determination of the fair value of the partners’ shares.

Furthermore, in accordance with Article 558(2) of the Commercial Companies Code, the transformation plan must be accompanied by:

1. 1. a draft resolution on the conversion of the company;
   2. a draft agreement or articles of association of the transformed company;
   3. in the case of conversion into a public limited company, a valuation of the assets and liabilities of the company being converted;
   4. financial statements prepared for the purposes of the conversion as at the date referred to in § 1(1), using the same methods and in the same format as the latest annual financial statements.

Subsequently, the Company must notify all shareholders of its intention to adopt a resolution on the conversion. This is indicated by the content of Article 560 § 1 of the Commercial Companies Code, according to which  “The company shall notify the shareholders of its intention to adopt a resolution on the conversion of the company twice, in the manner prescribed for notifying the shareholders of the company being converted. The first notification shall be made no later than one month before the planned date of adopting this resolution, and the second at an interval of not less than two weeks from the date of the first notification.”

The notice referred to in § 1 shall contain the essential elements of the transformation plan and shall specify the place and date on which the shareholders of the company being transformed may examine the full text of the plan and its annexes, provided that such date shall not be less than two weeks prior to the planned date of adopting the resolution on the transformation.

2. MANAGEMENT ACTIVITIES PHASE

The most important step in the conversion procedure is the adoption of a resolution by the partners of the limited partnership regarding the conversion. This resolution must be recorded in the minutes drawn up by a notary. Furthermore, in addition to all general partners, limited partners representing at least two-thirds of the total limited partnership capital must also vote in favour of the resolution. However, the partnership agreement may provide for stricter requirements.

The resolution on the conversion of a limited partnership shall contain at least:

• • a statement that the limited partnership is being converted into a limited liability company,
  • the amount of the limited liability company’s share capital,
  • the scope of rights granted personally to the members participating in the limited liability company, if the granting of such rights is provided for,
  • the surnames and first names of the members of the first management board of the converted company,
  • approval of the wording of the articles of association of the converted company.

3. REGISTRATION PROCEDURES

The final stage of the conversion process is the court stage, involving the submission of the converted company (LLC) to the registry court. As provided for in Article 569 of the Commercial Companies Code, an application for entry of the conversion in the National Court Register shall be submitted by all members of the management board or by shareholders entitled to represent the converted company. Importantly, in accordance with the general principle set out in Article 22 of the Act on the National Court Register, the application for entry in the register must be submitted no later than within 7 days of the date of the event justifying the entry (this event being the date on which the resolution on the transformation was adopted).The final step concluding the court (registration) stage, as well as the entire transformation procedure, is the announcement of the transformation. As provided for in Article 570 of the Commercial Companies Code, “the announcement of the transformation of a company shall be made at the request of the management board of the transformed company or of all shareholders managing the affairs of the transformed company.” In the case of a limited liability company, the body authorised to submit an application for the announcement of the conversion is the company’s management board (in practice, a member of the management board authorised to represent the company, or a proxy or authorised signatory of the company).

EFFECTS OF THE CONVERSION

One of the most important effects of the transformation is that the transformed company assumes all the rights and obligations of the company being transformed by way of universal succession. This means that the transformed company becomes a party to contracts entered into by the company being transformed, as well as to pending proceedings. Nevertheless, due diligence must be exercised to verify whether certain contracts require the conclusion of appropriate amendments or the notification of counterparties of the transformation in the appropriate manner. Furthermore, the transformed company remains the holder of any previously granted permits, licences and concessions, unless the Act or decision under which such permits, licences or concessions were granted provides otherwise. The shareholders of the company being transformed become shareholders of the transformed company on the date of the transformation.

Author

Adrian Łukasik

Radca prawny, Senior Associate

He gained his professional experience in one of Lublin's renowned law firms, dealing with civil and business law in its broadest sense. At the law firm Hewelt Wojnowski i Wspólnicy spółka komandytowa, he deals on a daily basis with current counseling in the field of business and the development of corporate documentation of companies, such as. Company agreements, bylaws of company bodies, agreements regulating relations between shareholders, resolutions of company bodies, M&A transactions. In addition to…

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