How do you convert your business into a company?

How do you convert a sole proprietorship into a single-member limited company?

The steps required to convert a sole trader business into a limited company are set out in Article 5845 of the Commercial Companies Code, which stipulates that the following are required for the conversion:

• drawing up a conversion plan together with annexes and an auditor’s opinion,
• submission of a declaration regarding the conversion of the business,
• the appointment of members of the governing bodies of the transformed company,
• the conclusion of a memorandum of association or the signing of the articles of association of the transformed company,
• entering the transformed company in the register and striking the transformed business from the Central Register and Information on Economic Activity.

The first stage of the conversion is the preparation of a conversion plan, which, as a rule, accompanies every conversion procedure. The formal requirements for the conversion plan are set out in Articles 5846–5847 of the Commercial Companies Code.

Importantly, the conversion plan must be drawn up in the form of a notarial deed.

In accordance with Article 5847 of the Commercial Companies Code, the entrepreneur’s transformation plan should include, at a minimum**, a determination of the balance sheet value of the assets of the entrepreneur being transformed** as at a specific date in the month preceding the drawing up of the entrepreneur’s transformation plan.

In addition to the above, the following must also be attached to the transformation plan:

• a draft statement on the conversion of the business;
• a draft of the memorandum and articles of association;
• a valuation of the assets and liabilities of the undertaking being transformed;
• financial statements prepared for the purposes of the conversion as at a specified date in the month preceding the preparation of the entrepreneur’s conversion plan.

If the entrepreneur is not required to keep accounts under the Accounting Act of 29 September 1994, the financial statements for the purposes of the conversion shall be prepared on the basis of a summary of entries in the tax revenue and expenditure ledger and other records kept by the entrepreneur for tax purposes, a physical inventory, as well as other documents enabling the preparation of these financial statements.

Subsequently, the prepared conversion plan must be submitted to the registry court, together with an application for the appointment of a statutory auditor to issue an opinion on the correctness and reliability of the prepared conversion plan.  The deadline for issuing the opinion is set by the registry court, but must not exceed two months from the date of the auditor’s appointment.

Once the auditor has issued an opinion on the transformation plan, the next essential requirement of the transformation procedure is for the entrepreneur to submit a declaration of transformation, which is equivalent to a resolution adopted by the company being transformed.

The entrepreneur’s declaration of transformation, in accordance with Article 5849 of the Commercial Companies Code**, must be drawn up in the form of a notarial deed** and should specify at least:

• the legal form of the company into which the entrepreneur is being transformed;
• the amount of the share capital or stock capital;
• the scope of rights granted personally to the entrepreneur being transformed as a partner or shareholder of the transformed company, if the granting of such rights is provided for;
• the surnames and first names of the members of the management board of the transformed company.

Irrespective of whether the entrepreneur being converted submits a declaration of conversion, a necessary element of the procedure for converting a sole proprietorship into a single-member capital company is the signing of the memorandum and articles of association (statutes) of the converted company.  As regards the requirements concerning the content of the memorandum and articles of association, reference should be made to the following provisions: Article 157 of the Commercial Companies Code  – in the case of conversion into a single-member limited liability company, Article 3005 of the Commercial Companies Code – in the case of conversion into a single-member simple joint-stock company, Article 304 of the Commercial Companies Code – in the case of conversion into a single-member joint-stock company.

The next step in the procedure for converting a sole trader business into a single-member capital company is to submit an application to the Registry Court for the registration of the converted company in the Register of Entrepreneurs of the National Court Register. Once the Registry Court has issued a decision on the entry of the transformed company in the Register of Entrepreneurs of the National Court Register, an application must also be submitted for the removal of the entrepreneur from the Central Register and Information on Economic Activity.

The steps listed in Article 5845 of the Commercial Companies Code do not exhaust all the actions that must be taken by the entrepreneur during the transformation procedure.

In a situation where, for example, a sole trader’s business forms part of the matrimonial property regime, the consent of the spouse is required for its transformation. Furthermore, on the day preceding the registration of the transformed company, it is necessary to close the accounts of the sole proprietorship, open the accounts of the sole-member capital company resulting from the transformation as of the date of transformation (the date of entry of the transformed company in the Register of Entrepreneurs of the National Court Register) and pay the tax on civil law transactions at the time of signing the memorandum and articles of association (statutes) of the transformed company. In addition to the above, pursuant to Article 58412 of the Commercial Companies Code, the transformed company is obliged to publish a notice of the transformation. This announcement, in accordance with Article 5 § 3 of the Commercial Companies Code, should be published in the Court and Economic Monitor, and if the memorandum of association (articles of association) provides for announcements to be made in other ways as well – also in the manner specified in the memorandum of association (articles of association).

Consequences of the conversion of a sole proprietorship into a single-member capital company

The most important effects of the conversion of a sole proprietorship into a single-member capital company are set out in Article 5842 of the Commercial Companies Code, which provides that the converted company is entitled to all the rights and obligations of the entrepreneur being converted. Furthermore, the transformed company remains the holder of, in particular, permits, licences and concessions granted to the entrepreneur prior to the transformation, unless the law or the decision granting the permit, licence or concession provides otherwise. Additionally, on the date of the transformation, the entrepreneur becomes a partner or shareholder of the transformed company.

Importantly, the existing business name may remain the same. In such a case, only the legal form of the transformed company needs to be added. Conversely, where the change to the name of the entrepreneur being transformed in connection with the transformation does not merely involve adding a part identifying the legal form of the transformed company, the transformed company is obliged to state the former name in brackets, alongside the new name, with the addition of the word ‘formerly’ – for a period of at least one year from the date of the transformation.

Furthermore, Article 58413 of the Commercial Companies Code provides for the joint and several liability of the transformed entrepreneur and the transformed company for the transformed entrepreneur’s liabilities arising from the business activity conducted prior to the date of transformation, for a period of three years from the date of transformation.

Is it worth converting a sole proprietorship into a single-member capital company?

Transforming a sole trader business into a single-member capital company may prove to be a good way of mitigating the existing risk of personal liability for liabilities. As a result of the conversion, the converted company assumes all the rights and obligations of the entity being converted, and just three years after the conversion, the shareholders of the converted company can enjoy limited liability for the company’s liabilities.

Another reason for deciding to undertake the conversion may also be the opportunity to take advantage of a form of taxation that has undeniably gained popularity recently, namely the flat-rate tax on company income, commonly known as Estonian CIT, which a limited liability company formed as a result of the conversion may also utilise.

Furthermore, it is worth noting the possibilities of limiting or reducing the burden arising from the obligation to pay health insurance contributions. The health insurance contribution for a sole shareholder of a limited liability company amounts to 9% of the assessment base. The assessment base for this contribution is the average monthly remuneration in the enterprise sector in the fourth quarter of the previous year, including profit distributions, as announced by the President of the Central Statistical Office in the Official Journal of the Republic of Poland, ‘Monitor Polski’.

Conversion to a limited liability company (sp. z o.o.) also offers the opportunity for comprehensive business development and raising capital, for example by taking on new partners – investors. Changing the legal form from a sole proprietorship to a limited liability company also enables a smooth succession process, through the gradual introduction of legal successors into the company’s structure.

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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