Converting a sole proprietorship into a limited liability company (Sp. z o.o.) may raise many questions and doubts. Is such a change truly beneficial for the entrepreneur? Below are the key advantages of operating as a limited liability company and the changes an entrepreneur should expect after converting their sole proprietorship.
Registration of a Limited Liability Company
Converting into a Sp. z o.o. initially involves more extensive registration requirements than a sole proprietorship. The primary difference is the obligation to register the company in the National Court Register (KRS). The application to the KRS must include, among other things: a draft of the company’s articles of association, a draft conversion statement, a valuation of the assets of the previous business, and a financial statement. This application is then reviewed by the registration court. With the assistance of experienced advisors, completing this process should not pose significant difficulties.
Limited Liability of a Shareholder in a Sp. z o.o.
One of the greatest advantages of a Sp. z o.o. is limited liability for the company’s obligations. An entrepreneur operating as a sole proprietor is liable with their entire personal property — and, in the absence of marital property separation, also with their spouse’s assets. In contrast, a shareholder in a Sp. z o.o. is generally liable only up to the amount of their contribution. The minimum share capital for a Sp. z o.o. is PLN 5,000. This structure protects the entrepreneur’s private assets.
Operating Under the Same Business Name After Conversion
After conversion, the entrepreneur does not need to worry about changing the business name. The existing name can be retained, updated only to reflect the new legal form by adding “spółka z ograniczoną odpowiedzialnością.” If the entrepreneur wishes to change the business name entirely, the converted company is required to indicate the former name in parentheses next to the new name, with the word “formerly,” for at least one year from the date of conversion. An added benefit of including the legal form “Sp. z o.o.” in the company name is the increased prestige and credibility it conveys to potential clients.
Rights and Obligations from the Previous Business
By operation of law, the converted company assumes all rights and obligations associated with the previous sole proprietorship. This means the Sp. z o.o. becomes a party to all contracts directly related to the former business. The entrepreneur is not required to execute annexes or assignment agreements. All rights — including concessions, permits, and licenses — will also remain valid after the conversion.
Decision-Making in a Sp. z o.o.
Unlike a sole proprietorship, a Sp. z o.o. operates through a shareholders’ meeting and a management board. As a result, the entrepreneur’s autonomy in decision-making may be somewhat limited. However, after conversion, the entrepreneur can become the sole shareholder and the sole member of the management board. This arrangement allows them to retain full control over the company while also enabling the inclusion of additional partners and the delegation of certain administrative responsibilities.
Taxation of a Sp. z o.o. vs. Sole Proprietorship
A sole proprietor is subject to a single form of taxation selected at the start of the business. It is worth noting the significant planned changes to the taxation of sole proprietorships. Currently, entrepreneurs pay a flat-rate health insurance contribution based on the minimum wage. Under the changes planned for January 1, 2022, this contribution will be calculated proportionally to income. Another burden is the planned elimination of the ability to deduct the health insurance contribution from income tax. As a result, an entrepreneur may fall into the second tax bracket (32%) and additionally pay a 9% health contribution based on income (not to mention the so-called solidarity levy). Consequently, the entrepreneur’s income may ultimately be taxed at a rate of at least 41%.
A Sp. z o.o., as a separate legal entity, is subject to corporate income tax (CIT) at a rate of 9% or 19%. This means that the shareholder is also taxed separately, which may result in double taxation. This occurs because income reaches the shareholders — after CIT — only in the form of dividends, which are subject to a 19% flat-rate income tax, without deducting acquisition costs. Notably, dividend income is not combined with income taxed under the progressive scale and is not reported in the annual tax return. However, double taxation can be avoided, for example, by employing the shareholder under a contract for specific work or appointing them as a member of the management board.
