The decision to change the corporate form is made in connection with the economic condition of the entity, in order to optimise the management (bearing in mind the tax aspects). The converted company continues to hold the same rights and obligations and continues the business, but under a new legal form.
The decision to convert the legal form may also be dictated by a desire to limit liability, because in commercial partnerships the partners may be personally liable for the debts of the partnership, but in capital companies the shareholders’ liability is generally limited, and they are at risk only for the consideration they have provided for the shares. Moreover, conversion into a capital company may be tied to growth in the scale of the business or an intention to float the company on the stock market (which is possible only in the case of a joint-stock company or joint-stock limited partnership).
Companies are sometimes converted into partnerships in order to reduce tax liabilities. A company is an income tax payer, and thus income tax is paid at the level of the company as well as the shareholders. But in the case of a partnership, income tax is paid only at the level of the partners. An exception is the joint-stock limited partnership, which, like companies, is an income tax payer..
Permissibility of conversion
The Commercial Companies Code regulates what types of entities may undergo conversion:
- A registered partnership (s.j.), professional partnership (sp.p.), limited partnership (sp.k.), joint-stock limited partnership (SKA), limited-liability company (sp.z o.o.) or joint-stock company (SA) (pre-conversion) may be converted into another form of commercial company or partnership (post-conversion).
- An ordinary partnership (s.c.) may be converted into any commercial company or partnership; however, in the event an ordinary partnership is converted into a registered partnership, a different legal regime applies.
- The business of a sole trader (i.e. business conducted pre-conversion by an individual on his or her own account) may be converted into a single-shareholder capital company.
A company in liquidation that has begun to distribute its assets may not undergo conversion, nor may a company in bankruptcy.
Forms of conversion
There are two main forms of conversion:
- Conversion of a partnership into a capital company
- Conversion of a capital company into a partnership
Rights and obligations after conversion
As of the conversion date, the post-conversion entity assumes all of the rights and obligations of the pre-conversion entity, specifically including concessions, exemptions and entitlements (unless otherwise provided by law or by the decision establishing such rights).
The conversion date is the date when the post-conversion entity is entered in the National Court Register. The entry is a technical matter, and for organisational or tax reasons parties often request that the conversion be registered on a specific date. The court is not bound by such request, but generally will comply.
In the case of conversion into a company, the company assumes all tax-law rights and obligations of the pre-conversion entities.
A partnership arising as a result of conversion of a company enters into the totality of the tax-law rights and obligations of the converted company. After the conversion, the taxpayers are the partners of the partnership, subject to taxation under the rules appropriate to them (personal income tax or corporate income tax, as the case may be).
Main stages of conversion
- Preparation stage:
- Preparing conversion documentation (conversion plan and enclosures).
- Decision stage:
- Filing of conversion plan with the National Court Register
- Application to appoint an auditor to examine the conversion plan
- Notice of the conversion to the shareholders/partners of the entity being converted (twice)
- Adoption of conversion resolution
- Declaration of the shareholders on participation in the converted company, submitted within one month after adoption of the conversion resolution
- Registration stage:
- Filing of motion for conversion
- Registration of the conversion
In the case of conversion of a company into a partnership, it is important to examine the tax aspects of the conversion carefully. If the company has undistributed profit or profit assigned to capital other than share capital, upon conversion it will be taxable income of the partners.