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 personal companies (i.e. certain types of 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).
Companies are sometimes converted into partnerships in order to reduce tax liabilities. (In the case of a company, there is income tax at both the corporate level and the shareholder level, but a partnership is a pass-through entity for tax purposes: only the income of the partners is taxed.)
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 (post-conversion).
- An ordinary partnership (s.c.) may be converted into any commercial company, however, in the event an ordinary partnership is converted into an registered partnership, different 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.
In the case of conversion of a company into a partnership, the partnership assumes the totality of the tax law rights and obligations of the company, but it does not assume the rights and obligations that were held by the shareholders, because they do no function in partnerships. After conversion, the partners becomes the taxpayers, and are subject to personal income tax.
Main stages of conversion
- Preparation stage:
- preparing conversion documentation (conversion plan and enclosures)
- Decision stage:
- filing of conversion plan with the National Court Register and publication in Monitor Sądowy i Gospodarczy
- 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
- 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 supplementary capital, upon conversion these funds will be treated as income of the partners, which will be subject to personal income tax.