Conversion of a sole trader into a capital company
It is now possible for a person conducting business as an individual to convert the business into a single-shareholder company, carrying over most elements of the existing business—except tax breaks.
From July 2011, an amendment to the Polish Commercial Companies Code made by the Act on Restriction of Administrative Barriers for Citizens and Businesses dated 25 March 2011 enables an individual doing business as a sole trader to convert his or her business into a single-shareholder commercial company, for the most part maintaining the privileges, rights and obligations previously held by the sole trader.
One of the benefits of this option is universal succession, or passage to the new company of the rights and obligations previously held by the individual as a sole trader. This means that the converted company becomes the holder of permits, licences and exemptions previously obtained by the sole trader, unless otherwise provided by law or the decision granting the permit, licence or exemption. There is an exception for tax relief, however, which does not pass to the new company. One reason for this exception is that because the sole trader is an individual, he legally continues to exist as a taxpayer when his sole proprietorship is converted into a company.
An individual who converts his business into a company will remain jointly and severally liable with the company for the obligations of the business that arose prior to conversion, but only for three years going forward. Thus there may be an incentive for a sole trader with long-term obligations to convert the business into a company so that further in the future he may avoid possible execution against his personal assets, because after three years have passed the company alone will be liable.
The existing business is assumed by the new company upon entry in the commercial register, which is deemed to be the conversion date. The register court is then required to notify the business register where the individual’s business was previously entered, which in turn will delete the converted business from the Central Business Register (CEIDG).
The existing business of a sole trader may be converted only into a capital company—i.e. a limited-liability company or a joint-stock company—because these are the only corporate forms that may have a single shareholder. On the conversion date, the individual becomes the shareholder of the new company.
If the name of the new company is different from the name of the previous business (other than merely adding a suffix identifying the legal form—sp. z o.o. or SA), the new company is required to state the old name alongside the new name, in parentheses with the word “formerly”.
Unless otherwise provided for this type of conversion, the regulations governing establishment of the specific type of company apply accordingly. The steps required for conversion include:
- a conversion plan in the form of a notary deed, stating as a minimum the balance sheet value of the assets of the converted business as of a specific date during the month prior to signing of the conversion plan, with enclosures and an auditor’s opinion;
- a declaration of conversion in the form of a notary deed, stating the type of company into which the business will be converted, the amount of the share capital, and the members of the management board of the new company;
- appointment of the management board;
- signing of the articles of association or statute; and
- entry of the new company in the commercial register and deletion of the existing business from the business register.
The enclosures to the conversion plan include:
- a draft of the declaration of conversion;
- a draft of the articles of association or statute;
- an appraisal of the assets and liabilities of the converted business; and
- a financial report prepared for purposes of the conversion as of a specific date in the month prior to signing of the conversion plan.
The conversion plan must be reviewed by an auditor for fairness and accuracy. Upon motion of the business undergoing conversion, the register court for the place where the business has its registered office will designate an auditor.
Because of the lack of universal succession for purposes of tax law, the new company will exist as a separate taxpayer going forward, and thus it must apply for issuance of a tax identification number, which is then filed with the National Court Register under the “one-stop shop” approach. The new company will also need to register for VAT and the previous sole trader will need to be deregistered. It should be noted that the law does not exempt this type of conversion from the obligation to pay the tax on civil-law transactions, and thus capital duty will be payable on the conversion at the rate of 0.5% of the new company’s share capital.
Kinga Ziemnicka, Corporate Law, Restructuring, and Business-to-Business Contracts practices, Wardyński & Partners