Is it worth converting a sole proprietorship into a company?
It all depends on what situation your company is currently in. A sizable problem of a sole proprietorship is that the entrepreneur bears full responsibility for the company’s finances, making it more difficult to take risky business actions. However, risk is an inherent part of running a company – often the changes that have the greatest potential benefit are not free of it.
The transformation of a JDG into a limited liability company is primarily a smaller (or, as the name implies, limited) liability, which the shareholder bears only up to the amount of the contribution made and other benefits made to the company. This is the main feature that distinguishes a limited liability company from a sole proprietorship and makes it worth considering such a business direction.
So let’s first find out what are the benefits and burdens of converting an existing business into a limited liability company.
What does an entrepreneur gain by switching from a JDG to a limited liability company?
As we mentioned earlier, the reduction in financial responsibility is the main reason for the changes, but not the only one. What other benefits come from taking such a step?
- New partners, new capital – the people who will run the company together with the entrepreneur bring their own capital into the company. Its amount depends on the arrangement of the partners. What’s more, each of them brings their contacts and know-how to the company, which increases the possibility of raising capital at a later stage of the business;
- Possibility of sale – a limited liability company can be sold if this is the will of the partners;
- The possibility of inheritance – shares in the company can also be transferred to descendants;
- determinant of development – in many business situations, running a limited liability company is seen as a more serious activity and heralding greater opportunities than a sole proprietorship. However, this is an image benefit, with no specific restrictions or privileges behind it;
- Smooth transition to operating under the new rules – the transformation of a JDG into a limited liability company takes longer than the incorporation of a new company, but allows the entrepreneur to continue operations unhindered. After the conversion, the entrepreneur retains all the concessions he was entitled to as a sole proprietor, continues all contracts (without having to enter into new ones) and can continue to benefit from the concessions granted.
What are the disadvantages of converting a sole proprietorship into a company?
In the world of entrepreneurs, there are no perfect solutions that meet expectations regardless of the circumstances. The conversion of an existing business into a company is no different. What are the dark sides of such a process?
Get ready for more paperwork
To convert a JDG into a limited liability company, you will need a conversion plan and the necessary attachments. These include the draft resolution on the transformation of the company, the draft articles of association of the company, as well as the financial statements.
The plan prepared in this way must be filed with the National Court Register, and then an application must be made for the appointment of an expert to examine the conversion plan. The next step is to notify the company’s shareholders – this should be done twice: no later than one month before the day you plan to adopt the resolution, and then no less than two weeks from the date of mailing the first notice.
It is also necessary to notify all employees – at least one month before the planned date of conversion.
Subsequently, the entrepreneur, together with the partners, passes a resolution to transform the company, and then submits an application to the National Court Register to register the transformation.
As the number of formalities to be handled increases significantly, the process of converting a JDG into a company will take much longer than starting a new company from scratch.
What does the transformation plan consist of?
In order for a notary to draw up a conversion plan, you must provide him with all the required information.
The first will be the carrying value of the transformed entrepreneur’s assets. Financial documents determining the value of assets should be prepared so that the entire conversion plan (using these data) is prepared no later than the following month.
The appendices to the conversion plan must include an accurate valuation of the assets and liabilities belonging to the company, as well as financial statements for the purpose of conversion.
Another required document is a statement on the transformation of the entrepreneur, which must include the following information:
- The type of company into which the entrepreneur converts (limited liability company);
- The amount of share capital (minimum PLN 5,000);
- Data of members of the board of directors of a limited liability company. (partners);
- The scope of the rights that are granted to the partners of the limited liability company. (if applicable).
The last necessary attachment is a draft of the articles of incorporation of a limited liability company. Its contents should include the address of the company’s registered office, the object of its activity, the nominal value and number of shares belonging to each shareholder, the value of the share capital and the duration of the company (if established).
Consider the costs
All the formalities described in the previous section involve costs – after all, an auditor must be remunerated, the conversion plan must be confirmed with a notary, the appropriate court fees must be paid, and so on. The approximate costs of converting a sole proprietorship into a limited liability company are shown in the table below:
| SERVICE | COST |
| Preparation of a plan for the transformation of the entrepreneur in the form of a notarial deed | Up to 246 zł |
| Preparation of a limited liability company agreement in the form of a notarial deed | Up to PLN 1,000 with the minimum value of share capital (PLN 5,000) |
| Determination of the value of the company’s assets by the auditor | From about PLN 1,000 to 1,500 |
| Opinion of court-appointed auditor | From PLN 1,500 to PLN 5,000, depending on the number of people employed in the transformed enterprise |
| Court fee on the application for the appointment of an auditor to examine the transformation plan | 300 zł |
| Court fee for registering a limited liability company with the National Court Register. | 250 zł |
| Fee for placing the company’s entry in the Court and Economic Monitor | 100 zł |
These costs will vary depending on several factors: first and foremost, the value of the company and its size. The larger the company (it employs more people) and the higher its value, the higher the cost of transformation.
Important!
In the case of notary costs (the first two items), we have given maximum notary tax amounts – nothing prevents you from trying to negotiate a lower rate from the notary.
Remember also that the above costs are only those you will incur in the conversion process itself. Consider that running a limited liability company requires keeping much more complicated financial records, reports and drafting shareholder resolutions. In all of these matters, your accountants and lawyers will help you – so reserve funds in the company’s resources for their salaries.
PCC tax of 0.5% of the company’s share capital should also be added to the cost.
What else is worth keeping in mind when converting a business into a company?
There are a few more things to take care of when converting a sole proprietorship into a company:
First: as your business has been transformed into a company, you must delete the entry for sole proprietorship from CEIDG.
Second: the new limited liability company will be assigned a new TIN and REGON number – keep this in mind when you handle the first matters on behalf of the company.
Third: a limited liability company is taxed under CIT, not PIT. However, if the partners decide to pay dividends, this will trigger the obligation of each of them to pay PIT.
Fourth: it is the duty of a limited liability company to keep full accounts – a tax ledger is no longer enough.
Fifth: the liability of the entrepreneur for the financial obligations of the company is limited, however, the obligations incurred as a sole proprietor remain in force and liability in relation to them is not subject to limitations.
Does it make sense to convert a sole proprietorship into a limited liability company?
A lot depends on the situation your company is in. With the help of our table, try to estimate the cost and see if the final amount is acceptable. If so, consider converting. Remember, too, that closing one business and opening a limited liability company is not an extremely onerous solution.
Many companies are prepared for such an eventuality, which means that the continuation of contracts already concluded should not be a major problem. It will certainly be necessary to draw up appropriate annexes to them or even to conclude contracts from scratch, but in the end this solution will probably prove cheaper and less time-consuming.
