Changing the legal form of business - how to do it?


Up to a certain point, a sole proprietorship is a profitable form of running a business. However, at some point, when the dynamic development will increase the turnover and the scale of conducted business, continuing running the company in the form of sole proprietorship causes taking too much risk. We should remember that, as a sole proprietorship, we are responsible with all our property for its obligations. In the case of a sole proprietorship, a change in the legal form of activity may involve its transformation into a civil partnership, partnership or capital company. The willingness to change may also result from friends' persuasion to cooperate within one company or the desire to limit liability for obligations incurred by the company. In this article, we will tell you what the change of the legal form of business should look like.

Change of the legal form of activity - methods

A change in the legal form of business activity may be effected through:

  • Contribution of a sole proprietorship in kind to the company
  • Liquidation of business activity and then establishment of a new company
  • Sale of business assets to the company
  • Transformation of a sole proprietorship into a capital company.

Contribution of a sole proprietorship in kind to a partnership or civil law partnership

This is the most advantageous way when it comes to tax issues. It consists in establishing a company before liquidation of the activity. In this way, we will avoid having to pay VAT on the physical inventory. It is possible to make an in-kind contribution of the entire enterprise to the company under Article 551 of the Civil Code. However, due to the VAT exemption, if the property is transferred to the company through a contribution in kind, on the acquisition of which the entrepreneur benefited from a VAT deduction, he must correct the VAT at the time of transfer. Payment of a contribution in the form of an organized part of an enterprise in exchange for shares in the company constitutes a sale against payment and gives rise to income, which, however, is exempt from income tax under Art. 21 section 1 point 50b of the PIT Act.

The only tax that the entrepreneur will have to pay in this case is the PCC tax (on civil law transactions). Its payment should be made within 14 days from the date of transfer of the contribution, and the form to be completed in connection with this fee is PCC-3.

Such a transformation of activities results in the succession of only some of the rights and obligations of the activity into a company. It should be remembered that identification data such as NIP or name is not transferred to the newly created company. The company will be assigned a new tax identification number during registration. Therefore, there may be a problem with the use of, inter alia, cash registers previously used in business. In order to be able to use them in a company, their memory should be exchanged.

As for the depreciation of fixed assets transferred to the company, their current depreciation in the previously conducted activity should be taken into account. If they were 100% depreciated in the company's operations, they cannot be depreciated.

Liquidation of business activity and then establishment of a new company

Such a transformation consists in the liquidation of the economic activity, the liquidation of which requires a physical inventory to be drawn up and the resulting VAT payable. With this method of transformation, the entrepreneur will have to tax the income obtained for the sale of the company's assets against payment. Only after completing his activity and deregistering from appropriate offices and institutions (more on this subject in the last 13th article of the business cycle), he will start establishing a company.

Sale of activities to an existing company

The condition is that the company has legal personality. In this situation, components of the enterprise are transferred, such as name of the company or movable property in the form of equipment, materials or goods, as well as property rights or property rights. The deregistration of the business takes place only after the company's assets have been sold. After this fact, you can join the company as a partner. This solution, similarly to the contribution in kind, will be exempt from VAT. However, we will not bypass the obligation to pay income tax on the assets sold to the company. The income obtained from the sale may be used as own contribution made upon joining the company as a new partner.

Start a free 30-day trial period with no strings attached!

Transformation of a sole proprietorship into a capital company

In 2011, as part of reducing administrative barriers for citizens and entrepreneurs, another possibility was created to transform a sole proprietorship into one of capital companies. This transformation takes place from the moment of entry into the National Court Register. At the same time, the activity is also automatically deregistered from CEIDG.

In order for the change of the legal form of business to be a capital company to be properly made, it is necessary to:

  • Prepare a transformation plan - in a notary form containing information on the carrying amount of the enterprise undergoing transformation (as of the selected day of the month preceding the preparation of the plan), together with the opinion of the statutory auditor and attachments:
    - a draft declaration on the transformation of an entrepreneur,
    - a draft deed of incorporation of the company,
    - valuation of the assets (assets and liabilities) of the transformed entrepreneur,
    - financial statements drawn up for the purpose of the transformation
  • Submit a declaration of transformation - at the same time, you can sign the company's memorandum of association because the documents should be drawn up in the form of a notarial deed
  • Appoint members of the governing bodies of the transformed company
  • Conclude a company agreement (sp.z o.o.) or create its statute (joint-stock company), depending on the type of company
  • Make an entry of the transformed company to the National Court Register

Such a change in the legal form of activity results in the establishment of a capital company. If the entrepreneur decides to use a new name within 12 months of the transformation, he will also have to enter the old name along with it. However, you can stay with the name of the former activity by adding only the appropriate ending identifying the legal form of the company, i.e. sp.z o.o. or SA.

A positive aspect of this method of transformation is the transfer of rights and obligations of activity to the resulting company. The company will be subject to the same rights and obligations in the following matters: administrative; civil law and labor law. However, it should be noted that despite the introduction of a new provision in the scope of the Commercial Companies Code, no simultaneous changes in the scope of tax law were initiated. Therefore, the tax laws are not transferred to the resulting company. This means that, as in the case of an in-kind contribution to a new company, the new form of enterprise cannot benefit from the “old” NIP number and tax exemptions previously granted to the entrepreneur.

How are partnerships different from capital companies?

We already know how the legal form of business should change, but what new legal form should we choose? The choice largely depends on the reasons for the conversion. If we just want to start cooperation with a partner, we can choose a civil partnership or one of the partnerships. Unlike capital companies, most of them (except limited joint-stock partnership) do not require own contribution. However, it should be noted that the change of the legal form of business and the creation of a partnership in most cases does not protect us against liability for liabilities. Moreover, it even extends the scope of our responsibility also for the partner. Therefore, when deciding to cooperate within the company, you should be aware of this.

It is different in capital companies. By joining a capital company as a partner, the entrepreneur is not liable with all his property for the obligations of the partnership and the partner, as is the case in most partnerships and civil partnerships. In capital companies, the company itself is responsible for liabilities incurred by the company. The exception is deliberate failure to contract liabilities when the company's financial situation is very bad. Apart from such cases, partners of a capital company are not liable for it with their personal property. Therefore, if the change in the legal form of the business is due to the expansion of the business, an increase in its turnover, and at the same time an increase in risk, the decision of the entrepreneur to choose a capital company that will exclude him from personal liability for the liabilities incurred, and thus reduce the personal risk in the business is rational. .