As a business grows, many entrepreneurs begin to consider transforming its legal structure into a limited liability company. Such a decision can bring tangible benefits, but it should be preceded by a thorough analysis.
What will you learn from the article?
Why is it worth converting a sole proprietorship into a limited liability company (sp. z o.o.)?
Converting a sole proprietorship into a limited liability company limits the entrepreneur’s personal liability for the company’s debts and allows for more favorable taxation, e.g. 9% CIT for small taxpayers.
What are the main steps in converting a sole proprietorship into a limited liability company?
The process includes preparing a conversion plan in the form of a notarial deed, valuing the entrepreneur’s assets, and submitting an application to register the company with the National Court Register (KRS).
What documents are required to convert a sole proprietorship into a limited liability company?
The required documents include a conversion plan with an asset valuation, financial statements, and consent for the conversion. All documents must be prepared by a notary.
Does converting a sole proprietorship into a limited liability company require closing the existing business?
No, the conversion allows the business to continue under a new legal form without the need to liquidate the sole proprietorship, and the company assumes all rights and obligations.
What are the costs of converting a sole proprietorship into a limited liability company?
The costs include notary and court fees (approx. PLN 600 for registration in the KRS) as well as taxes, such as the civil law transaction tax (PCC) of 0.5% of the value of the contribution to the company.
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First and foremost, it is advisable to comprehensively assess the company’s financial standing, define its future development directions, and gain a clear understanding of the potential legal and tax implications of the planned transformation. Issues related to the liability of shareholders and board members are also significant, as are the new registration and reporting obligations that will arise after the change in the legal form of the business.
To support you in making an informed decision, we have prepared this two-part guide. In this first part, we discuss the key arguments for considering the transformation of a sole proprietorship into a limited liability company. We encourage you to read the second part of the publication, where we present detailed information on the formal procedures and implications of such a transformation: From sole proprietorship to LLC – a guide, part 1 – jrd
Limiting the entrepreneur’s liability for obligations
One of the key differences between a sole proprietorship and a limited liability company (LLC) lies in the scope of liability for business obligations. This is often the main reason why entrepreneurs consider changing their business structure, as business growth inevitably involves greater risk.
In the case of a sole proprietorship, the entrepreneur operates in their own name and is liable for all company obligations with all of their assets — without limitation. This results from the fact that the entrepreneur’s business is closely tied to them as a natural person. Even if the entrepreneur has separate bank accounts – business and private – in the event of debt, creditors may pursue claims against their entire estate, including those assets that are not directly related to the business activity.
In a limited liability company, the situation is completely different. Liability for obligations lies with the company itself, as a legal entity separate from its shareholders and management board – with all of its assets. Enforcement is therefore carried out against the company. Although the law provides for the possibility of holding management board members liable in exceptional cases (e.g. in the case of ineffective enforcement against the company’s assets), the general rule remains the exclusion of personal liability for shareholders.
Shareholders (unless they also serve as members of the management board and the articles of association state otherwise) are generally not liable for the company’s obligations, and their risk is limited to the value of the contributions made (although in practice this risk may turn out to be broader, e.g. when a shareholder has granted the company a loan or a guarantee and the company encounters financial liquidity problems).
This is why transforming a business into a LLC can be an effective way to protect personal and family assets from the consequences of potential business failures.
Business continuity
Many entrepreneurs, particularly those whose businesses are growing dynamically, wonder what will happen to their company in the event of unexpected circumstances – including their death – and how to effectively ensure its continuity. As mentioned above, a sole proprietorship does not have a separate legal personality – its tax and statistical identification numbers (NIP and REGON) are assigned not to the company itself, but directly to the individual operating it. For this reason, the death of the entrepreneur usually results in the cessation of business operations – contracts with contractors and employees are terminated, and licenses or permits obtained by the entrepreneur expire.
Under the applicable legal provisions, it is possible to appoint a succession manager who, most often until the final confirmation of inheritance acquisition or registration of a certificate of inheritance, temporarily manages the business following the death of the sole proprietor. The manager may be appointed by the entrepreneur themselves or, after their death, by their spouse or heirs.
It is worth noting that although succession management allows for temporary continuation of business activity after the entrepreneur’s death, it does not grant full operational freedom. A succession manager faces certain limitations. For example, in the case of intended actions beyond ordinary management (such as the acquisition of real estate), the consent of all co-owners of the inherited business is required.
The situation becomes more complicated if unanimity is lacking – for example, due to a dispute among heirs. In such a case, the succession manager must apply to the court for permission to carry out the intended action. This may significantly delay decision-making and hinder the day-to-day functioning of the business, negatively affecting its liquidity and operational capacity as an organized economic entity.
Additional difficulties may arise if one of the heirs is a person who, due to their age, does not possess full legal capacity. Although the appointment of a succession manager itself does not require the consent of the family court, further actions taken by the manager may, in such a case, be subject to judicial supervision.
The family court has the right to indicate specific actions that the succession manager may not undertake without prior permission – whether one-time, recurring, or planned for the future. This is intended to protect the interests of the minor heir but may also significantly affect the speed and effectiveness of managing the business under succession management.
By comparison, in the event of the death of a shareholder in a limited liability company, business operations are not interrupted. The company, as a separate legal entity, continues to operate regardless of changes in the shareholder structure.
In practice, this means that the death of a shareholder does not affect the business continuity of the company – both in terms of operations and legal standing. The company can continue to meet its obligations, enter into contracts, and employ staff. The shares of the deceased shareholder, as a rule, become part of the estate and may be inherited, unless the articles of association provide otherwise.
Credibility and standing in the business world
The decision to transform a sole proprietorship into a LLC may also influence how the business is perceived by potential contractors, financial institutions, or investors. An LLC, as a more formalized and transparent structure, is often viewed – especially in certain industries – as a more stable and professional entity than a sole proprietorship. This can have real significance when applying for financing, participating in tenders, entering into high-value contracts, or negotiating with foreign partners.
In our practice, we have been supporting entrepreneurs at every stage of their business development for years. We offer comprehensive assistance – both in analyzing the company’s situation and throughout the transformation process, as well as through ongoing legal support after the change in business form.
