On our website, you will find an article outlining the differences between operating a business as a sole proprietorship and as a limited liability company: From sole proprietorship to LLC – a guide, part 1 – jrd. If, after reading the first part of the guide, you are considering transforming your sole proprietorship into a limited liability company, this article will help you understand how the entire process works — step by step — including its legal, tax, and organizational consequences.
From decision to company registration – an action plan
If, after a thorough assessment of the current state and potential of the business, the entrepreneur concludes that converting a sole proprietorship into a limited liability company will support further growth and capital expansion, they should prepare to carry out this process in compliance with applicable regulations. This includes exercising due diligence in assessing the legal, financial, and organizational implications.
The first step is to prepare a transformation plan with attachments. The law requires that the transformation plan be drawn up in the form of a notarial deed. This document should include, among other elements: the type of transformation, the balance sheet value of the entrepreneur’s assets, a draft statement on the transformation, a draft of the company’s articles of association, an asset valuation, and financial statements prepared specifically for the purposes of the transformation. The transformation plan is then subject to review by a statutory auditor, whose task is to confirm the reliability of the plan and the accuracy of the asset valuation.
Once the plan has received a positive opinion from the auditor, the entrepreneur proceeds to formally adopt the decision on the transformation. The key element at this stage is submitting a transformation statement, which must also be executed in the form of a notarial deed.
After the transformation plan and the transformation statement have been completed, the next step is to appoint members of the limited liability company’s governing bodies. In the case of a sole proprietorship conversion, entrepreneurs often choose to establish a single-member limited liability company, where one person serves as both the sole shareholder and the sole management board member. Regardless of the number of shareholders, it is necessary to formally appoint the management board, which will have the authority to represent the company. At this stage, the founding act of the company is also signed.
Subsequently, a motion must be submitted to the National Court Register (KRS) to register the newly established commercial company. This step requires payment of a filing fee of PLN 500, as well as a PLN 100 fee for the publication of the transformation notice in the Court and Commercial Gazette. The registry court is required to process the application within seven days, although in practice, this deadline may occasionally be extended.
The entrepreneur should also submit an application to remove the previous business from CEIDG and report the formation of the company to the Central Register of Beneficial Owners (CRBR). Additionally, the Social Insurance Institution (ZUS) and the relevant tax office must be notified of the change in legal form. It is also advisable to update company data on the website and in email footers.
Consequences of transforming a sole proprietorship into a LLC – legal, tax, and business aspects
Upon the registration of the limited liability company in the National Court Register, the transformation becomes official — the newly established company obtains legal personality and becomes the legal successor of the former sole proprietor. This means a “continuation” of business activity in a new legal form, which has far-reaching legal, tax, and operational consequences that the entrepreneur should be aware of already at the planning stage.
In principle, the newly formed limited liability company acquires all rights and obligations of the former entrepreneur. This includes administrative decisions, such as permits, licenses, and concessions obtained during the course of business, unless specific regulations state otherwise. As a result, the company does not need to reapply for these, which simplifies the continuation of operations. Nevertheless, it is advisable to review the terms of each specific authorization individually. As of the date of the transformation, the company also becomes a party to all contracts previously entered into by the entrepreneur — generally, no annexes or new contracts are required. However, business partners should be informed of the transformation. Furthermore, all employees of the entrepreneur automatically become employees of the new company, with employment relationships continuing under existing terms, without the need to sign new agreements (the entrepreneur must inform employees of the upcoming business transfer at least 30 days prior to the transformation).
It is important to note that all limited liability companies are required to maintain full accounting records. This means keeping detailed documentation of all financial transactions. This represents a major shift — the majority of sole proprietors are allowed to keep simplified records using a revenue and expense ledger, focused mainly on cost and income invoices. Moreover, limited liability companies are also required to prepare annual financial statements.
From the moment of registration, the company becomes a separate corporate income tax (CIT) payer, and also a VAT payer under a new tax ID (NIP). It is important to remember that income generated by the company and paid out to shareholders is subject to double taxation — first at the company level (CIT) and then at the individual level (PIT) when dividends are distributed. An alternative option may be the Estonian CIT regime.
In the case of single-member limited liability companies — where only one shareholder exists — it is also important to note that the company formed as a result of the transformation is jointly and severally liable with the individual for any tax arrears incurred prior to the transformation in connection with their business activity.
Transforming a sole proprietorship into a limited liability company offers significant advantages in terms of future business development. It enables easier access to capital and, importantly, allows the separation of private and business assets, thereby limiting the entrepreneur’s liability for the obligations of the newly formed entity.
Our team provides comprehensive support for entrepreneurs at every stage of the transformation process – from preparing the necessary documentation, through notarial and registration services, to full tax advisory, accounting support, ZUS filings, and ongoing legal assistance tailored to the nature of your business. Do not hesitate to contact us.
