How to transform a sole proprietorship into a limited-liability company?

A sole proprietorship can be transformed into a limited-liability company in one of the three ways:

• By transforming a sole proprietorship into a limited-liability company directly
• By setting up a new limited-liability company and merging a sole proprietorship into it
• By closing a sole proprietorship and opening a new limited-liability company

Although it might seem to be the most complicated, the first option allows for a smooth continuation of all business activities without the need for outsourcing or signing new contracts, etc. This article will describe this form of transition from a sole proprietorship to a limited-liability company in depth.

Transformation of a sole proprietorship into a limited-liability company –  step by step

The process of converting a sole proprietorship into a limited-liability company, as well as legal issues of the succession of rights and obligations related to the economic activity of the business, are regulated by the provisions of the Commercial Companies Code. The necessary steps are required, following the Act as mentioned above:

Step 1: Prepare the transformation plan with all attachments and an opinion of a statutory auditor

The transformation plan to change a sole proprietorship into a limited-liability company must be drawn up in the form of a notarial deed. Under the Commercial Companies Code, such a document should include at least the balance-sheet value of the entrepreneur's assets that are being converted on a specific day in the month preceding the preparation of this plan. The attachments to the transformation plan should include: the valuation of the assets (assets and liabilities) and the financial statements prepared at a specific date in the month preceding the preparation of the transformation plan (Important! If the entrepreneur has not kept accounting books, the financial statement is prepared based on a summary of entries in the KPiR (księga przychodów i rozchodów, or ledger) and other records maintained by the entrepreneur for tax purposes, a physical inventory, and other documents).

A statutory auditor must review the conversion plan. The application for the appointment of a statutory auditor should be submitted to the registry court subject to the registered office address of the transformed business.

Step 2: Submit a declaration of the transformation

The transformation statement on the change of an entrepreneur into a limited-liability company should be prepared in the form of a notarial deed indicating, among others: the type of the company being formed, the amount of share capital (not lower than 5,000 złotys), and full names of the board members of the transformed company.

Step 3: Appoint members of the governing bodies of the transformed company

To transform a sole proprietorship into a limited-liability company, it is necessary to pass resolutions on the appointment of the management board (obligatory body) and a supervisory board or an audit committee.

Step 4: Conclude the Memorandum and Articles of Association of the transformed company

The limited-liability company agreement should specify the company name and address, its object of economic activity, amount of share capital and duration of its corporate existence.

Step 5: Enter the transformed company in the Register of Entrepreneurs of the National Court Register (KRS) and remove the sole proprietorship from the Central Register and Information on Economic Activity (CEIDG)

The application for entry of the company in the KRS must be submitted within six months of signing the Memorandum and Articles of Association of the limited-liability company. The application is submitted on standard forms with all attachments specified in the Commercial Companies Code.

At the same time, it will be necessary to apply to remove the sole proprietorship from the Central Register and Information on Economic Activity. Such application must be submitted within seven days from the date of limited-liability company entry to the KRS.

According to the Commercial Companies Code, the transformed sole proprietorship becomes a limited-liability company upon its entry into the KRS.

We entered the transformed limited-liability company into KRS – what's next?

Additional formalities related to transforming a sole proprietorship into a limited-liability company include a complete update of all data used for tax purposes. Firstly, it is necessary to submit an identification application using the NIP-8 form and a VAT-R application for tax purposes (provided that the limited-liability company needs to be VAT registered). In addition, suppose the entrepreneur was a VAT taxpayer as part of a sole proprietorship. In that case, it will also be necessary to submit a declaration of cessation of activities subject to VAT taxation on the VAT-Z form.

Suppose the limited-liability company is an employer. In that case, it is also necessary to update the payer's data with ZUS (i.e. de-register the payer who is an individual and register the company as the payer).

Tax consequences of business transformation

According to Art. 93a of the Tax Ordinance Act, a sole proprietorship established as a result of the transformation of an entrepreneur who is a natural person into the laws realised for the provisions of the tax law related to the conducted economic activity, except for those rights that cannot be continued under the conditions governing the taxation of companies (e.g., tax breaks provided for in the PIT Act). For example, this means that the company takes over the rights and obligations related to VAT, if applicable.

Transition from KPiR to accounting books

An important issue related to the transformation into a limited-liability company is a transition from personal income tax (PIT) to corporate income tax (CIT), an entirely new method of taxation. As a result, an individual should settle their PIT to the date of the transformation, and the company should start paying CIT from the moment of transformation.

The above results in the necessity to change the form of settlements – on the day of transformation, the KPiR closes, and a full inventory is made. It should cover not only the condition of goods, materials, finished products, and work in progress, but also assets such as: fixed assets, equipment, intangible assets, cash, receivables, and liabilities.

On the day of the legal-form change – that is, the day of entering the company into the KRS – the accounting books should be opened. In the case of transformation, it is possible to continue the depreciation of fixed assets – the net value of fixed assets is then shown in the newly opened accounting books.

ACCO Accounting & Consulting Office

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