Do you want to expand your business by making contribution to a company? Discover all the steps and consequences of business contribution. In this article, you will find information on what a business contribution is and how to properly conduct the process. You will also learn about its long-term consequences for the company.
Definition of an enterprise
According to the Civil Code, an enterprise is an organized set of intangible and tangible factors. These are obviously intended for conducting business (https://arslege.pl/przedsiebiorstwo/k9/a1047/).
| What does an enterprise include? | A designation individualizing the enterprise or its separate parts. |
| Real estate or movables, including equipment, materials, goods, and products. Also other property rights to real estate or movables. | |
| Rights arising from lease and tenancy agreements for real estate or movables. Also, rights to use real estate or movables arising from other legal relationships. | |
| Receivables, rights from securities, and monetary funds. | |
| Concessions, licenses, and permits. | |
| Patents and other industrial property rights. | |
| Copyrights and related property rights. | |
| Trade secrets. | |
| Books and documents related to running a business. |
The above enumeration is of an open catalogue nature and is exemplary.
Business contribution – what is it?
A business contribution is nothing more than a non-monetary contribution. In a contribution of enterprise, an entrepreneur contributes his existing assets to another existing company. These may include real estate, fixed assets, and even monetary capital. Contributing an enterprise to a company allows using an already existing legal structure. This allows for reducing time and costs associated with establishing a new company.
Contribution to a capital company
Two methods are possible:
- The initial incorporation of a business to a capital company. An entrepreneur forms the company by making a contribution to cover his shares in the share capital.
- Secondary incorporation of a business to a capital company. This method focuses on an increase in share capital.
Every time the entrepreneur gets shares which correspond to the value of capital contribution.
Contribution to a limited liability company
For an LLC, there is no obligation of valuating contribution during an audit. If the contribution is overvalued, the shareholder and the board member are accountable. The partner is liable for damages to the company and defects of the contribution. The member of the board is jointly liable with the company towards its creditors. The liability of a board member is limited in time. It amounts to 3 years from the registration of the company or the increase of its share capital.
After the contribution to an LLC, a natural person can terminate its business. Such person becomes a shareholder in the LLC. The company on the other hand gains the right to conduct the business based on the contribution.
Contribution to a partnership
The contribution involves transferring ownership of property or rights to the partnership. In exchange, the contributor receives a share in capital. It is equal to the value of the contribution specified in the partnership’s agreement. The agreement forms the basis for determining rights and obligations of partners. A contribution to a partnership does not result in an increase of assets on the side of contributor. In exchange for the contribution, a natural person receives shares. Thus, he or she obtains the right to share in the profits and losses of the entity. Such a person obtains also rights related to conducting business and influencing its operations.
Contribution to a general partnership
A general partnership receiving contribution of an enterprise assumes all tax-related rights and obligations. Therefore, methods and depreciation write-offs of fixed assets and intangible assets are continued.
Contribution to a limited partnership
To transition from a sole proprietorship to a limited partnership, an entrepreneur may transfer ownership of a business to a limited partnership as a contribution. In exchange for the contribution, he becomes a partner in the limited partnership. However, each time, the value of the specific contributed assets should be analyzed. You should also consider the contribution’s effect on contracts, permits, concessions, and other administrative decisions.
Business contribution and tax consequences
The contribution of a company or an organized part of the company is neutral for income tax purposes and VAT. However, it is inevitable to pay tax on civil law transactions (PCC). The contribution of a company also prevents the option of using a 9% CIT. This applies to the tax year in which the business was contributed and the following tax year.
Business contribution and VAT
According to the VAT Act, it does not apply to transactions involving the sale of a company or its organized part. If the subject of the transaction is the sale of a company or its organized part, the transaction is not subject to provisions of the VAT Act.
If the subject of the contribution is not a company or its organized part, the taxpayer must settle VAT.
Contribution of an enterprise and income tax
In the case of partners who are both PIT and CIT taxpayers, the contribution of an enterprise has no tax consequences on their part. Any income is deferred until the shares received in exchange for the contribution are sold.
Business contribution and tax on civil law transactions
In the case of a company contribution, tax on civil law transactions (Polish PCC) applies to:
- the value of the share capital – in the event of the conclusion of a company agreement,
- the value by which the share capital was increased – in the event of a change in the company agreement.
The tax rate is 0.5%. However, the contribution is exempt from PCC taxation if its subject is a company.
Business contribution and company transformation
In the case of a formal company transformation, the entrepreneur must prepare a plan. It should describe the transformation of the company into a partnership. The plan presents, among other things, the indication of the balance sheet value of the company’s property. It also provides the valuation of the assets. It is also necessary to submit the founding documents of the company. After registering the new entity in the National Court Register, the sole proprietorship is automatically deleted.
If you have more questions about this topic, our experts will help you with legal advice. Do not hesitate to contact our law firm.
FAQ – frequently asked questions about: Business contribution
What is a business contribution?
It is a process where an individual or a legal entity contributes its business or a part of it as input to a company, in exchange for shares in that company.
What documents are needed for making a contribution to a company?
Depending on the type of company, various documents may be required. Typically they include a company agreement, a statement from the contributor, and documents on the value of the contributed business.
Is a contribution of an enterprise the only way to contribute to a company?
No, there are other forms of contributions, such as in-kind or monetary contributions.
What are the financial benefits of a company contribution?
Financial benefits may include acquiring shares in the company and potential advantages related to the development of its operations.
What are the tax consequences of a company contribution for the company?
Usually, a company contribution is subject to taxation. Its value may affect the calculation of the company’s income tax.
Can a company contribution be in the form of assets other than money?
Yes, it can take various forms, such as real estate, machinery, equipment, copyrights, trademarks, etc.
What are the differences between a company contribution and an in-kind contribution?
A company contribution involves contributing the entire business or its organized part to a company. An in-kind contribution entails contributing assets other than the business itself.
Can any type of company accept the contribution of business?
Any type of company can accept business contribution.
What are the main stages of the company contribution procedure?
The main stages include preparing documents, approving the contribution by the company’s authorities, registering changes in the business register, and issuing new shares or stocks.
Are there any restrictions on the type of businesses that can be contributed to a company?
There are no restrictions in this regard.
