Transformation of a loss-making company is one of the biggest challenges for business owners. Although losses are a natural part of business, they can become a serious problem for companies. Especially if they are systematic and last for a long time. In such a situation, business owners often wonder if it is possible to transform a loss-making company. What steps should be taken to make the company profitable? Regardless of whether the company with a loss is the result of management errors, market changes, or other reasons, it usually requires changes in management structure and the company’s operations. But is it possible to transform such a company and make a profit?
Table of Contents
- What is the transformation of a loss-making company?
- Transformation of a loss-making company – what steps to take?
- Transformation of a loss-making company – tax aspects
What is the transformation of a loss-making company?
Transformation of a loss-making company means changing its legal form or organizational structure. There are various ways to transform a company depending on specific needs and circumstances.
Among them you can find:
- Transformation of a company from one legal form into another. For example, a transformation of a sole proprietorship into a limited liability company.
- A merger of companies, i.e. combining two or more companies into one new entity.
- Division of a company, i.e. splitting one company into two or more new entities.
- Acquisition of a company, i.e. taking over shares or stocks of one company by another company or investor.
Transformation of a loss-making company – what steps to take?
First of all, it is worth paying attention to the reasons that led to the situation in which the company generates losses. It is often caused by a lack of an effective business strategy or a weak market position. Insufficient funding or irregularities in financial management may also be the cause. Therefore, the first step to transform a loss-making company is to make a detailed analysis of the causes. This will help to develop a new plan of action.
The next step is to search for new sources of funding. This may require obtaining an investor, taking a loan, or issuing bonds. However, it is important to carefully analyze the costs of these solutions. Their impact on the company’s further functioning is crucial.
It is also worth paying attention to the costs of running the business and finding ways to reduce them. These can include changes in production processes or giving up on unprofitable products or services. Finding cheaper suppliers and partners would also be a good idea.
Another important step is a thorough analysis of the market and competition. The company must fully understand the needs and expectations of its customers. It’s crucial to know what products and services competitors offer. Market trends are equally important. Only then it will be possible to develop a strategy that will enable the transformation of a loss-making company into a profitable one.
The last but not least step is the implementation of the plan. At this stage, the company owners must invest time and resources in realizing the new strategy.
Transformation of a loss-making company – tax aspects
The transformation of a loss-making company may have significant tax consequences. This aspect should be carefully analyzed before making a decision about the transformation.
In the case of transformation of a loss-making company, there are two possible situations. If you transform a company into a company of the same legal form, its loss will be transferred to the new entity. It will be possible to deduct it from future profits. However, in the case of a change in the legal form or organizational structure, it looks different. Tax regulations impose certain limitations on the possibility of deducting losses.
According to Art. 7(5) of the CIT Act, one can deduct a loss from an income earned in the next five consecutive tax years. However, no more than 50% of that loss may be deducted in each of those years.
Based on Art. 7 (3) point 4 of the CIT Act, when determining income that forms the tax base, losses of entrepreneurs transformed in the event of a change of legal form are not taken into account. The only exception is transformation of a capital company into another capital company. Losses of transformed entrepreneurs are also not taken into account when determining it. Again, only capital companies transformed into other capital companies are an exception (Art. 7 (4) of the CIT Act).
This means that if you transform a limited liability company into a joint-stock company, the joint-stock company can deduct the loss of the limited liability company. When determining the loss of a joint-stock company for a given year, the loss of an LLC incurred in that year can be also included. It is also possible in the case of the transformation of a joint-stock company into an LLC.
However, based on Art. 8 (1) in conjunction with Art. 8 (2) point 1 of the PIT Act, losses from participation in a company that is not a legal person are determined in proportion to the taxpayer’s share in the profit. In the absence of proof to the contrary, the rights to share in the loss are equal.
Transformation of a company is a process that requires fulfillment of certain formalities. This is especially true for the transformation of a loss-making company. In this case, the entire procedure can be more complicated. Thus, before making a decision and undertaking any actions on the transformation of a loss-making company it is a good idea to consult with a lawyer.
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