Transformation of a sole proprietorship into an LLC

The transformation of a sole proprietorship into an LLC involves a smooth change of its existing operations without the need for liquidation. This process is quite complex and formalized. Yet, it allows entrepreneurs to achieve many desired goals. It enables cost reduction, improves decision-making processes, and changes the scope of responsibility. What are the conditions for transforming a sole proprietorship into an LLC? What is a transformation plan, and what form should it take? What benefits does the transformation of a sole proprietorship into an LLC bring? We provide answers to these questions below.

Table of Contents

• Transformation of a sole proprietorship into an LLC – the principle of continuity
• Transformation of a sole proprietorship into an LLC – conditions for transforming the entrepreneur
• Transformation of a sole proprietorship into an LLC – entrepreneur’s transformation plan
• Transformation of a sole proprietorship into an LLC – statement on the entrepreneur’s transformation
• Transformation of a sole proprietorship into an LLC – appointment of members of the transformed company’s bodies
• Transformation of a sole proprietorship into an LLC – conclusion of the company’s agreement
• Transformation of a sole proprietorship into an LLC – registration of the transformed company and removal of the transforming entrepreneur from CEIDG
• Transformation of a sole proprietorship into an LLC – what are the benefits?
• Summary

Transformation of a sole proprietorship into an LLC – the principle of continuity

The fundamental principle of transforming a sole proprietorship into an LLC is the so-called principle of continuity. According to this principle:

• The transformed LLC is entitled to the rights and obligations of the transforming sole proprietorship. This allows a smooth continuation of operations. There is no need to amend existing contracts.
• LLC remains the subject of permits, licenses and benefits granted to the transformed sole proprietorship. This applies unless the law or a decision on granting a permit, license, or benefit states otherwise.

So, the LLC formed as a result of the transformation of a sole proprietorship is in a way a continuator of the activities of the transformed entity. It is important to notify contractors about the transformation. Moreover, it is worth informing them about the intention to continue the existing agreements.

Transformation of a sole proprietorship into an LLC – conditions for transforming the entrepreneur

 According to the Commercial Companies Code, the transformation of a sole proprietorship into an LLC requires:

1. Preparation of a transformation plan. It should include attachments and an opinion of an expert auditor.
2. Submission of a statement on the sole proprietorship’s transformation.
3. Appointment of members of the transformed company’s bodies.
4. Conclusion of the company agreement or signing the transformed company’s statute.
5. Registration of the transformed company and removal of the transforming entrepreneur from CEIDG*.

*CEIDG is an abbreviation of the Polish register, i.e. Central Registration and Information on Business.

Transformation of a sole proprietorship into an LLC – entrepreneur’s transformation plan

The entrepreneur’s transformation plan should be drawn up in the form of a notarial deed. It should include at least the determination of the balance sheet value of the entrepreneur’s assets on a specified day in the month preceding the plan’s preparation.

According to the Commercial Companies Code, the transformation plan should include:

1. A draft statement on the entrepreneur’s transformation
2. A draft of the founding act (articles of association)
3. valuation of the assets (assets and liabilities) of the transformed sole proprietorship
4. Financial statements prepared for transformation purposes on a specified day in the month preceding the plan’s preparation.

The transformation plan should then be subject to examination by an expert auditor. He will verify it in terms of correctness and reliability. The auditor is appointed by the competent court according to the registered office of the transforming entity. He provides a detailed written opinion within a time specified by the court. However, this period cannot exceed two months from the date of appointment.

Transformation of a sole proprietorship into an LLC – statement on the entrepreneur’s transformation

The statement on the transformation of the sole proprietorship into an LLC should have a form of a notarial deed. According to the Commercial Companies Code, it should include at least:

1. The type of company into which the entrepreneur is transformed.
2. The amount of share capital.
3. The scope of personal rights granted to the entrepreneur being transformed as a shareholder of the transformed company, if such rights are provided for.
4. Full names of the members of the management board of the transformed company.

Transformation of a sole proprietorship into an LLC – appointment of members of the transformed company’s bodies

An essential element of transforming a sole proprietorship into an LLC is the establishment of company bodies. Thus, it is necessary to appoint the management board of the LLC. The same requirements should be applied in this respect as in the case of its creation without transformation.

In a limited liability company it may also be necessary to appoint a supervisory board if:

• The company’s articles of association state that
• The share capital exceeds 500 000 PLN, and there are more than 25 shareholders.

Transformation of a sole proprietorship into an LLC – conclusion of the company’s agreement

Regardless of submitting a statement on the transformation of a sole proprietorship into an LLC, it is also necessary to conclude the company’s agreement. It should be in the form of a notarial deed and specify:

1. The company’s name and registered office.
2. The company’s scope of activity.
3. The amount of share capital.
4. Whether a shareholder may have more than one share.
5. The number and nominal value of shares held by individual shareholders.
6. The company’s duration if it is determined.

Transformation of a sole proprietorship into an LLC – registration of the transformed company and removal of the transforming entrepreneur from CEIDG

 According to the CCC, the application for registering the transformation of a sole proprietorship into an LLC should be submitted by all members of the transformed company’s management board. It can be done only electronically through the Court Registers Portal.

The application should include:

• The company’s agreement.
• The statement on the entrepreneur’s transformation.
• A resolution on the appointment of commercial proxies, if appointed. Along with it, one should enclose their consent and address for service.
• A list of shareholders with their service addresses. It must be signed by all members of the management board.
• The management board members’ consent to their appointment along with addresses for service.
• Statements from all management board members that all shareholders have contributed to the share capital.
• Proof of payment of fees for the application and the registration announcement.

The application for registering the transformation of a sole proprietorship into an LLC should be submitted within six months from the date of concluding the company’s agreement.

Importantly, the registry court doesn’t remove the transformed entrepreneur from CEIDG ex officio. Thus, such an application must be submitted independently. One should do it within 7 days from the entry of the company into the National Court Register.

Transformation of a sole proprietorship into an LLC – what are the benefits?

There is no doubt that the transformation of a sole proprietorship into an LLC has many benefits. Among them, there are:

1. Limiting the liability of the limited liability company’s shareholder. The shareholder’s liability is limited to the contributed capital and any contributions made to the company. However, obligations incurred by the entrepreneur before the transformation are an exception. In this case, the entrepreneur is jointly and severally liable with the company for 3 years from the date of transformation.
2. Enabling investor acquisition. Individuals who, together with the entrepreneur, will run the transformed LLC, will contribute their own capital, contacts and know-how.
3. Enabling future sale. If this is the will of the shareholders, a transformed LLC can be sold.
4. Enabling smooth succession. Shares in the transformed LLC  may be transferred to descendants as an inheritance.
5. Ensuring a smooth transition to new rules. Transforming a sole proprietorship into an LLC takes longer than establishing a new company. However, it allows the entrepreneur to continue their existing operations without obstacles.
6. Image-related benefits. In many business situations, running an LLC is seen as a sign of development.

Summary

An individual entrepreneur conducting business activities can transform it into an LLC. This process requires gathering various documents such as a transformation plan, transformation statement, and company’s agreement. Establishing a new limited liability company is undoubtedly faster and cheaper. However, the decision about the transformation of a sole proprietorship into an LLC brings numerous benefits. The principle of continuity is the fundamental one.

If you run a sole proprietorship and want to transform it into an LLC in Poland, we are here to help you. We offer both legal advice and support throughout the transformation process. Do not hesitate to contact our experts.