Transformation of business activities and establishment of a new company in Poland

People starting a business in Poland most often choose a sole proprietorship (JDG in polish). It is a simple and quick form of running a business, but over time – as the company grows – it may prove insufficient. This raises the question: is it better to transform the existing business into a company (e.g., a limited liability company) or to close the business and establish a completely new entity?

Transforming a sole proprietorship vs. establishing a new company – basic differences

The legal basis for the transformation of a sole proprietorship is Article 551 §5 of the Commercial Companies Code, which allows for a change of business form to a single-member capital company.

On the other hand, establishing a new company involves creating a separate entity in accordance with the provisions of the Commercial Companies Code.

Both paths lead to the same goal – conducting business in the form of a company – but they differ in terms of the scope of responsibilities, legal and tax consequences.

When is it worth transforming?

Transformation involves maintaining legal continuity, i.e., general succession. This means that the newly formed company automatically assumes all the rights and obligations of the entrepreneur, i.e.:

• it automatically becomes a party to all agreements with contractors, employees, and banks—without the need to re-sign them,
• it continues court and administrative proceedings,
• it takes over permits, concessions, and reliefs, unless otherwise provided by law.

Thanks to the continuity of its operations, the company does not lose, for example, its creditworthiness or rights resulting from won tenders.

The main advantages of transformation:

• limited liability – a partner is liable only up to the amount of their contributions (except for the liability of management board members under Article 299 of the Commercial Companies Code),
• greater credibility and prestige in the eyes of contractors and financial institutions,
• the possibility of accepting new partners,
• inheritance of shares – unlike a sole proprietorship, a capital company allows shares to be transferred to heirs,
• retaining the existing name (for one year with a note informing about the transformation).

The disadvantage of transformation is its complexity and cost, as it requires a number of formalities and notarial and court proceedings. In the case of large companies with an extensive structure, it may be more cost-effective to establish a new company and contribute the enterprise to it.

When is it better to establish a new company?

Contributing an existing business to a newly established company in the form of a contribution in kind may be a simpler solution, especially if the company does not have an extensive history of liabilities or contracts.

The contribution of an enterprise (or an organized part thereof) is not subject to VAT, provided that it covers the entire enterprise within the meaning of Article 551 of the Civil Code. However, if the transaction involves only individual assets, the tax office may consider it a sale subject to VAT.

When establishing a new company, it should be remembered that legal continuity is not maintained. This means:

• the need to obtain new consent from contractors to change the parties to the contract,
• the loss of previous administrative decisions (new ones must be applied for),
• the need to build creditworthiness from scratch.

However, the advantage of a contribution in kind is greater flexibility – the new entity may take any legal form (e.g., a general partnership or limited partnership), not just a capital company.

Tax consequences

Transformation

• Subject to civil law transaction tax (0.5% of share capital).
• Tax neutral in terms of PIT and CIT.
• Not subject to VAT, but the company must obtain a new tax identification number and register as a VAT payer.
• No obligation to prepare a physical inventory on the date of transformation.
• From the moment of transformation, the company is subject to CIT, and the partner to PIT.
• The company is required to keep full accounting records.

Contribution

• The contribution of an enterprise or an organized part of an enterprise (OPE) in exchange for shares is exempt from PIT and CIT.
• It is not subject to VAT, provided that it covers the entire enterprise or OPE.
• PCC applies (0.5% of the amount by which the capital was increased).

Estonian CIT

A company established as a result of the transformation of a sole proprietorship may benefit from the so-called Estonian CIT, i.e., a lump sum tax on corporate income. It is considered a new entity starting its business activity, which provides certain advantages (e.g., no employment requirement in the first year), but at the same time excludes the preferential CIT rate of 9% for the first two years.

In the case of a contribution in kind, the regulations provide for a 2-year grace period before entering the Estonian CIT system, unless court rulings allow for an exception in a specific situation.

Company assets – how to dispose of them?

After transforming a sole proprietorship into a company, it is important to remember that the company’s assets belong to the company, not to the partner. Access to them is possible, but requires compliance with the forms provided for in the Commercial Companies Code, e.g. through:

• payment of dividends,
• remuneration of a member of the management board,
• leasing real estate or equipment belonging to a partner to the company,
• providing services to the company (with an invoice).

In multi-member companies, decisions regarding assets require resolutions of the partners. It is also worth remembering the regulations on transfer pricing and the potential return of the regulations on so-called hidden dividends.

Liability for obligations

Both conversion and contribution in kind allow the entrepreneur to limit their personal liability.

After the transformation, the previous owner is jointly and severally liable with the company for previous liabilities for 3 years. After this period, the liability expires and only the company is liable for the debts.

In capital companies, a partner risks only the contribution made. Personal liability arises only when he or she holds a position on the management board.

In the case of the sale of an enterprise, the buyer is jointly and severally liable with the seller for its liabilities, unless he or she can prove that he or she could not have known of their existence despite exercising due diligence.

What to choose – transformation or contribution in kind?

The decision to transform a business or contribute it to a new company is one of the key moments in the development of a company. Each of these solutions brings specific benefits, but also different legal and tax consequences. Transformation allows for continuity of the entity, which means that the company continues its existing contracts, cooperation agreements, and obligations, and the entrepreneur gains protection for their private assets. This solution is particularly beneficial for businesses that already have an established position and want to develop within a stable, secure structure.

On the other hand, establishing a new company and contributing the enterprise to it is an option more often chosen by people who are planning a new stage of activity, a change in their business model, or who want to bring in new partners. This process is often simpler in terms of organization and less costly, although it requires building the company’s history from scratch.

There is no single universal answer to the question of which solution is better — it all depends on individual goals, the type of business, and the risks that the entrepreneur wants to minimize. In such situations, it is worth seeking the support of an experienced law firm. A professional team of advisors will help you choose the most advantageous form of operation, develop a secure legal and tax structure, and guide you through the entire process of transforming or establishing a company step by step. This allows the entrepreneur to focus on what is most important — the development of their business.