Transformation of sole proprietorship into a limited liability company

In order to address the needs of its customers, MDDP Outsourcing not only provides professional accounting services but also supports, among others, in management of the most important corporate processes. Thanks to their experience and expert knowledge, our specialists from the branch offices in Warsaw and Katowice help our customers with processes concerning, among others, transformation of the form of conducted business activity.

In cooperation with the MDDP tax consultancy specialists and the Osborne Clarke law firm, MDDP Outsourcing supports its customers at every stage of the transformation and helps them make the most favorable decisions.

Transformation of sole proprietorship into a limited liability company regardless of the amount of remuneration – our response to the actual need of the customer.

The dynamic growth of the conducted business activity often requires considering a change of its form.

We offer our customers support in the scope of, among others, transforming a sole proprietorship into a limited liability company. Such a solution brings many advantages such as restriction of the liability within the scope of conducted business activity or significant tax savings.

By using its knowledge and experience, MDDP Outsourcing supported the business transformation process of one of our customers from sole proprietorship into a limited liability company that settles its income tax according to the Estonian CIT regime.

Four premises for the change in the form of the conducted business activity.

1. Reduced personal liability within the scope of the conducted business

A natural person that runs a sole proprietorship is liable for their obligations with their whole assets, which means that creditors can pursue their claims also from the entrepreneur’s private assets.

In the case of a limited liability company, partners usually are not held personally liable for the company’s obligations. Most often, their liability is limited to the amount of the contributed share capital while debts constitute the sole responsibility of the limited liability company.

Settlement of income tax according to the Estonian CIT regime

• Possible taxation of income only at the moment of actual distribution of profit – deferment of the payment deadline of the tax liability
• Tax advantage within the scope of PIT for the partner
• A higher profit allocated for the payment of the dividend

Example:

(premise: the first payment of the dividend for the Estonian CIT, no hidden profits or expenses unrelated to the conducted activity and Estonian CIT at 20%, based on the example of the pre-tax and tax result for 2022).

A considerable reduction of the monthly advance payments for the CIT – possibility to use the generated funds for the ongoing business objectives

The main expenses subject to the Estonian CIT paid by the customer refer to the cars used for mixed purposes, where 50% of such expenses must be taxed at the level of monthly advance payments. In a situation when our customer’s business activities generate high income, the application of the Estonian CIT constitutes a major relief in the scope of monthly advance payments for the CIT.

Example:

On a half-year basis, the used solution brought an advantage of over PLN 1 million that the taxpayer can invest in the ongoing growth of their business. The monthly advantage amounted around PLN 170,000

     2. Change of the form of conducted business activity vs. the limitation of budgetary liabilities for the health insurance contribution to the Social Insurance Company.

The health insurance contribution in the case of a sole proprietorship is based on the income generated in the month preceding the month for which the contribution is paid. In the case of our customer who paid a flat tax, the health insurance contribution is 4.9% of the generated income.

According to regulations of the Social Insurance Company, partners of single-member limited liability companies are considered as persons conducting non-agricultural activity. In their case, regardless of the amount of remuneration or revenue, the health insurance contribution in 2024 constitutes a fixed amount of PLN 699.11 per month. As one may easily notice, the change in the form of the conducted business activity greatly reduced our customer’s budgetary obligations connected with the health insurance contribution to the Social Insurance Company.

Example:

As we can see, the advantages resulting from the change of the form of conducted activity are very obvious.

    3. Change of the form of conducted business activity vs. no obligation of solidarity levy payment

Our customer who runs a sole proprietorship generated income exceeding PLN 1,000,000, which obligated them to pay the solidarity levy. It was calculated based on the surplus income of over PLN 1 million and the amount of the levy was 4% of the surplus income subject to tax according to rules provided for in the Act on PIT.

The solidarity levy is charged on income specified in:

• Art. 27 sections 1, 9 and 9a of the Act on PIT (income subject to taxation according to the tax scale, among others: income from employment, business activity, pension and disability pension, contracts for a specific work and contracts of mandate, etc.);
• Art. 30b of the Act on PIT (capital profit subject to 19% tax);
• Art. 30c of the Act on PIT (income from non-agricultural business activity or other special sectors of agricultural production subject to 19% flat tax);
• Art. 30f of the Act on PIT (income from a foreign controlled unit subject to19% tax).

The income that is not covered by the obligation of solidarity levy includes, among others:

• revenue on rental or lease subject to lump-sum tax on registered income;
• income on sales of real property (outside business activity);
• passive income, such as interest on loans, bonds, dividends and other income on participation in the profits of legal persons.

Due to the transformation of a sole proprietorship subject to a flat tax of 19% into a limited liability company the profit of which is paid to the partner in form of a dividend, our customer does not need to pay the solidarity levy on a yearly basis.

The example above clearly presents that the change of the form of business activity made by our customer once again proved to be an extremely advantageous solution.

In order to meet satisfy their needs and meet their expectations, we not only supported them in searching for the most optimum tax solutions but also helped them go through the entire process of transformation of a sole proprietorship into a limited liability company.

We offer support at every stage of the said process.

Transformation of sole proprietorship into a limited liability company can be divided into seven main stages:

1. Preparation of the transformation plan along with appendices, including a financial statement drawn up for the purpose of the transformation.
2. Submission of the application for appointment of an auditor to inspect the transformation plan.
3. Verification of the transformation plan by the auditor.
4. Preparation of the declaration regarding the entrepreneur’s transformation.
5. Appointment of members of bodies of the transformed company and conclusion of the articles of association.
6. Submission of the transformation plan to the National Court Register.
7. Notifying the employees on the transformation of the workplace, at least 30 days before the transformation.

We also offer our customers comprehensive services within the scope of any registration obligations connected with the Tax Office, the Polish Social Insurance Company (ZUS) and the Central Registration and Information on Business (CEIDG), both for the transformed company as well as in the context of deregistration of the current activity.

What is more, in relation to choosing the Estonian CIT regime for the company income, we prepared a preliminary CIT-KW adjustment that must be filed along with the CIT-8 statement to the relevant Tax Office.

Agata Śmiałek, Team Leader w MDDP Outsourcing