Corporate Consulting – Company Conversion
There are many factors to consider when choosing a company structure. The choice you make will have an impact on several aspects of your organisation, including taxes, liability, ownership succession, and much more. It is important to consult with an accountant and attorney to help you select the form of ownership that is right for you.
Reasons for conversion of your business structure
The decision to change the company practice is made in connection with the economic condition of the entity, in order to optimise the management (bearing in mind the tax aspects). The converted company continues to hold the same rights and obligations, and continues the business, but under a new legal form.
The decision to convert the legal form may also be dictated by a desire to limit liability, because in personal companies (i.e. certain types of partnerships) the partners may be personally liable for the debts of the partnership, but in capital companies the shareholders’ liability is generally limited, and they are at risk only for the consideration they have provided for the shares. Moreover, conversion into a capital company may be tied to growth in the scale of the business or an intention to float the company on the stock market (which is possible only in the case of a joint-stock company).
Companies are sometimes converted into partnerships in order to reduce tax liabilities. (In the case of a company, there is income tax at both the corporate level and the shareholder level, but a partnership is a pass-through entity for tax purposes: only the income of the partners is taxed.)
Here are the some critical items to consider when selecting or re-selecting your business structure:
- Protection of personal assets – Sole proprietors and partners have unlimited personal liability for business debt or law suits against their company. Creditors can attach homes, cars, savings or other personal assets. Incorporating or forming a capital company helps separate your personal identity from your business identity. Corporation shareholders or capital company members have only the money they put into the company to lose.
- Pass-Through Taxation – For sole proprietors and partners, company profits/losses pass directly through to their personal tax returns. For corporations, profits are taxed, then the profits that are distributed to shareholders as dividends are taxed again on the personal level. This ‘double taxation’ can be avoided while still enjoying the benefits of personal asset protection by forming a Sp. z o.o. & Co. Sp. k. – a limited partnership with, typically, the sole general partner being a limited liability company. It can thus combine the advantages of a partnership with those of the limited liability of a corporation.
- Uninterrupted business – Sole proprietorships and partnerships may automatically end or become legally entangled when one owner dies or retires. Capital companies are enduring legal business structures. They may continue regardless of individual officers, managers or shareholders. Ownership of capital companies may be transferred, without substantially disrupting operations, through sale of stock.
- Access to Capital – Sole proprietorships and partnerships may find investors hard to attract, because of personal liability. Investors are more likely to purchase shares in a corporation where there is a separation between personal and business assets.
Forms of conversion
There are two main forms of conversion:
- Conversion of a partnership into a capital company,
- Conversion of a capital company into a partnership.
Rights and obligations after conversion
As from the conversion date, the post-conversion entity assumes all of the rights and obligations of the pre-conversion entity, specifically including concessions, exemptions and entitlements (unless otherwise provided by law or by the decision establishing such rights).
The conversion date is the date when the post-conversion entity is entered in the National Court Register (KRS). The entry is a technical matter, and for organisational or tax reasons parties often request that the conversion be registered on a specific date. The court is not bound by such request, but generally will comply.
In the case of conversion into a company, the company assumes all tax law rights and obligations of the pre-conversion entities.
In the case of conversion of a company into a partnership, the partnership assumes the totality of the tax law rights and obligations of the company, but it does not assume the rights and obligations that were held by the shareholders, because they do no function in partnerships. After conversion, the partners becomes the taxpayers, and are subject to personal income tax.
Main stages of conversion
- Preparation stage:
- Preparing conversion documentation (conversion plan and enclosures)
- Decision stage:
- Filing of conversion plan with the National Court Register and publication in Monitor Sądowy i Gospodarczy
- Application to appoint an auditor to examine the conversion plan
- Notice of the conversion to the shareholders/partners of the entity being converted (twice)
- Adoption of conversion resolution
- Registration stage
- Filing of motion for conversion,
- Registration of the conversion.
In the case of conversion of a company into a partnership, it is important to examine the tax aspects of the conversion carefully. If the company has supplementary capital, upon conversion these funds will be treated as income of the partners, which will be subject to personal income tax.
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How getsix® can help?
If you are interested in a consultation, or if you would prefer getsix® to assist you in the different stages of conversion of your business, please do not hesitate to contact us. Our experts form tax, legal and accounting would be happy to assist you.