Transformation of a sole proprietorship into a company – what does the process look like?

Transformation of a sole proprietorship into a company.

The economic situation and the development of businesses often require the transformation of sole proprietorships into commercial law companies. Such a transformation does not create a new entity but merely changes the legal form of the existing entrepreneur. What happens to the profit earned by the entrepreneur after the transformation into a commercial law company?

Transformation of a sole proprietorship into a company – the process:

  1. Preparation of a transformation plan for the entrepreneur, including attachments and the opinion of a certified auditor.
  2. Submission of a statement of transformation by the entrepreneur.
  3. Appointment of members of the transformed company’s organs.
  4. Conclusion of a company agreement or the signing of the statute of the transformed company.
  5. Registration of the transformed company in the register and removal of the transforming entrepreneur from the Central Register and Information on Economic Activity.

Transformation involves changing the organizational form of the entity without altering its activities and ownership structure. The transforming entrepreneur becomes the transformed company upon registration.

The transformed company inherits the rights and obligations of the entrepreneur, including permits, licenses, and tax incentives, unless the law provides otherwise.

Tax consequences of the transformation:

  • The transforming entrepreneur must specify the share capital or share capital of the transformed company in their transformation statement.
  • If the value of the entrepreneur’s business exceeds the share capital of the transformed company, the surplus goes to the reserve capital of the company, treated as “agio.”
  • Payment of funds by the transformed company from profits earned before the transformation is considered income from participating in the profits of legal entities and is subject to personal income tax.

It’s worth noting that in jurisprudence, there may be a different interpretation suggesting that the payment of funds from the reserve capital of the transformed company could be tax-neutral.

In any case, it is essential to assess the specific circumstances and legal provisions to determine the tax consequences of the transformation accurately.

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