October 2020

A Limited Liability Company - the most important information

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How to set up an LLC? When can a limited liability company start its business activity? Who represents a limited liability company and is responsible for the company's liabilities? What are the advantages of this type of business?

I decided to compile all the most important questions to give you a complete overview of the whole issue. Knowledge in a nutshell? - This is it! Sit back and enjoy reading what you need to know about a limited liability company.

What does a limited liability company mean? - short definition

A Limited Liability Company is one of the forms of business activity available in Poland. It is special and very popular form of business activity, mainly because of having so called separate legal personality. A limited liability company is a completely independent entity, which has among others: the right to incur obligations (e.g. loans) or take other legal actions, e.g. buying a car.


To put it figuratively, forming a limited liability company means establishing a new person - however, not existing in the physical world, but only on a piece of paper and in relevant registers.


 

From the economic point of view, the main advantage of a limited liability company is that it is regarded as a separate person, which acts on its own behalf and bears the consequences of its own actions. Therefore, a limited liability company is an ideal form for any investment in Poland. It is the most frequently chosen type of company by foreign investors.

LLCs - advantages and disadvantages

The structure of a limited liability company is well illustrated in the graphics below:

 

A limited liability company has a lot of advantages, but to use them properly, you must have a good understanding of how a limited liability company is structured and who represents the company and what roles they play in it.

The important persons in a limited liability company are as follows:

  1. Partners (also called shareholders) - individual people who own shares in the company (one person is enough to form such a company) or who act jointly (then called a "shareholders' meeting");
  2. Management Board - composed of at least one person, which manages the company;
  3. Supervisory Board - it may or may not be appointed, composed of a minimum of 3 persons, which supervises the Management Board.

This division is key to understanding the idea and principles of LLCs.

Shareholders (big circles in the graphics) are people who contribute capital (e.g. money) to the company. Thanks to the capital they contribute, the company has the means to start its business activity. It is very important for shareholders not to be liable for the company's obligations.

However, something for something... The partners do not run the day-to-day operations of the company. So it is not them who "manage" the company on a daily basis. The Management Board is responsible for current obligations of a limited liability company.


It is the Management Board that manages the daily tasks of the company, making decisions on current issues. The Management Board is responsible to the shareholders and external stakeholders (customers, contractors, etc.) for all decisions made.


 

The Supervisory Board is a supervisory body that may exist in a limited liability company. The Supervisory Board must be appointed if the company's share capital exceeds PLN 500,000 and there are more than twenty-five shareholders. In other cases it is not necessary. In small private companies or family companies where the shareholders have day-to-day control over the company's operations, it is rather unnecessary. The Supervisory Board is often present in companies established by foreign investors. In most cases, it is made up of representatives of the parent company and thus it supervises the Management Board. If you want to find out how to best set up a corporate structure in your company, you should contact us!

LLCs in Poland - liability of Shareholders and Management Board

According to the introduction, the biggest advantage of an LLC is its limited liability - it is even implied in its name.

Limitation of liability in a company can be divided into two types:

  1. As a limitation of liability of the Shareholders of the company
  2. As a limitation of liability of the company's Management Board

When referring to the liability of Shareholders - it is limited only to the value they contributed into the company. What the Shareholders have contributed to the company automatically becomes its property. They must take into account the risk that if the company goes bankrupt they will not get anything back. However, a shareholder is not liable above that level - so they will not be held responsible for the company's debts, failed investments, etc.

The liability of Members of the Management Board is broader in theory, but still petty in practice.

The rule (Article 299 of the Code of Commercial Companies) states that if the execution against the company proves ineffective, Members of it Management Board are jointly and severally liable for its debts - with all their assets. This rule is subject to significant limitations. Pursuant to Article 299 § 2 of the Code of Commercial Companies, this liability can be totally excluded.

A Board Member can be exempt from the liability for the company's debts if they prove that:

  1. They filed a bankruptcy petition in due time or, at the same time, a decision was made to open restructuring proceedings or to approve an arrangement in proceedings for the approval of the arrangement;
  2. The bankruptcy petition was not filed through fault of other persons, not their own;
  3. Despite the failure to file a motion to declare bankruptcy and the failure to issue a decision to open restructuring proceedings or to approve an arrangement in proceedings for the approval of the arrangement, the creditor has not suffered any damage.

The rules of limiting liability in an LLC - I have described the rules of limiting liability of both Shareholders and Management Board in detail here, so I invite you to read it if you are looking for detailed information on the subject.

 

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Polish LLCs - their history in a nutshell

The formation of a limited liability company was a milestone allowing for the economic boom Poland experienced in the 20th century. This legal form, which allows to develop business without responsibility, encouraged people to take more investment risk and make bolder economic moves. It is no coincidence that the lion's share of the automobile, aircraft and pharmaceutical corporations we know today were founded or began to develop at the turn of the 20th century.


It is easy to explain - as long as the main business model was an activity in which the entrepreneurs were responsible for all their assets, the willingness to take risks by introducing new products or taking large loans was limited. The emergence of a company, which made it possible to borrow a significant amount of money while allowing you to not worry about the success of the business (or at least worry less), was a real breakthrough.


 

I think we are currently in a similar "development" place in Poland. After years of communism, when private business was out of the question, in 1990s Poles started to set up sole proprietorships and develop small businesses. The next (and natural) step towards the evolution of business activity was the recognition of the disadvantages of sole proprietorships - mainly through the personal liability of the businesspersons.

This resulted in an increasing interest in the limited liability company form. Immediate transition to the limited liability company form was not possible mainly due to legal barriers - setting up and running such a business model was expensive and complicated. Fortunately, we have also undergone a revolution in this field and a limited liability company is now a form of business for everyone.

A limited liability company gives you economic freedom and allows you to develop your business beyond the scope of sole proprietorships or partnerships. It is also a great form of business for foreign entrepreneurs who want to open a business in Poland.

How to set up a limited liability company?

A limited liability company can be established in two ways:

  1. Through conclusion of a limited liability company agreement with a notary public (in the form of a notarial deed) and then filing an electronic application for registration of the company in the National Court Register through the Court Register Portal;
  2. Through conclusion of a memorandum of association in an electronic form via the S24 portal provided by the Ministry of Justice and filing an electronic application for registration of the company with the National Court Register via the S24 portal.

The first method is time-consuming (you have to wait for the registration in the National Court Register), as well as more expensive (notarial fees, and if the founder is a foreigner also the cost of a sworn translator, who has to be present during the procedure). However, it allows to conclude the articles of association with the content tailored to the needs or expectations of the shareholders (e.g. with regard to special clauses like drag along or tag along).

The second method should be faster and cheaper, but it allows to conclude the articles of association only according to an uncomplicated template.

Co zrobić, jeżeli ktoś potrzebuje spółki na już, a jednocześnie (nie na już) wymaga skomplikowanej umowy, regulującej szczegółowe prawa i obowiązki wspólników? Szczęśliwie można połączyć obie metody w dwóch krokach:

  1. Set up a company in the S24 system;
  2. When it appears in the NCR (KRS) system (after approx. 7 days), you should go to a notary to change the articles of association to the ones that you need.

Thanks to this method, the company will be immediately visible in NCR (KRS) (with TAX ID (NIP) and NCR (KRS) numbers) and will be able to freely operate on the market. In the meantime, the amended agreement is reported to the National Court Register (the new agreement will be in force from the moment it is registered in the National Court Register), but waiting for the changes to be registered does not paralyse the operation of the company - in our Law Office we often carry out such processes from the beginning to the end. So if you are interested, please contact us. You may also find more information in our article on how to establish a limited liability company in Poland.

Limited liability company or business activity - costs

The general opinion is that running a limited liability company is expensive and this is the reason why it is not economic to establish it, e.g. in exchange for a sole proprietorship. I personally believe that this is not true. The dynamically changing market makes it paradoxically easier and cheaper to run an LLC.

The costs that may differentiate an LLC from, for example, a sole proprietorship are as follows:

  1. The obligation to keep full accounts,
  2. Reporting obligations - such as e.g. the obligation to file financial statements;
  3. Fees connected with registers (National Court Register);
  4. The requirement of taking some actions in the form of notarial deeds.

Perhaps once these costs on an annual basis amounted to thousands of PLN, but the situation has long since changed. Especially in case of small LLCs, the total costs do not have to be high:

  1. Competition in the market for accounting services means that the price of such services for an LLC starts at 200 PLN per month, not much more (if at all) than a one-person business;
  2. The transition to digital handling of the registration of financial records has meant that financial statements can already be filed with no payments.

In many cases, the day-to-day running of a limited company is no more expensive than running a sole proprietorship. If you would like to read more about the advantages and disadvantages of a limited liability company. - I invite you to read the post, available here.

An LLC - summary

A Limited Liability Company (Spółka z o.o.) is a very useful legal form, which allows you to take more risk, reduce liability and, as a result, develop your own business in Poland. If you are interested in this subject, please, feel free to read the other entries on the blog!

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