maj 2022

A limited liability company – pros and cons

7 minut
Spis treści

A limited liability company is entering the podium as the main form of conducting business activity in Poland.

Despite some stereotypes about an LLC which still appear, more and more entrepreneurs, including foreign investors, invest in this type of business.

Why is it worth to set up a Polish LLC? In a nutshell - this type of business is simply a better legal form. A limited liability company is easy to set up, you need no other shareholders than yourself, contrary to popular belief it is not expensive and on top of that it almost completely excludes personal liability for debts.

An LLC – who is liable for debts? Liability of the shareholders and management board

According to the above introduction, the greatest advantage of an LLC is the limited liability - this results from its very name. This limitation of liability can be divided into two types:

  1. Limitation of liability of the LLC’s shareholders.
  2. Limitation of liability of the LLC’s management board.

Regarding the liability of shareholders - their liability is limited solely to the contribution they made to the company. The contribution a shareholder made  to the company becomes its property (e.g. money or other values contributed in kind), therefore one must take into account the risk that if a company goes bankrupt – a shareholder will not get their contributions back. Despite the loss of their part of the capital, a shareholder will not be held responsible for the company's debts, failed investments, etc.

Therefore, an LLC is an excellent choice for investments, including for example, starting business in Poland.

How does limited liability of shareholders work in practice? I will explain it with a (simplified) example:

Jan and Paweł set up an XYZ LLC and become its shareholders. Each of them contributes 20,000 PLN to the company and also Jan contributes a computer and Paweł contributes a printer. Let's assume that the company is not doing well and has 200,000 PLN in debt. The creditors start the enforcement of the company's assets, which allows them to recover the total amount of PLN 40,000. For this reason:

  1. Neither Jan nor Paweł will get their 20,000 PLN back,
  2. Jan will not get his computer back,
  3. Paweł will not get his printer back.

The money and equipment are forfeited to creditors. However, there still remains a debt of PLN 160,000 and for this debt both of them (as shareholders) will not be liable. It does not matter how many private assets they have (e.g. as a parent company), how much cash, how many houses or cars they possess - none of their assets will be seized on account of the company's debt. Their liability is limited solely to what they contributed to the company.

How does the limitation of the management board’s liability work? Well, the liability of members of the management board is much higher in theory, but in practice – it is still low.

The general rule (Article 299 of the Commercial Companies Code) provides that if enforcement against a company proves unsuccessful, members of its management board are jointly and severally liable for its obligations - with all their assets.

Coming back to the example above – if Jan and Paweł were members of the management board of XYZ LLC they would be liable for the remaining PLN 160,000 of the debt with their own assets.

The board members are jointly and severally liable, so each of them is responsible for the entire PLN 160,000. This constitutes a big convenience for creditors - it is enough that at least one member of the management board has assets to recover the money.

However, thanks to the rules described also in Article 299(2) of the Commercial Companies Code it is possible to exclude such liability entirely, and thus not to be liable for anything at all.

A member of a management board can be exempted from liability for company's debts if they prove that:

  1. a bankruptcy motion was filed at the right time or that at that time a ruling on opening of restructuring proceedings or on the approval of an arrangement in the proceedings in the matter of approving the arrangement was issued;
  2. the failure to file a bankruptcy motion was not through their fault;
  3. even though no bankruptcy motion was filed and no ruling on opening of restructuring proceedings was issued or no arrangement was approved in the proceedings in the matter of approving the arrangement - the creditor has not suffered any damage;

In business practice, those three possibilities provide members of the management board with a good chance to completely avoid the liability. Only one of the above conditions needs to be met. If the management board duly supervises  company's affairs - exemption from liability by, for example, filing a bankruptcy motion, remains in the hands of the management board.

This is particularly important when establishing companies as part of an investment in Poland. The aforementioned rules allow to hire professional members of the management board (or to have these positions taken by investor's representatives)which allows not to worry about their liability.

If you want to learn more about conducting business in Poland and liability – make sure to contact us.

A limited liability company and social security contributions. When an LLC does not pay social security contributions?

There are two rules as to whether or not to pay social security contributions:

  1. In case of shareholders – if a company has at least two shareholders neither of them pays social security contributions.
  2. Board member remuneration vs social security contributions – remuneration paid based on a resolution on appointing a given person as a member of the management board is exempted from social security contributions (although it is subject to health insurance contributions as of January 1, 2022 - read more in post on the Polish Order). If a member of a management board is employed by a company based on the contract of employment or mandate contract – social contributions are settled according to general rules.

As I wrote before, a shareholder of an LLC is not liable for its debts and that is why it is worth for e.g. a wife or husband, a brother or parents to join a company (unless we have natural candidates for shareholders). This will allow to avoid the obligation to pay social contributions by the main shareholder, who will in fact run the business through the company.

This will not be a case if another company, e.g. a foreign one is a shareholder of an LLC. Then, of course, social security contributions are not due.

A limited liability company – taxes

How are limited liability companies required to settle their taxes?

What taxes are paid by an LLC?

The disadvantage of an LLC is double taxation. First, the company pays income tax (CIT) and if it distributes profits to its shareholders - they also pay tax (PIT).

The tax paid by a company may amount to 9% or 19%. The companies with revenue earned not exceeding the equivalent of EUR 2,000,000 in a tax year may benefit from lower taxation.

This amount is converted into PLN at the average exchange rate of EUR announced by the National Bank of Poland on the first working day of the tax year. Having exceeded the said level of revenue, the company is obliged to pay 19% tax. Furthermore, companies established as a result of transformation from another form of business activity (except for transformation of a company into another company), as well as if a contribution in kind in the form of an enterprise or an organized part thereof with a value exceeding EUR 10,000 are also obliged to pay 19% tax.

In such cases, the company is taxed with 19% CIT in the year in which the transformation took place or a contribution in kind was made, as well as in the following year.

The rules may change if a company in Poland is set up by a foreign entity the company will be a subsidiary of. In this case, the taxes between these companies may be settled in a different, more beneficial way. You may read more about taxes in Poland paid by companies in our article „Taxes in Poland’.

How to avoid double taxation in an LLC?

There are many legal ways to avoid double taxation of a limited company which will be especially helpful for small companies. In order to avoid paying tax twice you should make sure that the company has no income. Here are some of the main ways to avoid double taxation:

  1. You can become a member of the management board of the company, with the remuneration paid on the basis of a resolution – this method is favorable due to the exemption of such remuneration from social security contributions;
  1. You can enter into a mandate contract between the company and your own sole proprietorship and invoice the company;
  1. You can conclude a contract for a specific work and bill it to the company – of course all the conditions for concluding this contract shall be fulfilled;
  2. You can rent your own premises to the company and receive remuneration for the rent;
  3. You can charge the company with expenses of business trips - payment of funds to a shareholder (as reimbursement for business trips, business travel or training) is a cost for the company.
  4. Finally, you can receive remuneration from the company for non-monetary services performed for its benefit, pursuant to Article 176 of the Commercial Companies Code.

All of the actions described above incur tax costs by the company, and therefore the reduction of income on which tax must be paid. However, it is not the case that each of these actions can be taken discretionally - each of them requires to meet adequate requirements.

These methods will be applicable to small companies, although some of them will also be helpful in optimizing international holding companies. For example, subsidiaries may conclude various IP or franchise agreements between each other. However, each case requires careful legal analysis.

If you have been wondering how to set up an LLC in Poland, make sure to contact us.

Pros and cons of a limited liability company – summary

In my opinion, an LLC is an advantageous form of conducting business in Poland, having far more pros than cons.

Running a limited liability company may involve more formalities or slightly higher operating costs, but in comparison with the quality of its advantages (e.g. possibility to save on social security contributions, avoidance of liability for debts) - overall, establishing a limited liability company is very beneficial for both domestic and foreign entrepreneurs.

I also invite you to read our post regarding general information on LLC and post how to set up an LLC.

And if you need help with handling an LLC– contact us, we will be glad to assist!

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