Limited Liability Company (LLC) in Poland – Pros and Cons

What is a Limited Liability Company in Poland?

An LLC in Poland is a capital-based commercial company with legal personality, meaning it operates as a separate legal entity independent of its shareholders. It can be established by one or more individuals or legal entities. The minimum share capital required to form an LLC is only PLN 5,000, making it accessible to a wide range of entrepreneurs.

Advantages of an LLC in Poland

Protection of shareholders’ personal assets

The greatest advantage of an LLC is the limitation of shareholders’ liability for the company’s obligations. Shareholders are only liable up to the amount of their contributions, ensuring that their personal assets remain protected (with some exceptions). This is a significant benefit compared to sole proprietorships, where the business owner is personally liable for all debts.

Tax optimization opportunities

An LLC allows for a more flexible approach to taxation. For example, under certain conditions, a company can benefit from the so-called Estonian CIT, where the effective income tax rate is 10% for small taxpayers and 20% for others.

Additionally, shareholders in LLCs with multiple stakeholders are not required to pay social security contributions (ZUS), which can result in significant savings compared to sole proprietorships.
(Note: In single-member LLCs, the shareholder is subject to mandatory social and health insurance contributions.)

Legal personality

Because an LLC has legal personality, it can acquire rights, incur obligations, sue, and be sued in its own name. This facilitates large-scale operations and allows the company to enter into favorable contracts with business partners.

Low ninimum share capital

The requirement for a minimum share capital of only PLN 5,000 makes establishing an LLC accessible to a wide range of entrepreneurs, including small and medium-sized enterprises.

Challenges of operating an LLC in Poland

Double taxation of profits

An LLC is subject to double taxation, which is one of the main differences compared to sole proprietorships.

1. The first stage involves corporate income tax (CIT), which is 19% for most companies and 9% for small taxpayers with annual revenues not exceeding EUR 2 million.
2. The second stage is personal income tax (PIT) of 19% on dividends paid to shareholders.

In practice, this means profits allocated for dividends are taxed twice. At first glance, this may seem less advantageous. However, in many cases, the effective tax burden in an LLC is lower than in a sole proprietorship, especially considering the absence of full ZUS contributions for shareholders. In sole proprietorships, ZUS contributions can significantly increase operating costs, making LLCs potentially more cost-effective even with double taxation.

Operating costs

Operating an LLC entails higher costs compared to sole proprietorships. Key expenses include the requirement for full accounting, which necessitates hiring a qualified accountant or using a professional accounting firm.

Other costs may include legal services for drafting contracts or resolutions and tax advisory services. Additional expenses may arise from the need for financial audits and annual reports. Depending on the size and nature of the business, these costs can significantly impact profitability, especially in the early stages of operation.

Formalized procedures for establishment and operation

Establishing an LLC is more complex than registering a sole proprietorship. It requires drafting an articles of association in the form of a notarial deed (unless using the S24 online system), registration with the National Court Register (KRS), and meeting various formalities.

During operation, the company must comply with numerous procedures, such as preparing financial statements.

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Options for transitioning to an LLC

If you currently operate as a sole proprietor, you can consider transitioning to an LLC. Common methods include:

1. Transformation of a Sole Proprietorship into an LLC
   This allows for a seamless transition to a new legal form while transferring the existing rights, obligations, and contracts to the LLC, ensuring business continuity.
2. Contribution of an Organized Part of the Business (ZCP)
   This involves contributing a defined and organized part of the business to a newly established LLC, including assets like real estate and equipment, as well as rights and obligations under contracts.
3. Sale of Individual Assets to an LLC
   This enables the gradual transfer of assets to a newly established LLC, offering flexibility and control over the process while adjusting the business structure to the new legal form.

Each of these methods has specific benefits and limitations that should be discussed with tax advisors.

You may also be interested in our other article – How to establish a limited liability company in Poland?.

Conclusion: Is an LLC right for you?

An LLC combines many advantages, such as protecting personal assets, tax optimization opportunities, and operational flexibility. While it comes with certain challenges, such as double taxation and higher costs, it is often an attractive alternative to sole proprietorships, especially in the context of growing risks and changing tax regulations.

If you are considering changing your business structure, we encourage you to take advantage of our tax advisory services. We can help you choose the best solution and guide you through the process without unnecessary complications. Schedule a consultation to learn more!