Why can company transformation be crucial for your business?
Company transformation allows you to adapt your business operations to current business needs while maintaining continuity of operations. It is a process that goes beyond a simple change in the legal form of the company. It requires consideration of many legal and organizational aspects that may prove challenging for entrepreneurs. In this article, we will present the most important practical issues related to company transformation. We will also share experiences from transformation processes carried out by our law firm.
Preparing for Transformation
Before you decide on company transformation
Company transformation is a solution that can bring numerous benefits to both shareholders and the company itself. Transformation can be, among other things, a step toward increasing the scale of the company’s operations. Thanks to this, it will gain credibility in the eyes of potential investors and a chance for recapitalization and development. Through transformation, shareholders can also limit their liability for the company’s obligations and thus better protect their private assets. Transformation sometimes also enables tax optimization (of course, within the permitted scope) or improvement of company management.
Due diligence – the first step before changing the company form
The first thing you should do before transforming a company is its internal due diligence. Why? Because problematic issues always emerge at the least appropriate moment.
Company transformation – most common problems
Our experience shows that a significant portion of companies planning transformation are not aware of the legal obstacles contained in their own documentation. One overlooked issue can derail the entire transformation procedure or generate unplanned costs.
Non-transferable permits and licenses
As a general rule, the transformed company will automatically be entitled to all rights and obligations of the company being transformed (including all permits, licenses, and exemptions). However, there are certain exceptions to this rule. These include, for example, permits and licenses for road transport operations, the transfer of which to the transformed company requires submission of an application and issuance of a decision by the authority.
Co-financing agreements
Particularly problematic are agreements concluded with the Polish Development Fund (PFR), in which clauses on maintaining business continuity raise interpretational doubts. In our practice, we encountered a case where doubt arose as to whether the transformation would violate the provisions of such an agreement. This is a question whose answer could cost the return of part or even all of the co-financing.
“Change of control” clauses
As a general rule, the transformed company becomes a party to all agreements concluded by the company being transformed. However, agreements with contractors may contain provisions enabling them to terminate these agreements in the event of a change in the company’s structure, including its legal form. It is therefore possible that the day after transformation, the company will lose its most important client.
Name conflicts
The company’s name should be sufficiently different from the names of other entrepreneurs (including companies) operating in the same market. If there is too much similarity, there is a risk that the court will refuse to register the transformation. This may also result in a costly lawsuit from a company whose right to the firm name has been violated. It should also be remembered that when changing its name, the transformed company is obligated to provide the former name alongside the new one, together with the word “formerly” – e.g., XYZ sp. z o.o. (formerly: ABC sp.j.). This obligation rests on the transformed company for one year from the date of transformation.
Estonian CIT
Transforming a company may hinder or even prevent the selection or maintenance of this form of taxation. One of its basic conditions is a simple ownership structure – shareholders of a company taxed under Estonian CIT can only be natural persons. This is an issue that can generate significant tax costs if the transformation has not been properly planned. Particularly when it is necessary to replace a shareholder that is another company.
Universal succession – what does it mean in practice?
The transformed company essentially enters by operation of law into all rights and obligations of the company being transformed. It will usually also be a party to all agreements concluded by the company being transformed, which it will continue to perform unchanged. Therefore, if the company concluded an agreement with a contractor for the supply of certain goods or provision of certain services, after transformation such agreements will continue to be in force.
However, it is worth remembering that sometimes agreements contain provisions linking negative consequences to transformation. Sometimes transformation of a company carried out without the contractor’s consent or failure to notify them about the transformation may lead to them charging a contractual penalty or even terminating the agreement. Such consequences typically occur in agreements with banks.
In practice, there are also situations where contractors use transformation as a pretext to force changes in contract terms. For security purposes, it is therefore worth introducing a provision prohibiting renegotiation in such a situation.
What happens to employees after transformation?
Transformation is also neutral from the employee perspective. It is not treated as a transfer of an establishment. All employees of the company being transformed automatically become employees of the transformed company, thus maintaining continuity of employment.
The transformed company will also retain the REGON and NIP numbers of the company being transformed.
Tax aspects – what does the accountant not always remember?
The decision to transform a company is often driven by the need for tax optimization. A transformation that was not preceded by a comprehensive analysis of its consequences may produce the opposite effect to that intended. It may lead to the company incurring unplanned costs instead of achieving savings.
The most important matters from the company’s perspective that need attention are double taxation (including profits earned by the company before transformation), settlement of losses from previous years, and tax on civil law transactions.
Company transformation – how to save time and money?
There is a widespread belief that company transformation takes several months. The entire procedure is prolonged particularly by formalities related to notifying shareholders about the planned adoption of the transformation resolution. However, full agreement among shareholders and a clear transformation plan enables completion even within a month.
Practical tips from experts – record 13 days
In our practice, we use a solution that bypasses the stage of notifying shareholders and allows for saving money and time. It enabled us to complete a transformation in a record time of 13 days – from receiving the order to registering the transformation in the National Court Register. However, this required exceptionally efficient cooperation with shareholders and accounting.
Summary
Transformation is an opportunity for a company to develop, change its organizational structure, increase shareholder security, or optimize taxes. It is therefore a strategic decision requiring knowledge, practical expertise, and thorough analysis that will determine whether the transformation will bring the expected benefits. The key to proper and effective transformation is appropriate preparation of the entire process. Our team will help you choose the best solution and efficiently carry out the entire procedure.
