Why sole proprietorship may no longer pay off

This article will answer the following questions:

• Who is a business owner, what are the definitions of a business entity and business activity?
• What are the risks associated with being a sole proprietor?
• To whom does the issue of succession apply?
• Is succession management a permanent solution and one worth endorsing in a sole proprietorship?
• How to secure a business in the event of the business owner’s death?

The vast majority of business owners in Poland conduct business in the form of a sole proprietorship, based on an entry in the Central Registration and Information on Business (Polish: CEIDG). The key feature of such businesses is then their close connection with the person running them whose death entails a number of practical problems that prevent smooth continuation of the business operation. Is it therefore worth running such a risky form of business, or is it better to consider transforming a sole proprietorship into a limited liability company? Let's find out! 

Business owner, business entity, business activity…

A business owner may, alternatively, be a natural person, a legal person or an organisational unit that is not a legal person to which the law grants legal capacity (Art. 33¹ § 1 of the Act of 23 April 1964, the Civil Code – consolidated text, Journal of Laws of 2023, item 1610, as amended, hereinafter referred to as the "Civil Code", "CC").

Other definitions of a business owner and business activity are also indicated in special non-code provisions, including, in particular, the Act of 6 March 2018 – Entrepreneurs' Law (consolidated text, Journal of Laws of 2024, item 236, hereinafter referred to as the "Entrepreneurs' Law").

Pursuant to Art. 3 of the Entrepreneurs' Law, business activity is an organised profit-bearing activity, carried out on one's own behalf and on an ongoing basis. The most common case in which such business activity is carried out is conducting a business in the objective sense (Art. 55¹ CC)¹. 

Under Art. 55¹ CC, a business entity is an organised set of intangible and tangible assets intended for conducting business activity. It includes in particular:

1. a designation that individualises the business entity or its separated parts (name of the business entity);
2. ownership of immovable or movable property (including equipment, materials, goods and products), and other property rights to immovable or movable property;
3. rights arising from lease and tenancy agreements pertaining to immovable or movable property and rights to use immovable or movable property arising from other legal relationships;
4. receivables, rights arising from securities and cash;
5. concessions, licences and permits;
6. patents and other industrial property rights;
7. proprietary copyrights and related rights;
8. business secrets;
9. journals and documents related to running a business.

The list of business assets under Art. 55¹ CC is not exhaustive, as indicated by the phrase in particular used there. Thus, a business may constitute a set of a larger or smaller number of assets, including those expressly indicated in Art. 55¹ CC, or not named directly².

In the case of individual business activity, the subject of the rights and assets that make up the business is its owner, i.e. the entrepreneur being a sole proprietor, entered in the CEIDG. The business is therefore closely linked to the person of its owner and – unlike commercial law companies – does not have a legal personality that would be separate from the owner.

What are the risks associated with running a sole proprietorship?

The greatest risk associated with running a sole proprietorship results from the close connection between the business and its owner, which becomes particularly problematic in the event of the death of the person.

First of all, unless a succession manager has been appointed during the lifetime of the person running the business (or by certain persons after the death of the business owner), the death of the business owner makes it impossible to continue the business. This means in particular:

• expiration of employment contracts, 
• expiration of powers of attorney, 
• preventing the performance of contracts concluded with contractors, 
• preventing the use of the business owner’s NIP (tax identification) number, 
• expiration of administrative decisions, 
• loss of access to bank accounts.

Other risks associated with running a sole proprietorship also include full liability of the sole proprietor for the obligations of their business and the need to constantly monitor frequent changes in Polish tax law, and the fact is they significantly increase the levies of business owners every year. All these translate to the fact that if we wish to weigh the advantages and disadvantages, sole proprietorship seems to be losing position.

“But I still have time…”

The issue of business succession mainly affects business owners who decided to establish a sole proprietorship in the first years of the Polish political transformation, i.e. 50/60-year-olds.

The generation of today's doyens and executives is the first generation in the reality of the Polish economy to face the challenges that follow the succession³. These are the ones who should, in the first place, think sensibly about the plan for the coming years and make conscious decisions that will allow them to “immunise” the business to fortuitous events. 

This, however, does not mean that younger people should not be investigating into the problem today. On the contrary, every business owner who, regardless of their age, has been operating on the market for some time already should consider changing the form of conducting business – in particular those who have switched to the so-called large ZUS (i.e. higher social insurance contributions).

Why succession management can’t solve all problems related to inheriting a sole proprietorship 

The succession management has become a partial remedy to the problems with terminating the legal existence of a business after the death of the business owner running a sole proprietorship, as referred to in the Act of 5 July 2018 on the succession management of an individual's business entity and other facilities related to the succession in business entities (consolidated text: Journal of Laws of 2021, item 170, hereinafter referred to as the "Act on Succession Management").

Although the regulations allow the family of the deceased business owner to appoint a succession manager after that person’s death, it can only be done two months after the date of the business owner's death, at the latest (Art. 59, § 1 of the Act on Succession Management). This deadline regards substantive law and cannot be reinstated⁴. 

In order to appoint a succession manager, the family of the deceased must first submit a declaration of acceptance of the inheritance (as provided for in Art. 1012 of the Civil Code).

However, the deadline for submitting the declaration of acceptance of the inheritance is six months after the day on which the heir learned of the legal grounds for their appointment to inheritance resulting from Art.1015 § 1 of the Civil Code⁵. This means that the need to appoint a succession manager of the sole proprietorship will significantly shorten the time to meet this obligation.

Therefore, in order for the succession in a sole proprietorship to be possible, the family of the deceased business owner will have to immediately identify the heirs, confirm the existence of wills, find out who wants to inherit from the deceased, etc.⁶  Two months is an exceptionally short time to make such arrangements and take important decisions that determine the future fate of the business entity – especially considering the fact that these actions must be taken during the time of mourning.

As a matter of fact, the succession management is of a temporary and transitional nature only, as the standard period for sorting out matters of the inheritance related to the business activity conducted by the late business owner is two years (Art. 59, § 1, p. 7 of the Succession Management Act) 7 – unless, for some important reasons, this period is extended by the court (up to five years from the date of the business owner's death – Art. 60 of the Succession Management Act). Importantly, this period is not interrupted or suspended by actions aimed at settling inheritance matters, e.g. court proceedings for the division of the estate⁸. 

The law on succession management is not intended to enable the transfer of a business as a whole but only to maintain the legal fiction of its existence despite the death of the owner⁹.

The time after the appointment of succession management is extremely busy for the succession manager  

Immediately after the establishment of the succession management, the succession manager must prepare and submit to a notary public a list of inventory pertaining to the inherited business, including the assets of the inherited business (taking into account their state and value as at the time of the owner's death), as well as the estate debts related to the business activity of the deceased owner and their amounts (as at the time of the business owner's death – Art. 28, § 1 of the Succession Management Act).

We should also clarify the fact that, as a result of the appointment of the succession manager, the business entity does not become the "property" of the manager. On the contrary, it continues to belong to the owners (e.g. statutory or testamentary heirs), which is associated with certain obligations. 

The succession manager may act completely independently as far as they carry out regular management activities. Where the activities exceed the ordinary scope of management, the manager may proceed only with the consent of all owners of the inherited business, and in the absence of such consent – with the permission of the court (Art. 22 of the Succession Management Act).

In terms of the profits of the inherited business (and advances on this profit), the succession manager is the debtor of the owners of the inherited business. The owners of the inherited business may annually request the division and payment of profit (less the public law liabilities and uncovered losses) and the payment of advances on the anticipated profit (Art. 27 of the Succession Management Act)¹⁰.

The above principles inevitably lead to the conclusion that the succession management is not only a somewhat imperfect solution but also one requiring a large organisational effort and efficient actions of the succession manager. What is worse, the effect of these pursuits is not permanent.

How to best protect the business in the event of a business owner’s death and why you should opt for transforming it into a limited liability company 

The best solution to the problem of succession in family businesses is undoubtedly the transformation of a sole proprietorship into a limited liability company while its owner is still alive.

Firstly, the transformation of a business is a long-term solution and does not require the use of merely temporary solutions related to the appointment of a succession manager. The business, as a standalone legal entity, is separated from the owner. The Commercial Companies Code stipulates the rules of conduct in the event of the death of a shareholder and – what is more – shareholders may already in the articles of association limit (or exclude) the possibility of joining the company by heirs replacing the deceased owner.

Secondly, a limited liability company is a safe and solid solution from the perspective of its contractors. The legal form will not make them dread the fate of the cooperation in the face of a fortuitous event, such as the death of the company owner. 

Thirdly, a limited liability company is a solution that will exclude the shareholder's full liability for company obligations. Shareholders in a limited liability (unless they are also members of the company's management board and do not file a bankruptcy petition in due time) are not liable for its obligations.

Establishing a sole proprietorship may be a good start for a business but you should have the future of your company in mind 

A sole proprietorship remains a risky form of running a business, especially considering the problems associated with succession. Even succession management fails to eliminate the risk entirely. Entrepreneurs running a sole proprietorship should therefore strive to secure their business in advance and transform a sole proprietorship into a limited liability company.

Thus, we strongly encourage you to contact RSM Poland – thanks to our expertise, we can help you navigate the winding path to transforming a sole proprietorship into an LLC and devise as well as carry out the entire process – taking into account the legal, tax and financial matters.

¹ K. Czub [w:] Kodeks cywilny. Komentarz aktualizowany, red. M. Balwicka-Szczyrba, A. Sylwestrzak, LEX/el. 2024, art. 43(1).
² M. Balwicka-Szczyrba [w:] Kodeks cywilny. Komentarz aktualizowany, red. A. Sylwestrzak, LEX/el. 2024, art. 55(1).
³ Zarząd sukcesyjny. Podręcznik, Ministerstwo Rozwoju i Technologii, Warszawa 2023.
⁴ M. Jaśniewicz [w:] Zarząd sukcesyjny przedsiębiorstwem osoby fizycznej. Komentarz, red. S. Babiarz, Warszawa 2021, art. 59.
⁵ M. Jaśniewicz [w:] Zarząd sukcesyjny przedsiębiorstwem osoby fizycznej. Komentarz, red. S. Babiarz, Warszawa 2021, art. 12.
⁶ M. Wojtas, Zarząd sukcesyjny w firmie, https://dziendobrypodatki.pl/055-zarzad-sukcesyjny-w-firmie-michal-wojtas/
⁷ M. Jaśniewicz [w:] Zarząd sukcesyjny przedsiębiorstwem osoby fizycznej. Komentarz, red. S. Babiarz, Warszawa 2021, art. 59.
⁸ M. Jaśniewicz [w:] Zarząd sukcesyjny przedsiębiorstwem osoby fizycznej. Komentarz, red. S. Babiarz, Warszawa 2021, art. 59.
⁹ M. Z. Sondej, Zmiany przepisów o spadkobraniu w latach 2015-2023 i ich wpływ na dotychczasowy system dziedziczenia, LEX/el. 2024.
¹⁰ K. Osajda (red.), Ustawa o zarządzie sukcesyjnym przedsiębiorstwem osoby fizycznej. Prawo spadkowe przedsiębiorców. Komentarz. Wyd. 2, Warszawa 2022.