Shareholders in limited liability companies (Polish: spółka z o.o.) and share capital contribution

This article will answer the following questions:

• Who can become a shareholder in a limited liability company?
• What is the difference between the primary and secondary acquisition of shares?
• What can constitute a share capital in a Polish LLC and how to make a legitimate contribution?

In our previous articles, we have already presented the key characteristics and advantages of limited liability companies and explained step by step the company formation and registration process. Now it is time to have a closer look at the definition of shareholders in a limited liability company as well as the contributed share capital, as stated in the Polish law. We will try to pinpoint the conditions that must be met in order for an individual to become a shareholder in an LLC and clarify the term contribution made to an LLC as well as delineate the correct manner of making the said contribution.  

Who are shareholders in an LLC?

In case of a limited liability company, a shareholder means each and every individual holding a share in it (understood as a portion of its share capital but also as the overall rights and liabilities of a shareholder). 

In a nutshell, a shareholder is a person owning the company (or being one of its owners) who, as a result, has certain rights and obligations imposed by the law.

Major rights of the shareholder include the right to receive dividends, right to vote, pre-emptive right to subscribe for new shares and the right to participate in the distribution of the residual value of the company on dissolution. The primary obligation of the shareholder is to make an initial contribution – any other obligations must be stated in the articles of association, as specified in Art 151 § 3 and Art. 159 of the Commercial Companies Code.

Under legal regulations, any natural or legal person can be a shareholder in an LLC (this includes, with one exception stated below, another LLC), but also an organisational unit without a legal personality (e.g. commercial law partnerships). Please bear in mind that foreign entities and individuals can also become shareholders in an LLC – including those from outside the EU and this is not a rule for example in the instance of general and professional partnerships. 

Technically, it is possible that the shareholder in an LLC would be an individual not having full capacity to perform acts in law (i.e. a minor or someone legally incapacitated) In such a case, due to the nature of participation in the company, the person must act through a statutory representative (a parent, legal guardian or a custodian). In special cases it might even be necessary to obtain a permit issued by a guardianship court. 

Who cannot be a shareholder?

The only existing restriction is stated in Art. 151 § 2 of the Commercial Companies Code and stipulates that a limited liability company cannot be established by a single-person limited liability company only.

The said restriction applies also to foreign entities being equivalents to a Polish limited liability company, i.e. German GmbH or Dutch B.V. 

This, however, raises doubts of some proponents of the doctrine as it only refers to the process of company incorporation, and not to its further operation. Therefore, it paves the way for a single-person LLC to become a sole shareholder of another LLC in the course of further actions (especially as a result of an acquisition of all shares). Additionally, it becomes possible for an LLC to be incorporated by another single-person LLC and its shareholder or its related entity. 

Due to the presence of these solutions, there are voices calling to lift the ban in question or extend it in a way that would disenable this simple method of circumventing the regulations. 

How to acquire shares and what is the difference between a primary and secondary acquisition? 

As explained above, in order to become a shareholder in a limited liability company, it is necessary to have a share in it. There are two basic ways to acquire shares:

1. primary acquisition – a result of taking up newly created shares,
2. secondary acquisition – a result of acquisition of existing shares from their previous owner.

Both ways of acquiring shares differ fundamentally. 

In the event of taking up shares, we are dealing with a transaction between the shareholder and the company itself: on the one hand, the company undertakes to create new shares, and on the other hand, the shareholder undertakes to provide a certain benefit to the company (in the form of a contribution).

Taking up shares (and, consequently, making a contributions to cover them) occurs each time a company is established. For obvious reasons, it is not possible to establish a company without shares and, consequently, shareholders. Additionally, the subsequent creation of new shares in the company is possible if the procedure for increasing the company’s share capital is implemented. We will provide you with details on how to carry out this process in our subsequent publications. 

After the company is established, the acquired shares may become the subject of trading (although the articles of association may introduce certain restrictions here or require the shareholder to apply a specific procedure in advance – primarily in the form of a requirement to obtain the company's consent to sell the shares). As a rule, a shareholder may transfer all or only part of their shares to another entity, thus allowing the purchaser of the shares in question to become the company’s shareholder. The basic difference between taking up and acquiring shares is therefore that in the case of acquiring shares, we are dealing with a transaction between the transferring shareholder and a third party, and not between the shareholder and a company. 

This means that the acquirer of the existing shares only has to pay a given price (or provide a benefit) to the transferring party, i.e. the previous shareholder. There is therefore no need (or possibility) for the acquirer to make contributions to the company in this situation – the required contributions have already been made to the company when the shares were previously taken up. The items contributed to the entity as a primary contribution are already the property of the company and are not subject to return should there be a change in the share ownership.

There is yet another important reservation regarding the acquisition/sale of shares: under Art. 16 of the Commercial Companies Code, this type of operation (disposal of shares) will not be possible before the newly established company is entered in the register or before the registration of the increase in its share capital.

Contributions to a limited liability company

As we have already explained above, in order to become a shareholder in a Polish limited liability company, it is necessary to hold shares. They can be acquired through primary acquisition (which occurs at the time of their creation) or secondary acquisition (from a previous shareholder of the company). For obvious reasons, however, in order for shares to be created (and possibly acquired/sold later), their primary acquisition, occurring through the process of taking them up, is necessary. 

Taking up shares requires the shareholder to submit a relevant declaration – from that moment on, they are obliged to make a contribution to the company.  

What is the definition of a contribution? Unfortunately, the provisions of the Commercial Companies Code fail to include it, however, this should be understood as either a benefit or right of a determined value that is contributed by a shareholder to the company in exchange for the share in the company granted to them. In general, a contribution can be either a tangible item (e.g. real estate, a car, computer, as well as an amount of money or even shares in another company) or an intangible item (e.g. services provided to the company). 

Under the Commercial Companies Code, there are two main types of contribution: 

1. pecuniary contribution (meaning cash),
2. in-kind contribution.

At this point, however, we must draw your attention to some significant differences between partnerships and corporations (this includes limited liability companies).

Under Art.14 § 1 of the Commercial Companies Code, an inalienable right or provision of work or services cannot be the subject of an in-kind contribution made to a limited liability company, a joint-stock company or to the share capital of a simple joint-stock company. This means that, in the case of a limited liability company, a shareholder may only contribute certain property rights (of an alienable nature).

This solution should be considered justified due to the legal personality of corporations. Since these companies (including a limited liability company) are entities fully separate from their owners (who are not liable for their obligations), it is necessary for them to actually have assets that could satisfy the claims of potential creditors. On the other hand, in the case of partnerships, the insolvency of the company itself does not pose such a serious risk to creditors, as, as a rule, the partners are liable for the obligations of such companies with all their assets – therefore, even if a partnership does hold assets in the form of property, this fact becomes irrelevant.

The above differences also justify a different time of making a contribution compared to partnerships. In the case of a limited liability company, the agreed contribution must be made before the registration of its formation or increase in the share capital – so that the new shares are fully covered*. Therefore, when submitting an application for entry in the register of a new company or an increase in its share capital, a declaration signed by the entire management board of the company is attached with information about the contribution being made to fully cover the share capital. If the declaration fails to represent the factual state, this may result in personal liability of the members of the management board for the company's obligations. 

* An exception to this rule is provided for in Art. 158 § 11 of the Commercial Companies Code, which allows for a cash contribution to be made to a company whose articles of association were concluded using model articles – within 7 days of its registration. 

How to contribute to a Polish LLC? 

Making a contribution means simply to transfer a right in favour of the company. As a result, the company becomes the owner/holder of the transferred right and in return the shareholder receives its shares. It is crucial that the value of the contribution may be equal to or higher than the nominal value of the shares*.

*Under Art. 154 § 3 zd. 1 of the Commercial Companies Code, shares can be taken up below their nominal value.

In practice, however, making a contribution may prove troublesome. While, as a rule, there are no complications in the event of making a cash contribution (made by way of a transfer or – less often – in cash to the company's cash desk), making an in-kind contribution may raise doubts. Due to the fact that in such a case we are dealing with a transfer of rights, in order to make an in-kind contribution correctly (transfer it to the company), relevant declarations must be made in the required legal form – e.g. the contribution of real estate must be made in the form of a notarial deed to be valid. 

At this point, however, another, quite reasonable question pops up: since the articles of association of a Polish LLC, as well as all its amendments – and, as a rule, the declaration on the acquisition of shares – are drawn up in the form of a notarial deed, is it then necessary to draw up a separate document regarding the contribution?

The lawyers (unfortunately) most often reply: it depends.

Under Art. 155 of the Civil Code, a contract of sale, exchange, donation, transfer of real estate or other contract obliging a party to transfer ownership of an item of specified identity transfers ownership to the purchaser, unless a special provision provides otherwise or the parties have otherwise agreed. As each real estate is an item of specified identity (i.e. an item determined individually, with an individual land and mortgage register number assigned), and the content of the company articles of association and declarations on taking up shares clearly stipulate the obligation of the shareholder to make a contribution to the company (transfer the subject of the contribution to the company), it seems that in such a case there is no need to submit additional declarations. 

This conclusion, however, bears a certain flaw – both from the purely academic as well as practical point of view. 

From a scientific point of view, in order for the right to be transferred, it is necessary for each party to submit declarations of intent leading to the conclusion of an agreement. These conditions seem to be met if a contribution is made under the articles of association of a Polish LLC, under which each shareholder submits a declaration of conclusion of a relevant agreement (AoA) and making a contribution. The situation is different, however, in the case of a contribution made at a later date, i.e. when there is an increase in the company's share capital. In the latter case:

1. the previous shareholder submits only a declaration of taking up new shares (or an increased value of the share or shares), 
2. the new shareholder submits a declaration of joining the company and taking up a new share or shares.

Moreover, certain restrictions are also imposed in result of the practice of the courts – especially when dealing with real estate. Often, land and mortgage register departments require the submission of a complete set of required declarations of intent in the form of a single contract document before entering the company as the owner of the property.

For the above reasons, when making an in-kind contribution, it would be considered a good practice to each time conclude a separate agreement (the so-called in-kind contribution agreement) – in order to stay clear from these problem or any doubts. 

To sum up: remember who can make a contribution and what can be contributed to the company

To briefly sum up, firstly we must indicate that a shareholder is indispensable for effective LLC incorporation and operation. It is not only a natural person that can be a shareholder in an LLC but also a legal person or an organisational unit without legal personality (e.g. a civil law partnership) – the only existing limitation is that a single-person business entity cannot  incorporate an LLC in its own right (this applies also to foreign entities equivalent to a Polish LLC). 

Secondly, the original (and standard) obligation of shareholders is to make a contribution, i.e. a right to assets towards the company – in exchange of the acquired shares.

Thirdly: the contributions made to the company can be both cash and in-kind ones. Regarding practical matters (and legal doubts), in the instance of an in-kind contribution it is recommended that the company and the shareholder conclude a separate in-kind contribution agreement.