Posted by Written by: Florian Wierzchowski
A whole book could be written on this issue. Therefore, this article will attempt to signal certain issues related to the adoption of a legal form by the enterprise to be established. The choice made will have momentous consequences, hence the decision requires careful prior analysis by the future entrepreneur. The aspects I will assess are the costs of running a particular form, liability and complexity.
The simplest form of business is the sole proprietorship. This means, in a nutshell, that the business is you. The assets of the company are your assets and no one else’s. Unfortunately, the same applies to your obligations – all contracts, obligations towards contractors and public institutions (social security, taxes) are at the same time your personal obligations, which you will have to fulfil personally. Otherwise, the consequences of unfulfilled obligations may affect your personal assets – including those accumulated prior to the commencement of the business activity.
In summary, in terms of liability, it is a business without limitation of liability. Why is it a simple form? It does not require complicated registration procedures, it does not require the contribution of share capital, bookkeeping and tax settlements are simple – a lump sum or income and expenditure tax book is usually sufficient. One-person businesses are also much less (although still too much in Poland) burdened with bureaucratic duties, e.g. reporting and statistics. With this in mind, it is the cheapest form of business.
Another drawback worth mentioning is that if the company is you, then at the same time, should something happen to you (illness, accident, death), the continuation of the business becomes very much endangered – often as a result of such events, businesses cease to exist at all. The solution to the many drawbacks of sole proprietorships are organisational forms with a higher level of complexity and running costs, i.e. most often companies.
The Polish Code of Commercial Partnerships and Companies, like company codes of other countries, provides for the existence of partnerships, the principles of which somewhat resemble those of sole proprietorship, however, with partners who take joint responsibility for the company while participating in its running. These are the general partnership, limited partnership, partnership, limited joint-stock partnership. I will not elaborate here on the detailed features of each of them, as there is not space for that. What is worth remembering is the possibility to ensure stability and continuity of the company’s operation, even if the number of partners decreases or changes, the possibility of a certain limitation of the degree of personal liability of partners for the company’s obligations, but all this at the cost of an increasing degree of bureaucracy and the necessity to handle this bureaucracy, and thus an increase in fixed operating costs.
Capital companies are another form of company that is very important and plays a huge role in economic life. The Polish Commercial Companies Code distinguishes three capital companies: the limited liability company, the simple joint-stock company and the joint-stock company. Limited liability companies and joint-stock companies are the most common in Polish trade. The simple joint-stock company is an institution that was introduced into Polish law only a few years ago.
Under civil law, these companies have their own separate legal subjectivity, they are legal persons, i.e. they are independent subjects of rights and obligations. They are companies in which the liability of the business founder – the shareholder – is limited only to the amount of the contribution made. This is one of the most important features of capital companies, which allows potential partners to engage in high-risk ventures, as the only thing these partners stand to lose is the cash or in-kind contribution made to the company. Limited companies are run – managed by boards of directors – professional, professional managers. Shareholders may or may not be managers. They may confine themselves to controlling the management either directly or by setting up supervisory bodies in the form of an audit committee or supervisory board.
Deciding what form of business to take requires deep thought and consideration of what is most appropriate to the size of the business, the resources, the company’s viability, the reduction of risks, the tax treatment, the possibility of leaving management in someone else’s hands. And what should be remembered is that what suits one does not necessarily suit another. Let the decision on the organisational and legal form be the result of your individual and considered decision.