The pitfalls of converting a single-person company

As change is the only constant in life, it is also part and parcel of doing business. Being flexible is an asset in business in its broadest sense. This is why entrepreneurs often go for major changes, such as corporate conversions.

Single-person companies are governed by additional regulations designed primarily to protect third parties. This begs the question of whether conversions are more difficult for single-person companies. After all, from a logical point of view, such companies should be more flexible.

Conversion plan

Converting a company consists of changing the legal form of an existing business while retaining its continuity, so without any need to liquidate it. This solution is commonly considered to be beneficial in that it makes it possible to achieve business goals without suffering the drawbacks involved in winding up one company and setting up another one.

As essential as it is in the conversion process, the conversion plan itself does not give rise to any changes in the company. It is typically developed in the first stage of the conversion procedure, referred to in legal doctrine as the managerial stage [1]. The plan is, in fact, a set of economic and financial data relevant to the conversion decision.

Article 558 of the Commercial Companies Code (hereinafter: CCC) defines the necessary content of the conversion plan and the documents that must be attached as its appendices. These requirements are relatively modest.

Single-person companies

The glossary provided in Article 4 of the CCC defines the single-person company as a joint-stock or limited-liability company all shares of which are held by a single partner or shareholder. Under Article 173 of the CCC, any declarations of will made by the sole shareholder of a limited liability company must be in writing, otherwise being null and void, unless the law provides otherwise. It is thus not a mandatory provision.

What is significant from the point of view of single-person companies is the provision of Article 210 and Article 379 of the CCC regarding agreements concluded by a company with the member of the management board. Under Article 210 § 2 of the CCC, where a company has a single shareholder who is also the sole member of the management board, a legal transaction between that shareholder and the company they represent must be in the form of a notarial deed. The requirement as to form appears to be entirely reasonable, arising, as it does, from the need to protect the company’s interests and, in particular, the interests of third parties. This safety measure is given even more weight with the obligation contained in the same article for the notary public to notify the registry court each time such an act is performed. It is thus impossible for the shareholder to perform an act with the company (i.e. in fact to enter into an agreement with themselves) with no disclosure of this fact in the registration records. For this reason, in practice, a “technical board member” is often appointed in a single-person company, whose principal, if not exclusive, responsibility is to conclude agreements between the company and the company’s sole shareholder.

Single-person company conversion plan

The regulations on the conversion of companies should be assessed somewhat differently. Article 557 § 1 of the CCC stipulates that the conversion plan is prepared by the management board of the company being converted or by all the shareholders handling the affairs of the company being converted. Article 557 § 2 of the CCC requires that such a plan be drafted in writing, otherwise being null and void. The only exception is a conversion plan drafted for a single-person company, which requires a notarial deed. It is difficult to identify the purpose of this provision in the CCC. As mentioned above, the conversion plan is merely a document in the conversion process and does not have any legal effect in itself. It is important to emphasise that the conversion itself requires a resolution to that effect, included in minutes drawn up by a notary public.

Furthermore, it is immaterial in this respect whether the shareholder decides to appoint a management board comprising more than one person or whether the shareholder themselves holds the positions of president of the company’s management board and the sole member of the management board at the same time. This could lead to a situation where a thriving company with a management board composed of numerous members draws up a conversion plan in writing rather than in the form of a notarial deed, thereby risking the legal consequences for violating the unreasonable requirement of the written form. We have also encountered cases in our practice where attaching a conversion plan as an appendix to minutes drawn up in the form of a notarial deed on the adoption of a conversion resolution was not regarded by courts as fulfilment of the requirement set out in Article 557 § 3 of the CCC. In such cases, the courts relied on the Supreme Court’s judgement of 26 September 2008 in case ref. V CSK 91/08, which, however, addresses a much more significant legal issue: the fulfilment of the requirement to include any resolutions passed by the general meeting in the minutes.

Other modifications of single-person companies

The unreasonableness of the requirement formulated in Article 557 § 3 of the CCC becomes clear when we simply juxtapose a conversion plan with a merger plan or a division plan for a company. As mentioned above, the conversion plan is only part of the process in which the same company moves from one form to another in a fluid manner, without any change of corporate bodies, shareholder or stockholder. In the process of merging limited liability or joint stock companies pursuant to Article 498 of the CCC, a merger plan is required only in writing; the law does not specify any different rules for single-person companies. The same applies to the division of a company, the plan for which, in accordance with Article 533 of the CCC, must be drawn up in writing. Also, the regulations on the division of a company do not require that the plan for single-person companies be notarised.

In the light of the above analysis, it is difficult to understand why the legislator does not require a notarial deed for the much more complicated modifications of single-person companies while requiring it for the conversion plan.

[1] Z. Jara (ed.), Kodeks spółek handlowych. Komentarz, Warsaw 2023