Sole proprietorship and limited liability company - differences, advantages and benefits

Sole proprietorship is the most frequently chosen form of running a company - which results in particular from the ease and cost-free registration, and further from simplified accounting. The second popular form of activity is a limited liability company - here mainly due to much greater financial security. What to choose? JDG a sp. z oo - we explain what separates them and what benefits they bring to the entrepreneur.

JDG a sp. z o.o – what form of business to choose?

Sole proprietorship or limited liability company – those planning their own business usually consider only two forms of running a business. And while the choices are quite limited, it's not an easy decision to make because both options have their advantages (and many benefits), but neither is perfect. Therefore, it is worth using the help of specialists - e.g. an accounting office or tax advisor and legal, who, after learning about the specifics of the planned activity, expected revenues and costs incurred as well as the scale of financial turnover, will advise on the choice and then help to register the company.

The decision should be made individually, taking into account, above all:

• whether we will run the business alone or with partners,
• responsibility for financial obligations,
• taxation and type of accounting,
• the minimum capital needed to start a business,
• forms of representation – i.e. who can represent the entrepreneur, e.g. in official matters,
• the place where we register the company and deal with related matters.

JDG distinguishes fast, simple, cost-free start-up and much less formalities and obligations to fulfill. On the other hand, a limited liability company gives a greater sense of security: strongly reduces the financial responsibility of the entrepreneur - the risk of losing his assets if something goes wrong. In practice, there are more differences between these two forms of running a business, advantages or benefits, but also disadvantages and threats on both sides, which is why we have prepared a comparison of them in terms of the most important aspects.

Establishing and registering a company - sole proprietorship vs. limited liability company

Setting up a sole proprietorship is much faster, easier and cost-free: we can do it one day and start the business the next. It does not require many formalities. JDG can be registered only by one natural person, and a company by at least one founder - and there can be many of themand, moreover, not only natural persons, but also legal persons and organizational units with legal capacity are allowed. How does the registration work?

• Sole proprietorship. To start a sole proprietorship, all you need to do is register with CEIDG free of charge - which can be done online. Of the more difficult aspects, it remains to state PKD codes in the CEIDG-1 application and select the form of taxation. We will submit the application to ZUS together with the request. The document should also indicate the address for storing accounting documentation, i.e. sign a contract for accounting in advance, if we do not do it ourselves. An entry in CEIDG is tantamount to an application for a NIP or REGON.
• Limited Liability Company – in order to set up a company, it is necessary to prepare the articles of association in the form of a notarial deed (in the case of a company founded by one person, it is the founding deed) or in the S24 system via the Internet (if the share capital is in cash). And the basis for the existence of a company is its entry in the National Court Register: depending on the form of registration (notarized or online), it costs PLN 500 or PLN 250 and PLN 100 for an entry in Monitor Sądowy i Gospodarczy (+ possible notary costs and costs related to the preparation of a contract sealing the establishment of the company ).

Financial contribution and initial costs - JDG vs. limited liability company

Setting up a sole proprietorship does not require any own contribution. The minimum share capital of the company is PLN 5,000. Contributions to the capital are made by all partners of the limited liability company - but they can be not only in cash, but also in kind (eg machinery and equipment for the company). The amount of the share capital, as well as the number and nominal value of shares taken up by individual shareholders should be indicated in the articles of association. In addition, apart from the cost of registering a limited liability company in the National Court Register and the announcement in Monitor Sądowy i Gospodarczy, a tax on civil law transactions is payable, amounting to 0.5% of share capital.

Company representation, official bodies, decisions – limited liability company or sole proprietorship?

Establishing a sole proprietorship does not require the appointment of official company bodies. All factual and legal activities are the responsibility of the business owner and the person conducting business activity in one. However, assuming limited liability company, the meeting of shareholders and the management board of the company should already be appointed and if the share capital exceeds PLN 500,000 and there are more than 25 shareholders, then also the supervisory board and/or the audit committee. 

A limited liability company has legal personality (and therefore is a full-fledged subject of rights and obligations, independent of its partners) - it can therefore perform all legal activities on its own behalf, both in court and out of court. The executive and representative body of a limited liability company is the management board - appointed by a resolution of the shareholders (may consist of partners, but also third parties). If the management board consists of more than one person, the representation of the company is based on the cooperation of two members of the management board or a member of the management board and a proxy. The management board and the owner of the company may also appoint a proxy to deal with certain matters.

Both the general meeting of shareholders and the board of directors be single in a situation where the company has only one shareholder – the shareholder himself or a third party may sit on the management board. Although the right to represent the company is not vested directly in its partners, they may, however, act in person on its behalf on the basis of a power of attorney or proxy granted to them by the management board of a limited liability company. The manner of representation of the company by the management board may also be specified in the agreement itself. 

Financial responsibility - limited liability company or sole proprietorship?

In this field undoubtedly gives a greater sense of security company – and this limited liability of partners is often one of the main reasons for choosing this form of business instead of JDG, especially in the case of risky businesses or involving large cash turnover. Nevertheless, this financial responsibility does not disappear completely. How does it look in practice?

• Leader A sole proprietorship is responsible for the company's obligations with all its assets – however, it may transform JDG into a limited liability company over time to limit its liability.
• The liability of a partner of the company is limited to the amount of the share capital (contribution made). Therefore, creditors have the right to demand settlement of liabilities solely from the company's assets. However, if such enforcement is ineffective (the assets are too small), the creditor may seek satisfaction of benefits from the personal assets of the company's management board.

Members of the company's management board are jointly and severally liable for its obligations – that is, it is not that their personal assets are completely safe. However, this liability may be limited in certain situations, but members of the management board of a limited liability company must prove the occurrence of at least one of the following three conditions:

1. an application for bankruptcy or liquidation of the company was filed in due time, or arrangement proceedings were initiated,
2. no relevant application has been submitted, but it is not the fault of the management board members,
3. failure to submit an application in due time did not cause any detriment to creditors.

Taxes and social security contributions - sole proprietorship or limited liability company?

• The person conducting the JDG pays income tax (depending on the chosen form of taxation) and social security contributions – the tax on general terms is 12 or 32%, and at a flat rate 19% on income (i.e. income less costs of obtaining it). The third form is a lump sum on registered income (3-17% on income, no KUP is presented). Entrepreneurs can take advantage of ZUS reliefs - do not pay social security contributions for six months, and pay preferential contributions for the next 24 months and take advantage of the so-called small ZUS + (contributions proportional to income).
• The company is taxed twice. Board members do not always pay social security contributions. First, the company's income is taxed at the company level (CIT 19% or 9%: for start-ups or if the income does not exceed EUR 2 million in a given year), and then (at the level of partners) the dividend is also taxed (usually PIT/CIT 19%). If the company has more than one shareholder, a member of the management board does not have to pay social security contributions. On the other hand, a partner in a sole proprietorship is obliged to pay ZUS contributions and there are no reliefs.

Accounting obligation - a company or a sole proprietorship?

• JDG may keep simplified accounting. Depending on the form of taxation, it is a book of revenues and expenses or a book of revenues (lump sum). In the KPiR, the entrepreneur books sales and purchase invoices - tax deductible costs. He can do it himself or outsource accounting to an accounting office - also online, as in the case of our Open Profit company. Then the entire obligation (and responsibility) rests with us: we send our clients information about the amounts and dates of advance payments or payments to the tax office and the Social Insurance Institution. It is enough to make a few transfers every month.
• A limited liability company is obliged to keep accounting books. Full accounting is required for all limited liability companies, including sole proprietorships (also for sole proprietorships, but only after exceeding EUR 2 million in revenue). It must be run by an accounting office, and this service is much more complex than the KPiR, and therefore also much more expensive. In addition, there is also the obligation to submit an annual financial report. However, also in this case, you can opt for online accounting, i.e. convenient remote cooperation with a professional accounting office.

To sum up: sole proprietorship or limited liability company? The advantages of the first form include easy registration, minimum formalities, no capital investment, simplified, cheap accounting, relief from ZUS contributions and lower taxes. A limited liability company usually turns out to be more expensive to run, but the higher costs are compensated by reduced financial liability - and this can be much more profitable in the long run. We will be happy to advise you individually: welcome to Open Profit.

FAQ:

1. Sole proprietorship or partnership - which is easier?

JDG is a much easier form of running a business, from the very registration of the company - it does not require own contribution, its establishment consists only in completing the CEIDG application, and the entrepreneur has the right to use simplified accounting and ZUS reliefs.

2. Sole proprietorship and civil law partnership - who can set them up?

A sole proprietorship may be established by only one natural person, while a civil law partnership must be established by at least two natural persons or legal persons or organizational units with legal capacity.

3. JDG or limited liability company - what is the difference in financial responsibility?

The JDG manager is responsible for the company's obligations with all its assets (there is no division between the company's property and the entrepreneur's private property). In a limited liability company, the shareholder's liability is limited to the amount of own contribution (all or part of the capital). The company's liabilities are covered by the company's assets.