The majority of foreign entities wishing to do business in Poland choose a limited liability company. Typically, it is a good choice.
The main benefit of a company limited by shares is that the liability of the shareholders is limited to the amount paid on their shares in the company. It follows that if the shares are fully paid up, the shareholders will not normally be liable to contribute further amounts in the event of the company becoming insolvent. A company is a separate legal entity, distinct from its shareholders and directors. This makes it an attractive proposition for a foreign investor looking to establish a business in Poland. Separate legal entity status enables the company to enter into contracts directly and offers the parent company protection from the subsidiary’s liabilities.
Some key issues relating to Polish limited liability companies:
Companies incorporated in Poland are obliged each year to file with the commercial register the minutes of the annual general meeting of shareholders together with the annual accounts. All information filed at the commercial register is available to the public, with some limited exceptions.
Upon first registration in the commercial register, each company must file its constitutional documents along with particulars of directors, information regarding ownership of shares and the company’s address. Companies are obliged to update the commercial register whenever certain details change, for example if a new director is appointed or resigns or if the shares are sold.
Although a company is treated as a distinct legal entity, Polish law imposes personal liability on the directors of a company in a number of ways. The most important one is the personal liability for the company’s debts if the company has no money to pay its debts. This is quite unusual solution which does not exist in other jurisdictions. Directors do not need to be involved in any wrongful trading or fraudulent activity.
According to Article 299 of the Commercial Code, directors are personally liable for the company’s debts if the execution against the company turns out to be ineffective. So, if a creditor takes the company to court, wins the case and then tries to execute the judgement against the company but the company has no assets, then the creditor is allowed to sue directors for the entire amount of the company’s debt even if no wrongful trading or fraudulent actions were involved. Directors become liable for the company’s debts automatically.
The directors can defend themselves only if they can prove in the court of law that they filed a timely motion for insolvency which means 14 days from the moment when the company becomes technically insolvent. In the day-to-day practice, it is very difficult to ascertain the exact moment when the company is becoming insolvent. There could be some receivables which are not paid but should be paid. Sometimes even the loss of major client may trigger insolvency. The entire risk in this respect is shifted on the directors. They have to monitor situation and be ready to file a motion for insolvency immediately otherwise they will become personally liable.
One of the solutions to improve the situation is to divide responsibilities among the directors so that each of them is responsible only for his or her particular area. For instance: one person deals with the sales, another deals with the production and the third one deals with the accounting issues. If the scope of responsibility is clearly defined and the director’s actions may be assigned to the particular area, then a director from another area may defend himself by arguing that he or she has not been aware of the company’s situation and therefore cannot be held liable.
There are three main types of finance available to a limited liability company:
- equity – whereby shareholders invest funds in return for shares
- additional payments to the share capital (“doplaty”) – whereby shareholders pay money into the company to finance its activity; it is called “quasi-equity” financing
- loan – this is often preferable to companies for tax reasons. A company’s assets may be used as security for borrowings to fund the business. If it is a loan from a shareholder, it should be arm’s length.