How is liability for debts in limited companies shaped? The time has come for the final entry in a series on liability for liabilities in different forms of business. In today's article, you will learn how liability for liabilities applies to those who operate as a limited liability company or joint-stock company.
Read the other articles in this series:
- Liability for company debts - sole proprietorship and partnership
- Liability for liabilities in partnerships
In the meantime, I cordially invite you to read this post on capital companies.
Liability for debts in limited companies - limited liability company.
A limited liability company is one of the two companies in the Polish legal system belonging to the so-called capital companies. These are companies that operate on the basis of their own share capital. Unlike the previous companies, a limited liability company has legal personality. This is manifested in particular by the fact that the company pays taxes for itself. In addition to the partners' income tax, there is corporate income tax, the so-called CIT.
A limited liability company (abbreviated to sp. z o.o.) - although its name might not indicate it - is liable for its obligations with all its assets. The partners of a limited liability company are not liable, except in special cases, for the company's obligations. However, they risk their contributions to the company to build up the share capital.
Special cases of personal liability of shareholders will include liability for:
- incurring liabilities with third parties before the limited liability company was entered in the National Court Register (KRS),
- compensating the company for the overvalued in-kind contribution made to the company,
- unfulfilled benefits due to the company on acquisition of a share or a fraction thereof,
- the occurrence of damage in the formation of a company in a situation of culpable wrongdoing.
Where a shareholder is also a member of the management board of a limited liability company, he or she may be held liable for debts in certain strictly defined situations. As a member of the management board, in the event of unsuccessful enforcement against the company's assets, enforcement may be directed against him.
Pros and cons of a limited liability company
The exclusion of shareholders' liability in a limited liability company is very attractive to entrepreneurs. This regulation is the reason why many entrepreneurs, including sole traders, decide to convert their existing business into a limited liability company. Certainly, a limited liability company has many advantages. For example, one can mention the lack of liability of the partners for its obligations (although not always).
Unfortunately, running a business in this particular form also has quite a few disadvantages. One of them will certainly be "double" taxation. It consists in taxation with income tax of profits generated by the company and income obtained by partners from the payment of dividends, i.e. profits due to the partner in accordance with the adopted resolution of the partners. The downside of a limited liability company will also be the rather formalised nature of setting up this type of entity. In order to establish a limited liability company, it is necessary to draw up an appropriate agreement, visit a notary public, prepare a number of documents for the National Court Register, etc. In such a company there is also the necessity to keep so-called full accounting. However, the possibility to sleep peacefully at night without constantly thinking about the liability of one's personal assets for failed business ventures often wins out over several inconveniences, which one manages to overcome in the end. I will talk more about the limited liability company and its pros and cons in my next post.
Liability for debts in limited liability companies - Public limited liability company
A joint-stock company, like a limited liability company, is a capital company that operates by relying on share capital divided into shares. Its participants are shareholders who, apart from the obligation to contribute to the company, are not at all liable for the company's obligations towards third parties. There is, however, an exception to this. Shareholders are jointly and severally liable with the company and persons acting on behalf of the company for the obligations of the so-called company in organisation. This is what the company is called from the moment its articles of association are signed until it is entered into the National Court Register (KRS). The liability of the shareholders in this case is limited to the amount of the unpaid contribution to cover the subscribed shares.
Liability for debts - summary of the series of entries
In the above discussion, I have tried to give you an idea of the liability for debts depending on the form of business. The form in which we choose to operate our business determines the way in which we are liable for debts in the company. However, our choice cannot always be reconciled with the applicable legal provisions. Sometimes, due to the type of intended activity, they force the entrepreneur to take a specific form of business (banks, insurance companies). However, these are exceptional situations, which usually concern a very narrow field of activity or only certain professions.
