Strona Kancelarii » Differences between a limited liability company (spółka z ograniczoną odpowiedzialnością) and a sole proprietorship (jednoosobowa działalność gospodarcza)

When deciding to start a business in Poland, a future entrepreneur should carry out a detailed analysis of which legal form to choose for conducting the business.

Below we present a comparison of the two most popular forms of doing business, i.e. a sole proprietorship (JDG) and a limited liability company (sp. z o.o.).

1. General characteristics

A. Sole proprietorship (JDG)

When conducting business as a sole proprietorship, no new legal entity is created under the law. The owner is simultaneously the entrepreneur and the taxpayer.

This is a very simple form which, “at the start,” requires only registration in the Central Registration and Information on Business (CEIDG). It is therefore an optimal solution for a business that does not generate high risk and does not involve complex and extensive processes.

Unlike a limited liability company, a sole proprietorship does not require any initial capital, so the entry threshold is very low. However, the entrepreneur should remember that liability for unperformed contracts, damages caused, or unpaid business obligations rests directly with the owner—who is liable with all of their assets.

B. Limited liability company (sp. z o.o.)

When choosing a limited liability company (sp. z o.o.), one should be aware that a new legal entity separate from the owner is created in the form of a company with legal personality. The owner will act as a shareholder and/or a member of the management board, i.e. a person making decisions on behalf of the company.

Incorporating a limited liability company is a more complex process, requiring the conclusion of the company’s articles of association, appointment of corporate bodies, and submission of the appropriate application to the court register. In addition, when forming a sp. z o.o., it must be provided with share capital at the minimum level of PLN 5,000.

Liability for the company’s business is borne by the company with all of its assets. However, if the company becomes insolvent and the management board fails to act in due time by filing for bankruptcy, liability for the company’s debts may shift to the members of the management board.

2. Taxes and social security (ZUS)

A. Sole proprietorship (JDG)

As a rule, an entrepreneur operating as a sole proprietorship independently pays mandatory social and health insurance contributions and settles income taxes on the income earned.

As regards the form of taxation, depending on the type of activity the entrepreneur may choose between:

the progressive tax scale (12% on annual income not exceeding PLN 120,000, and 32% on the excess over PLN 120,000),
the flat tax (19%),
lump-sum taxation (ryczałt), where the rate depends on the type of business activity.

In addition, the entrepreneur pays monthly ZUS contributions, i.e. social and health insurance contributions.

B. Limited liability company (sp. z o.o.)

In the case of a sp. z o.o., which is a corporate income tax (CIT) payer, the tax rate is 9% for “small” taxpayers (with annual revenues up to EUR 2,000,000) and 19% for others.

It should also be noted that further distribution of the profit earned by the company to shareholders is also taxed at 19%—at the shareholder level.

As a result, the effective taxation from the owner-shareholder’s perspective is higher, because the company’s profit is taxed twice.

The only “saving” in a sp. z o.o. compared to a sole proprietorship is the absence of a health insurance contribution, which is generally not paid either by the company or (as a rule) by its shareholders. It should be noted, however, that in single-member companies (i.e. with one shareholder), that shareholder is also subject to social security contributions.

3. Costs and formalities

A. Sole proprietorship (JDG)

As a rule, sole proprietorships keep simplified accounts and switch to full accounting only after reaching annual turnover of EUR 2,000,000.

Basic accounting means keeping only a Revenue and Expense Ledger (KPiR) or a revenue register, depending on the chosen form of taxation.

The annual settlement does not require preparation of financial statements and is made together with filing the annual PIT return.

The costs of accounting services are significantly lower than in more complex legal forms of conducting business.

B. Limited liability company (sp. z o.o.)

Limited liability companies are obliged to keep full accounting records and prepare annual financial statements. In addition, shareholders must adopt resolutions approving the financial result and submit financial documents to the National Court Register (KRS).

A number of obligations are imposed on the company’s bodies, i.e. the shareholders’ meeting and the management board, which require proper corporate governance (share register, minutes of shareholders’ meetings, minutes of management board meetings, etc.).

4. Recommendation

For a quick start of a relatively uncomplicated business that does not involve significant risks and does not require an extensive ownership structure, a sole proprietorship (JDG) is usually the best choice.

For a larger scale of activity, higher risk, and potential shareholders or investors, establishing a limited liability company (sp. z o.o.) should be considered.

If you are looking for legal support in this issue, please contact us.

Attorney at law - Michał Kubiak

e-mail: biuro@kancelariakubiak.pl or

phone/Whatsapp +48724293339

724 293 339

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