Strona Kancelarii » Disbursement of Funds from a Limited Liability Company (sp. z o.o.) – for Shareholders and Management Board Members

Before incorporating a limited liability company (spółka z ograniczoną odpowiedzialnością, “sp. z o.o.”) and commencing business activity in this legal form, it is advisable to analyse—both from a formal legal and a tax perspective—the available methods of disbursing funds from the company. One of the most common mistakes made by shareholders and management boards of newly established entities is treating company funds as their private assets, from which they may freely draw and make withdrawals.

Each disbursement of funds from a sp. z o.o. must have a legal and factual basis. What, then, are the most common disbursement models? In this article, we outline selected ones.

1. Profit distribution – dividend

The primary source of payments to shareholders of a sp. z o.o. is a dividend, i.e., the portion of profit generated from the company’s business activity that has been allocated for distribution among the shareholders.

As a rule, the manner, amount, and payment dates of a dividend are determined by the shareholders by way of a resolution adopted at the Annual General Meeting of Shareholders (Zwyczajne Zgromadzenie Wspólników), which should be held once a year, inter alia, to approve the company’s financial result (financial statements).

The provisions of the Polish Code of Commercial Companies (Kodeks spółek handlowych) set out the requirements that must be met for the shareholders to decide on a dividend payment. In principle, these include:

a) preparation of the financial statements and their execution (signing) by the company’s management board,
b) showing profit from business activity in the financial statements,
c) holding the Annual General Meeting of Shareholders and adopting resolutions approving the financial statements for the previous financial year and resolving on the distribution of profit among the shareholders.

As a rule, profit is distributed among shareholders proportionally to the shares held by them at the time the resolution is adopted. However, the articles of association and the relevant resolution may provide for a different method of determining from when shareholders participate in profit distribution. Moreover, the articles of association may provide for preference shares held by certain shareholders—who will participate to a greater extent in the distribution of the profit earned by the company.

In certain situations, the profit earned may not be allocated in full to dividend payment, and in extreme cases it may not be possible to distribute it among shareholders at all.

This applies to companies which generated a loss in previous years that should be covered from the profit earned. Where the company has negative equity (the company’s liabilities exceed the value of its assets), a dividend may not be paid and should instead be allocated to cover deficiencies in equity.

In the context of dividends, it is also worth noting that shareholders may provide in the articles of association for the payment of interim dividends (advance payments towards a dividend). In this way, once the requirements specified in the Code of Commercial Companies are met, shareholders may, during the year, receive amounts of money determined in a shareholders’ resolution as an advance towards a future dividend.

2. Remuneration of a management board member by virtue of appointment

If a shareholder of the company is simultaneously a member of its management board, the shareholders may, by resolution, grant such person remuneration for the function performed and the duties carried out.

We discussed the details regarding the formal legal basis for paying such remuneration and the public-law burdens (mandatory levies) applicable to it in the article: “Remuneration of management board members of a sp. z o.o. by virtue of appointment.”

At this point, we note that the function of a management board member may be performed either gratuitously or for remuneration. The amount, frequency, and rules of payment of remuneration to a management board member are specified in an appropriate shareholders’ resolution.

Remuneration may be granted to selected or all management board members, and its amount should correspond to the actual scope of duties and be economically justified.

3. Remuneration for work performed / services rendered

There is no obstacle to a shareholder performing work for the company under an employment relationship or providing services as part of the shareholder’s own business activity.

So long as the agreement concluded between the shareholder and the company is not sham, is based on market terms, and is actually performed by both parties, the risk of challenging such a legal relationship is relatively low.

Where a shareholder is simultaneously a management board member, special formal and legal caution is required when entering into the contract. Pursuant to Article 210 of the Code of Commercial Companies, a sp. z o.o. must be represented in agreements concluded with a member of its management board by a special attorney-in-fact appointed by a shareholders’ resolution or by the supervisory board, if established.

An agreement in which the company is represented by its management board while the other party to the contract is a management board member acting as the contractor/employee will be deemed null and void.

In this context, however, attention should be paid to the risk that the Social Insurance Institution (ZUS) may challenge the genuineness of an employment relationship in a company where the sole member of the management board is simultaneously employed under an employment contract. The authorities indicate that, in such a arrangement, the element of the employee’s subordination to the employer is lacking—since it is difficult to speak of being subordinate to oneself.

4. Remuneration for recurring non-cash performances

Article 176 of the Code of Commercial Companies also provides a mechanism whereby a shareholder renders to the company so-called recurring non-cash performances. In short, this is an obligation of the shareholder to perform for the company specific, recurring non-cash performances (e.g., periodic supplies, making specific resources available, licences/know-how, tolerating the use of an item), and in return the company is obliged to pay remuneration regardless of whether it earns a profit.

For a given relationship between the company and the shareholder to be classified as recurring non-cash performances, the obligation to perform must be precisely set out in the company’s articles of association. The amount of remuneration due to the shareholder does not have to be rigidly specified in the articles of association, leaving this issue to be determined, for example, in a separate agreement.

However, the remuneration may not exceed the rates adopted in commercial practice for a given type of performance and should be objectively equivalent.

The above solution began to gain popularity particularly in the context of the absence of an obligation to pay social security contributions and health insurance contributions on remuneration paid on this legal basis. Today, this is a disputed topic and entails the risk of the authorities challenging whether the activities constitute “recurring performances” under Article 176 of the Code of Commercial Companies, which translates into a risk of contributions being assessed.

Currently, in order to minimise the risk of a finding that, in reality, recurring non-cash performances conceal a services agreement subject to full social security contributions, the following criteria should be met:

1. periodicity—i.e., the recurring nature of the shareholder’s performances, rather than a one-off performance or continuous performance. A performance will be recurring if it consists in the repeated provision, over the term of the legal relationship, at regular intervals, of a certain number of performances;

2. specificity of the shareholder’s performances set out in the articles of association—the shareholder’s obligation should arise expressly from the articles of association and should not overlap with other activities performed by the shareholder for the company on a different legal basis, e.g., under a B2B contract, an employment contract, or performed in connection with holding the function of a management board member;

3. the performances are to benefit the company—the beneficiary of the performances carried out by the shareholder should be the company, not its customers or contractors.

Taking the above criteria into account, in order to properly apply the described legal structure, permissible will be those types of performances that are connected with the shareholder’s personal competences or resources.

5. Other lawful methods

The regulations also allow for the use of other, fully lawful methods of distributing funds from the company to the shareholders’ assets, depending on the specific factual circumstances. These include, inter alia, lease/rental of a shareholder’s assets to the company, redemption of shares for consideration, licences to intellectual property rights, and a loan from a shareholder.

In each case, entering into any of the relationships described and indicated in this article should be preceded by a detailed legal and tax analysis, as well as an assessment of the company’s actual needs and the shareholder’s ability to perform.

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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