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We know that every year many owners of rapidly growing businesses consider converting a sole proprietorship into a limited liability company. This can limit liability, business risks and some burdens while enhancing prestige, expanding financing options and facilitating succession. On the other hand, conversion is time-consuming and expensive, bringing certain inconveniences and restrictions. Is it therefore worth converting in 2025? This article describes the main advantages and disadvantages.
Conversion into a limited liability company in 2025: an optimisation opportunity? ZUS contributions and taxes
Those considering conversion most often earn increasingly higher income and consequently pay higher contributions and taxes.
They therefore see a company as an optimisation opportunity. Are they right?
Let us start with ZUS:
- Setting up a single-member limited liability company, with you as sole shareholder, creates an obligation to pay social and health insurance contributions under Article 8(6)(4) of the Act of 13 October 1998 on the Social Insurance System. Converting into this type of company generally changes little regarding ZUS contributions, apart from deregistering from your existing insurance and registering again with a new insurance basis code;
- The obligation to pay ZUS contributions ceases if the sole proprietorship becomes a multi-member limited liability company. Selling some shares to at least one other shareholder therefore removes monthly social and health insurance contributions, a substantial burden for many sole traders, especially as income grows.
Regarding taxes, conversion often brings double taxation. A limited liability company, with separate legal personality, pays corporate income tax (CIT) on its income. Its shareholders generally also pay personal income tax (PIT) when remuneration is paid. However, there are ways to pay a shareholder optimally. To learn about them, read our blog article devoted entirely to this subject!
Remember that a limited liability company can also use Estonian CIT, a taxation method for CIT taxpayers requiring no ongoing payments. Tax becomes payable only when company profits are distributed to shareholders.
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Converting a sole proprietorship into a company: limiting liability
Optimisation is one aspect. Often, however, a more important reason for conversion is the desire to limit liability and business risk.
This is a sound approach. As the name suggests, a limited liability company is a way to limit liability for possible debts.
However, conversion involves a “transition period” during which you are jointly and severally liable for debts arising before conversion.
Article 58413 of the Commercial Companies Code of 15 September 2000 expressly states: “A natural person […] shall be jointly and severally liable with the converted company for the converting entrepreneur's obligations associated with business activity arising before conversion, for three years from the conversion date”.
Remember that for three years after conversion, you cannot feel entirely secure!
Conversion as a route to a more prestigious company image and easier financing
Want to enhance your company's prestige? Converting a sole proprietorship into a limited liability company may help.
A limited liability company is perceived as a more professional and stable business form, highly desirable in many industries and potentially facilitating cooperation with certain partners.
Conversion can also help secure financing. Potential investors and banks see a limited liability company as a better and safer business status than a sole proprietorship.
Planning succession or long-term development? Conversion in 2025 may be a good idea
Do you want to prepare your business for succession and long-term growth, including after your death? Although sole proprietorship succession is possible, transferring shares in a limited liability company is a much simpler and more commonly chosen way to transfer business control.
Conversion into a limited liability company: disadvantages
Alongside its advantages, conversion entails significant disadvantages and restrictions, primarily:
- The time-consuming conversion process, often taking many months and requiring specific actions, particularly those in Article 5845 of the Commercial Companies Code of 15 September 2000;
- Costs of conversion and running the company, especially the full accounting required for a limited liability company;
- No access to preferential 9% CIT in the year of conversion or the following year, under Article 19(1a)(1) and (2) of the Corporate Income Tax Act of 15 February 1992;
- Numerous company administration formalities, such as annual financial statements;
- Every payment of funds from a limited liability company requires a formal basis.
Is conversion worthwhile in 2025? Summary
Conversion in 2025 therefore offers many advantages but also important disadvantages and restrictions.
Whether it is worthwhile depends on each business owner's circumstances, expectations and plans.
For one owner, limiting liability or removing ZUS contribution obligations through a multi-member company may be the priority; for another, the simplicity and costs of a sole proprietorship.
Conversion should certainly be considered carefully by owners of steadily growing businesses with increasing income and non-zero business risk, and by those seeking continuity throughout long-term development.
If you found this article interesting, explore our tax advisory services and read how we can help you:
Summary
Considering converting your sole proprietorship into a limited liability company? Contact us today for comprehensive help with tax advice, accounting and your company's finances! Our accounting firm also provides HR and payroll services, handles company secretarial work and advises on setting up, converting and running companies.
We warmly invite you to work with the TaxCoach accounting firm!
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