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Limited liability company or branch? The entrepreneur's legal form dilemma

Piotr NOWATKOWSKI
International Department Supervisor at RSM Poland

Choosing the right business form is of uttermost importance to every entrepreneur. Therefore, before you make the decision it is advisable to learn about all the resulting consequences. If you happen to be a Polish entrepreneur, the task seems rather simple (at least in theory): you browse the Internet (thousands of posts, but which ones are credible?), check on friends and their experiences, and finally there’s a phone call to the Companies House to check out the mundane side of starting a business (what forms need to be submitted, where to pay your fees and how much?).

But what if the entrepreneur doesn't speak Polish, has no Polish friends to consult, and even if he/she somehow manages to get hold of the authority's phone number and has perfect command of English – what then? About the only thing he/she is likely to hear will be a murmur of embarrassment and the buzzing sound of a hung-up call... In a word: what happens when a foreign entrepreneur wants to open a business in Poland? What options are there to choose from, according to Polish law-makers?

Freedom of business as in: freedom of choice

Keeping in mind that there are several forms of running a business in Poland available to a foreign entrepreneur (starting with sole proprietorship, through partnership and limited companies, to branches and representative offices), let me elaborate on the two most popular solutions: i.e. incorporating a limited liability company (sp. z o. o.) and opening a branch of a foreign enterprise.

What are the basic differences? First of all, a branch, unlike a limited liability company (sp. z o. o.), has no legal personality. This means that any liability contracted by the branch is in fact a liability contracted by the headquarters. Even if, formally-wise, it is the branch that is specified as the contractual party, with its KRS no., NIP no. and REGON no., the actual party of the contract is still the headquarters. More often than not contractors, and sometimes even certain authorities, will treat a company's branch as a separate business entity by considering an entry to the National Court Register (KRS) as being proof of complete separateness, also legally-wise. Nothing could be further from the truth: a branch is exactly what it is - a branch of its headquarters.

Further differences between a limited liability company (sp. z o. o.) and a branch can also be seen in terms of payment settlements. Each contribution by a limited liability company partner must be kept formal in one way or another (loan, additional capital contributions, increase of share capital), whereas cash flow between the headquarters and the branch are not subject to such limitations. However, this requires perfect coordination between HQ accountancy and the branch's accountancy in keeping track of mutual settlements. My colleague Justyna Chrzanowska, who provides accountancy services for branches of British enterprises here at RSM Poland, believes that without systematic and detailed information flow from British HQ it would be immensely difficult to even establish the current balance with a Polish contractor of the branch, given that payment is made by HQ.

When deciding on starting a business and choosing the right business form, it would also be wise to give some thought to the differences in representation structure between limited liability companies (sp. z o. o.) and branches. In case of a limited liability company (sp. z o. o.) there is no doubt that board members are at the same time the company’s representatives. In case of branches of foreign entrepreneurs, Polish law-makers, besides HQ board members whose details must be revealed in the National Court Register, allow for a branch representative to act on behalf of the foreign entrepreneur. The competences of such a representative, however, have not been clearly specified in the act, giving rise to dispute even among lawyers. From a practical point of view what is significant is that the person representing the foreign entrepreneur in the branch must have a Polish address, which is then made public in the National Court Register. In case of a limited liability company (sp. z o. o.) there are no formal obstacles to prevent entry into the Polish commercial register should even all board members live abroad.

Ignorantia iuris nocet

Foreign enterprises often prefer to have rather a branch opened than incorporate a company in the given country. They usually support their decision with HQ policies that say the same business form is to be maintained regardless of the country in which it is operating. One of our British clients, in support of his decision to open a branch rather than incorporate a company in Poland, admitted that liquidating a branch is basically easier than liquidating a limited liability company. What he did not know, is that in fact the same legal provisions apply in both cases... This simple case only proves that risking an a priori decision when it comes to selecting a legal form of conducting business in a foreign country is not always going to be the best choice, unless one supports this decision with knowledge of relevant regulations and a thorough analysis of resulting legal and tax-related consequences.