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Business succession - worth giving it some thought well in advance!

Marcin KAWKA 
Audit Partner at RSM Poland

We were recently asked for assistance in carrying out a “mission impossible” project. On his deathbed, the owner of a single-member business asked himself what will happen to his business after his passing. His daughter, who has been involved in running the company, wanted the family business to continue. Unfortunately, single-member companies cease to exist upon the death of a proprietor as succession proceedings may take months or even years, by which time the entities have long since disappeared from the market.

A decision was quickly made to transform the single-member business into a private limited company with the family being the shareholders thereof. Unfortunately, the process takes months and involves drawing up a transformation plan with attachments. One of the required attachments are financial statements, which for an entity that does not maintain accounting books (and only a revenue and expense ledger for tax purposes) is already a huge challenge in itself. But there are further obstacles along the way, as the conversion plan should then be subjected to an audit by a certified auditor (based on the decision of a competent court on the choice of expert) for its correctness and reliability. The adoption of resolutions on the conversion and drawing up the company’s Articles of Association in the form of a notarial deed are the next steps. And finally, there is a requirement that the conversion be registered and the company be entered into the National Court Register by a competent court. Normally, the procedure takes several months. Unfortunately, the terminally ill business owner, whose end was inevitably approaching, was running out of time. The situation required quick action.

Expeditious actions were undertaken as a matter of urgency. They involved many people and advisors (a certified auditor, accountant, tax advisor, solicitors, notary public), on top of the seriously ill business owner and his family. Considerable costs were incurred and a lot of unnecessary hassle that could have been avoided transpired in the final moments before death. The “mission” was accomplished though. We managed to wrap up what normally takes months in just over 30 days. The question remains, however, whether the extra stress and effort and spending the last remaining bits of energy at the end of one’s life to save the business were necessary.

Unfortunately in Poland, too few entrepreneurs think in the long term and put a thought to what will happen to their business after their death. After all, no one will live forever, and there are plenty of options to secure a business for the future. In the cited case, the family wanted to continue managing the company and engaged in all the necessary actions to make it possible after the owner passed away. Yet, there are plenty of examples for the lack of successors in the family. Using transactional advisory services and taking all options and opportunities under consideration when the time is right and the conditions are favourable, is worthwhile.

The problem has been recognised by the Ministry of Development. As a consequence, a draft bill on the succession of sole proprietorships has been issued for public consultation. Sole proprietors (at some point in their lifetime) and their successors will have the opportunity to appoint a succession administrator who will manage the company’s affairs after the owner's death. This will enable the distribution of inheritance without having to close a business. The new law shall take effect as of 2018.

However, regardless of the laws and regulations currently in force and their projected amendments, it is not worth waiting until the last minute.

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