Succession of a Company – What is it? Succession of an Entrepreneur in a Sole Proprietorship and Family Business

What is the Succession Management of a Sole Proprietorship and How is it Established?

Over 30 years after the establishment of a free market in our country, entrepreneurs who started their businesses during the transition period are now reaching retirement age. These entrepreneurs, taking advantage of a receptive and still unsaturated market, began filling it with goods and services.

Many of them started and continue their business activities in the simplest available form, namely as a sole proprietorship, which in no way ensures the safe continuation of the business in the event of the entrepreneur’s death. It does not allow the continuity of the business to be maintained, nor does it guarantee the retention of permits and licenses, as these are granted to individual entrepreneurs and expire upon the death of the person to whom they were granted.

At the same time, many sole entrepreneurs are often reluctant to delegate any of their responsibilities to future heirs, let alone change the legal form of their business. This reluctance primarily stems from the fear that such actions may lead to the loss of their decision-making power in the company and, consequently, to being pushed aside while they are still alive.

This situation was noticed by the legislator, leading to the enactment of the Law on Succession Management of a Sole Proprietorship, which came into force on November 25, 2018. Its main objective was to make the succession process easier for entrepreneurs. What does this term mean? Succession of a sole proprietorship is the process of transferring ownership of the business, enterprise, knowledge, and authority to manage it to a chosen successor. This is a legal succession – the successor assumes the rights and obligations of the business owner. A well-conducted succession in a family business allows the company to survive for some time after the death of its previous owner.

The new regulations also aimed to allow the entrepreneur to personally designate a person to manage the business after their death, known as the succession manager. If the entrepreneur does not appoint this manager, the right to choose one is granted to their heirs. According to the provisions of this legal act, these are the only two ways to establish a succession manager.

Importantly, many large multi-million dollar enterprises are still conducted as sole proprietorships, such as the case of Mr. Tadeusz Gołębiewski, who managed his business, including the Gołębiewski hotel chain, as a sole proprietor. This led, after his death, to his family taking advantage of the possibility of establishing succession management. Succession management provides tools to secure the existence of the business in case of the death of a sole entrepreneur, but the situation of this business can still unfortunately be compared to that of a person in the Intensive Care Unit.

Nevertheless, the management still does not solve the problem of a certain paralysis of the company, the need for urgent procedures to re-obtain any licenses and permits – this time for the manager, it also requires the preparation of an inventory of the business with a notary, as well as waiting for the final determination of the legal acquisition of the business in full by one person or the transfer of the business to a new entity, such as a newly formed company by the heirs, who will contribute their inherited shares of the business.

How Long Does Succession Management Last?

Those interested in the succession of a family business should remember that succession management is only a temporary solution. It lasts until the final resolution of the business’s ownership future, but no longer than two years from the date of the entrepreneur’s death. If the business’s future is not settled within this time frame, the succession management will expire, and the business will cease to exist in a formal sense, with all the legal consequences, including tax obligations, including the duty to repay VAT to the tax authorities.

Succession management may also expire earlier than two years after the entrepreneur’s death. This happens when one of the situations specified in the law occurs, such as the failure of the heirs to fulfill certain obligations. Therefore, it is crucial that succession management is both established and carried out in ongoing consultation with a lawyer who is skilled and, ideally, experienced in applying the provisions related to this area. Those who need assistance in this regard can use my services, as I, as an attorney in Krakow, specialize in this area, among others.

Extension of Succession Management

Succession of sole proprietorships is a complex process, but the regulations provide for the possibility of judicial extension of the duration of succession management only for important reasons and only for a total period of five years from the entrepreneur’s death. However, from my experience, I know that courts are very restrictive when it comes to determining which reasons can be considered important enough to justify the extension of succession management. Therefore, I would never recommend leaving the issue of regulating the business’s future until the last moment, i.e., until the end of the two-year period. It is better to act earlier and prepare the business thoroughly for its operation once it exits what I have described as the Intensive Care Unit for a business – succession management.

Securing a Business in the Event of the Entrepreneur’s Death – Is it Worth Establishing Succession Management and What Happens After It?

Remember that succession management of a business often happens in the wake of the grief of losing a loved one, in circumstances – often – of chaos that follows the death of the company’s current leader. This, in turn, causes heirs, without professional legal assistance, to often be unable to rationally, sensibly, consistently, and effectively (in the long term) agree on the principles of succession in the company, as I have concluded after providing dozens of consultations to the heirs of entrepreneurs who had to deal with taking over a business under the conditions of established succession management.

Therefore, I recommend that the very difficult topic of succession of a sole proprietorship be addressed by the entrepreneur while they are still alive. The tools provided by the Law on Succession Management of Sole Proprietorships can only serve as a kind of rescue. However, due to their complexity, level of formalization, and the necessity of implementing their assumptions under difficult inheritance conditions, they should not be seen as the foundation for preparing the succession of a family business or another sole proprietorship.

Creating a New Commercial Company

In order to ensure a safe, fully controlled succession of a sole proprietor’s business, they should consider creating an appropriate commercial company, into which they will contribute (via a so-called contribution) their entire existing business, and in return, acquire shares in the newly established company, potentially inviting their future heirs to join, while ensuring themselves an appropriate level of influence over the company.

With the appropriate structure of a contract, such as that of a limited liability company, heirs, in the event of the entrepreneur’s death, will simply inherit the majority of the shares in the company. As a result, the company will have the opportunity to continue its operations smoothly and uninterrupted, and all licenses, concessions, and – particularly importantly – all agreements and contracts entered into by the company and in its name will remain in force even after the death of the main shareholder – the former sole proprietor.

Transformation of a Sole Proprietorship into a Company

Another way to secure the future of a business, which has more advantages in many aspects than contributing assets to a company, is the transformation of a sole proprietor into a limited liability company or a joint-stock company in accordance with the provisions of the Commercial Companies Code.

The choice of the appropriate form for transforming a sole proprietorship should depend on various factors, including, but not limited to:

• the type of business activity,
• tax considerations,
• the type and number of contracts entered into by the entrepreneur,
• the personal situation of the entrepreneur’s closest family members,
• the number of employees,
• the type and nature of contracts already concluded with employees and third parties,
• the priority objectives of the transformation.

Continuation of the Business in the Inheritance through the Sole Proprietorship of the Successor

Recent tax interpretations also indicate the possibility of continuing the business in the inheritance (subject to succession management) by one of the heirs, under their own sole proprietorship. It seems that this solution would be the simplest way out of the impasse of succession management for many heirs. However, it should be applied skillfully and with great caution, taking into account various factors related to the specific situation of the business in the inheritance. Furthermore, this solution will not be applicable if more than one of the deceased entrepreneur’s heirs wishes to retain control over the company.

Is It Worth Establishing Succession Management?

There are methods to secure the business in the event of the entrepreneur’s death that are definitely more effective than establishing succession management. However, in certain cases – due to various circumstances, often including the entrepreneur’s personal characteristics – establishing succession management well in advance will be a kind of lesser evil, which will allow the business to survive during the difficult generational transformation process.

If the entrepreneur fails to take even this absolute minimum step, namely designating a succession manager during their lifetime, the appointment of one by the heirs after the entrepreneur’s death will often be the only way to ensure the continuity of the business and to buy time for the heirs to organize the company’s affairs and plan its future.

In order for the company’s succession to be successful, it is necessary to ensure legal support from a professional specializing in this area. At SURÓWKA Law Firm, we are one of the few law firms in Poland that comprehensively handles matters related to succession management for a sole proprietorship and the accompanying transformations. Our clients receive expert assistance and excellent service – we are distinguished by our proactivity and initiative, ensuring that every client is regularly and thoroughly informed about the progress of their case. It is worth noting that our specialization is not only business law Krakow, but also services in other areas, namely:

• criminal law Krakow,
• divorce cases Krakow.
• company legal services Krakow,
• company formation Krakow,
• bankruptcy of entrepreneurs Krakow,
• company liquidation Krakow,
• company division Krakow,
• company agreements Krakow,
• debt collection Krakow.

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