Company law, company formation, restructuring Can a single-member Ltd. set up another single-member Ltd.?
The draft articles of association had already been prepared. The client’s question essentially concerned only how long the registration process would take.
Our response, however, was different: under such arrangements, the registry court will not register the company.
What exactly does the law prohibit?
The regulations stipulate that a limited liability company cannot be formed solely by another single-member limited liability company.
The aim of this regulation is to limit the possibility of creating multi-tiered structures consisting solely of single-member limited liability companies, in which successive legal entities separate the ultimate owner from the business being conducted.
However, it is worth defining the scope of this prohibition precisely, as in practice it is sometimes interpreted too broadly.
First and foremost:
- the prohibition applies at the time of the company’s incorporation, not to its subsequent operation;
- it applies where the sole founder of a new company is to be a single-member limited liability company;
- a limited liability company with more than one shareholder may establish a subsidiary on its own;
- a single-member limited liability company, on the other hand, may acquire all the shares in a company that already exists;
- this prohibition may also be relevant in cross-border structures. It cannot be assumed that the prohibition will be disregarded simply because the sole founder of a Polish company is to be a foreign single-member capital company, such as a German GmbH or a British Ltd. When planning such a structure, it is necessary in each case to examine whether the foreign entity is functionally equivalent to a single-member limited liability company within the meaning of Polish law.
The problem, therefore, is not that a single-member limited liability company cannot be the sole shareholder of another limited liability company. It can. It simply cannot incorporate it on its own.
Shares may be transferred, but only after the company has been registered
One practical way of resolving this issue is for two shareholders to form a new company, and then for the intended shareholder to acquire all the shares.
Such an arrangement is, in principle, permissible, but the sequence of actions is very important.
The sale of shares cannot take place whilst the company is still in the process of being formed. Under the regulations, a transfer of shares carried out before the company is entered in the register is invalid.
In practice, this means that the following must be done first:
1. set up a company with at least two shareholders,
2. ensure it is entered in the National Court Register (KRS),
3. and only then carry out the share disposal transaction leading to the formation of a single-member limited liability company.
Conclusion
When creating holding structures, the problem is often not the permissibility of the target structure itself, but the manner in which it is achieved.
In the case in question, the target structure – a single-member limited liability company holding 100 per cent of the shares in another limited liability company – is permissible. However, the simplest route to achieving this, namely the single-member parent company establishing a subsidiary on its own, is not permissible.
The same risk must be taken into account with regard to foreign structures. The mere fact that the parent company is a GmbH, Ltd. or another foreign limited company does not in itself mean that the prohibition under Article 151(2) of the Commercial Companies Code will not apply.
This is a good example of a situation where a seemingly technical provision of the Commercial Code may determine the sequence of the entire transaction. Therefore, when setting up a holding structure, it is worth planning not only the end state but also the individual stages leading up to it.
