An entrepreneur can transfer their sole proprietorship (s.p.) to another entrepreneur or transform their s.p. into a limited liability company (d.o.o.), with the option to later sell their share in the company if desired.
Transforming a sole proprietorship into a limited liability company is primarily recommended for the protection of personal assets. A sole proprietor is liable for the company’s obligations with all of their personal assets. However, in a limited liability company, shareholders are not liable for the company’s obligations. Additionally, in cases of higher earnings, the transformation may be beneficial due to lower tax burdens. The entire transformation process from sole proprietorship typically takes between one and three months.
Methods of transformation
An entrepreneur can transform their business status in two ways:
- By transferring the business to a new capital company established specifically for this purpose, or
- By transferring the business to an existing capital company.
The transfer can be either complete or partial.
Upon registration of the transfer, the entrepreneur ceases business operations. The business of the entrepreneur, following the transfer decision, is transferred to the new company, and the entrepreneur becomes a shareholder in the new company. The registration authority must then notify AJPES to remove the entrepreneur from the Business Register of Slovenia.
With the transfer, the company acquires the business along with all associated rights and obligations of the entrepreneur. The company, as the universal legal successor, enters into all legal relationships related to the transferred business. Therefore, contracts with business partners, employment contracts, and other business-related agreements do not need to be changed. However, it is necessary to handle the registration and deregistration of employees with the Health Insurance Institute of Slovenia (ZZZS), transfer ownership of real estate in the Land Registry, and transfer ownership of vehicles. Depending on the specific assets of the sole proprietorship, other procedures for transfer or registration (licenses, concessions, etc.) may need to be completed.
The transfer date is the balance sheet cut-off date, on which the entrepreneur prepares the financial statements of the business. From the balance sheet cut-off date onwards, accounting and tax treatment considers the actions of the entrepreneur related to the transferred business as being done for the account of the new or acquiring capital company. Legally (in terms of rights and obligations), the transfer is completed when the transformation is registered in the court register.
Entrepreneur’s liability for obligations
If the company fails to meet obligations incurred by the entrepreneur related to the business before the transfer is registered, the entrepreneur is liable for them with all of their assets. Claims expire five years after the transformation unless the claim would expire sooner. The statute of limitations starts on the day the removal of the s.p. is registered. If the creditor’s claim against the s.p. only arises after the termination is registered, the statute of limitations starts from the due date.
Tax aspects of the transformation
Transforming an s.p. into a d.o.o. may be subject to taxation if the process is not carried out by the laws governing taxation.
A more favorable tax treatment (Article 51 of the Personal Income Tax Act) can be achieved if the transformation is performed in accordance with the provisions of the Companies Act on the status transformation of an entrepreneur. The following conditions must be met:
- The new or acquiring legal entity must be a Slovenian tax resident.
- The new or acquiring legal entity must value the acquired assets and liabilities and depreciate the acquired assets. It must also calculate profits and losses related to the received assets and liabilities based on the values on the last day of the period for which income tax prepayment is calculated for the entrepreneur undergoing transformation as if the business had not ceased.
- The new or acquiring legal entity must assume the reserves created by the entrepreneur, which can be attributed to the business or part of the business being transferred, under the same conditions as would apply to the entrepreneur if the business had not ceased.
- The individual must commit to retaining their share in the legal entity obtained through the status transformation for at least 36 months and not reduce its nominal value.
The part of the business refers to a set of assets and liabilities that can operate independently from a business organizational perspective. Within the part of the business being transferred, only obligations and tax benefits attributable to this part can be transferred.
Assets and liabilities that are not transferred in the case of a partial transfer of the business are treated as if they were disposed of, in accordance with the first paragraph of Article 51.
Non-compliance with conditions
If the above conditions are not met within five years of the cessation of business, there are consequences. Income that would not otherwise be considered taxable for the ceased entrepreneur will be taxed as other income of the individual under Chapter III.7 of the Personal Income Tax Act (taxed at a rate of 25%), except in cases where the entrepreneur has died. Additional taxation will also apply to the new or acquiring legal entity in accordance with the provisions of Chapter VII of the Corporate Income Tax Act.
More favorable tax treatment is granted if it is declared to the tax authority and the above conditions are met.
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