Continuation of entrepreneurial activity in the form of a company

The continuation of an entrepreneur’s business in the form of a company is an institution that enables business continuity and provides certain advantages compared to the situation where the entrepreneur would simply deregister and establish a new company “from scratch”.

Legal basis for transitioning from an entrepreneur to a company

The Corporate Law allows an entrepreneur to make a decision to continue conducting business in the form of a business company, with the application of the provisions of the law relating to the establishment of a specific form of a company (most often a limited liability company – LLC).

Based on that decision:

• the entrepreneur is deleted from the register of business entities,
• At the same time, the registration of the establishment of a business company is carried out,
• the new company takes over all rights and obligations that the entrepreneur acquired from the business until the moment of the company’s establishment (except for the personal obligations of the entrepreneur as a natural person).

Business continuity and legal succession

The main advantage of this procedure is the preservation of business continuity and legal succession, which can bring significant tax benefits and avoid complications that would arise when terminating the entrepreneurial activity and establishing a new business entity.

Before making a decision on the continuation of an entrepreneur’s business in the form of a company, it is necessary to carefully analyze all aspects of the procedure, because the reverse process (return from a company to an entrepreneur without loss of continuity) is not possible.

Taking over labor relations and general acts

An entrepreneur who converts to a company transfers:

• general act (e.g. work regulations),
• all employment contracts in force on the date of the change of employer.

A company as a successor employer is obliged to apply the general act of the entrepreneur for at least one year.

The accounting aspect

Upon termination of business, an entrepreneur is required to prepare a financial report in accordance with the law and submit it to the Register of Business Entities (APR).

This extraordinary financial report includes a balance sheet and an income statement and is prepared on the day preceding the date of deletion of the entrepreneur from the register. The deadline for submitting the report to the APR is 60 days from the date on which the report was prepared.

Before preparing the report, it is necessary to make an inventory of assets and liabilities, and to reconcile the accounting balance with the actual balance.

Also, on the same day when the report is prepared, a tax return is submitted to determine the tax liability for the period from the beginning of the calendar year to the date of deletion from the business register.

Tax aspect

Continuing business through the form of a business entity has an impact on several tax categories:

• Value Added Tax (VAT)
• Personal income tax
• Corporate income tax
• Property tax (including tax on the transfer of absolute rights)

VAT system: transition from entrepreneur to legal entity

When switching:

• the entrepreneur is deleted from the VAT taxpayer register,
• A new company is registered as a VAT payer, if it meets the requirements.

If a request for deletion from VAT records is not submitted, the following penalties apply:

• from 50,000 to 500,000 dinars for an entrepreneur,
• from 100,000 to 200,000 dinars for a legal entity, if it fails to submit a registration application.

Transfer of obligations and tax liability

A company that takes over the assets of an entrepreneur also takes over the liabilities arising from the business. This means:

• In the event of forced collection, the tax authority may request payment of obligations from both a natural person (former entrepreneur) and a legal entity (company).

On the other hand, the new company has the right to use:

• the tax credit to public revenues that the entrepreneur had,
• the possibility of refunding or recalculation of these funds.

Conclusion

Continuing an entrepreneur’s business in the form of a company is a legally enabled procedure that:

• ensures business continuity,
• enables legal succession and tax benefits,
• preserves existing contracts and employment relationships,
• reduces the risks of business interruption.

However, due to the complexity of the process, it is necessary to carefully plan all steps, in consultation with legal and accounting experts.