FORMS OF BUSINESS: Limited liability company (s.r.o.)

A limited liability company is considered as the best choice for beginning entrepreneurs. Compared to the self-employment, it has an advantage in the amount of liability and the possibility of investors entering your business. Compared to a joint-stock company, you do not have to deposit such a high share capital and its structure is simpler, even in terms of the company’s obligations.

First things first, have a look at our guide on how to start your own business in Prague before you begin!

To commence your business in Prague, you need to choose which legal form of your business first. The Czech Republic recognizes various forms of business companies:

COMMERCIAL COMPANIES

Limited liability company (s.r.o.)
Joint-stock company (a.s.)
Limited partnership (k.s.)
General commercial partnership (v.o.s.)

OTHER FORMS OF BUSINESS

Foundation (a non-profit organization)
Cooperative (co-op)
Self-employment (OSVČ)

Limited liability company (s.r.o.)

By establishing a limited liability company (s.r.o.), a self-employed person or a natural person becomes a legal entity. The big advantage is that the company acts under its own name (and not under the name of a natural person) which appears much more professional. Furthermore, s.r.o. has clearly limited liability for damages in the amount of share capital and reserve funds. Therefore, shareholders are not liable with all their personal assets, but only up to the amount of unpaid deposits, so there is a lower risk in case of insolvency.

Advantages

Partners do not guarantee their assets; they guarantee only to a limited extent – up to the amount of the company’s assets and up to the amount of their shares
A limited liability company (s.r.o.) is the most common and popular form of business in the Czech Republic.

Disadvantages

All expenses must be supported by a record
It is more demanding on accounting than the self-employment
Every year the company has to prepare and send a series of documents (memorandum of association, statements of directors, etc.) to various public offices
In the event of low share capital, the company may seem untrustworthy towards partners
In case of larger transactions, the contract partner may require a guarantee or other form of deposit, which is not necessarily the case in unlimited legal forms

Procedure for setting up a limited liability company (s.r.o.)

A company may be established by a single member or several partners. The minimum amount of capital at the foundation is subject to individual preference, i.e. even CZK 1. The recommendation, however, is to set the deposit and share capital at a higher, yet divisible amount, facilitating transfers and share changes.

The company shall write and sign a memorandum/partnership agreement of association with a notary
The notary shall submit a motion for registration of the company in the Commercial Register
The company is registered in the Commercial Register
On the day of registration in the Commercial Register, the Company shall be formed

Necessary documents for the establishment

ID cards of partners and executives
Extract from the criminal record of future executives of the company
Memorandum
Affidavit of the managing director
Seat agreement
Consent to the location of the company from the owner of the building
Extract from the real estate cadastre, where the company will be registered
Transaction account agreement
Deposit Manager Statement
Bank’s confirmation of repayment of share capital (if it is to be repaid during the establishment of the company)
Trade registration form at the Trade Licensing Office
Application form for an entry in the Commercial Register
Certificate of Incorporation
Tax registration form at the tax office
Extract from the trade register

Setting up a limited liability company – step by step

Before writing the memorandum/partnership agreement of association, it is appropriate to put together affidavits and specimen signatures of future executives and to reconcile the partners’ ideas about the future of the company. It is also necessary to agree on the company’s registered office (in the case of a lease, have a lease agreement secured). Only then will the memorandum/partnership agreement of association be drawn up and verified by a notary.

What must be included in the memorandum/partnership agreement?

name and registered office of the company,
designation of partners by stating their name and address (or registered office),
the subject of the business,
determination of the types of shares of each shareholder and the rights and obligations associated with them (in case the articles of association allow the creation of different types of shares),
the amount of the shared capital and the amount of the contribution or deposits attributable to the share or shares of each shareholder,
the number of executives and the manner in which they act on behalf of the company.

The next step is opening a bank account for the composition of the share capital. The bank will require the provision of the original memorandum/partnership agreement of association. It will then issue a confirmation that the deposit has been made.

This is followed by a notification to the Trade Licensing Office and an application for entry in the Commercial Register. It must be submitted within 90 days of the company’s establishment. Within 30 days of registration in the Commercial Register, the company must register with the tax office.

The articles of association also determine the company’s bodies. These are the General Meeting and the executives who are the statutory body. An optional body may then be the Supervisory Board or other bodies that are specified in the contract.

Changes:

All changes, such as a registered office or the subject of business, must be reported to the regional courts in Brno, České Budějovice, Hradec Králové, Ostrava, Plzeň, Prague, Ústí nad Labem and the Municipal Court in Prague (so-called “rejstříkový soud”). A fee must be paid for these changes, e.g. when establishing a new partnership agreement at the court of registration the fee is CZK 2 000.

Annulment:

The first step for the annulment is the annulment decision and beginning of the winding-up proceedings. The company may cease to exist when:

the period for which it was established expires,
by achieving the purpose for which it was established,
on the date stipulated by law or by legal proceedings for annulment of the company, or
on the day when the decision of the public authority becomes final (in cases where the court decides on the annulment)

State regulation and state authority competences

The obligations of the company include accounting, filing a Corporate Tax Return, filing financial statements, a proposal of profit distribution, reports on relations between related parties filed to the collection of documents in the Commercial Register, and holding a general meeting of minimum once a year.

Criminal liability

The Czech legal system recognises the concept of the criminal liability of legal entities; such liability can be in some cases effective beyond the Czech Republic’s borders.
In some cases, this concept allows for the prosecution of a legal entity where a crime has been committed to the benefit of such legal entity by its director, employee or other associated people.

Acquisition of real estate

Any purchase or transfer of real estate must be registered with the relevant Land Registry.

Data mailboxes

Data mailbox is automatically set up for each legal entity on the basis of its registration in the Commercial Register. The system is operated by the state and its purpose is to enable the official electronic delivery of documents and official communication, in particular between the public authorities and the owners of the data mailboxes.