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LIMITED LIABILITY COMPANY – SPOLEČNOST S RUČENÍM OMEZENÝM (s.r.o.)
A limited liability company is the most popular form of a business company in the Czech. A limited liability company is commonly used only for small and medium-sized businesses. It may be established either by (i) a founder’s deed by one entity (whether an individual or a legal entity) or (ii) by a memorandum of association concluded by a group of entities.
Basic information about the legal form of business called a limited
liability company.
A limited liability company is the simplest type of capital company despite the
fact that it contains many elements of a personal company. A limited liability
company may have between one and 50 members. The legal regulations of a limited
liability company are primarily set forth in the Commercial Code. The Commercial
Code defines a common basis for all business companies in § 56 and following.
Specific regulations for a limited liability company are contained in §
105 and following.
Basic capital
The basic capital of a limited liability company must amount to no less than CZK
200,000. Each member may contribute in the basic capital of the company with
only one investment. The amount of the individual member’s investment
contribution must be at least CZK 20,000. The amount of individual members'
investment contributions may be determined differently, but each such amount
must be divisible by 1,000 without a remainder. <0} The sum of all
contributions must correspond with the total amount of the company’s basic
capital.
If a nonmonetary investment contribution is to be used to pay up an investment contribution, the partnership contract or a written statement on increasing a contribution or a written statement on acceptance of this contribution must specify the object of such nonmonetary contribution and the amount to be included as the payment of the member’s investment contribution.
Before submitting an application for the registration of the company with the Commercial Register, the full premium and at least 30% of each monetary investment contribution must be paid up. The total of paid-up investment contributions and the value of nonmonetary investment contributions must amount to at least CZK 100,000. In the case that a company is formed by one person, it may be entered in the Commercial Register only when its basic capital has been fully paid up.
A typical misunderstanding we come across in practice is the false concept of the untouchability of the basic capital of business companies (e.g. it is permanently deposited in bank accounts). The basic capital becomes the property of the company and the company disposes of it freely, e.g. uses this money to purchase office equipment and goods, pay regular bills, etc.
Another frequent question is about the amortization of nonmonetary contributions. Does the value of the basic capital decrease as they are depreciated? No, it does not, as the basic capital is “the financial expression of nonmonetary contributions," not nonmonetary contributions as such. The basic capital appears in the balance sheet as a liability (source) and its particular form is no longer important.
Liability
The members are jointly and severely liable for their company’s obligations
up to the unpaid portions of their investment contributions according to the
entry in the Commercial Register.
During extended revision, there was a significant change as of January 1, 2001,
which often remained unnoticed by entrepreneurs. Today, members are not liable
only for their unpaid investment contributions, but they are jointly liable for
the total of all unpaid funds. A situation may then arise when a creditor of
the company successfully seeks payment from you despite the fact that you have
long paid up your contribution.
A business company
A business company in the form of a limited liability company must include the
designation “společnost s ručením omezeným” (“limited liability
company”) or its abbreviated form “spol. s r.o.” or “s.r.o.” in its
commercial name (§ 107 of the Commercial Code). The business company must
comply with general requirements as a matter of course; in particular, it must
not be interchangeable with another enterprise and must not act deceptively.
According to the Commercial Code, a differing designation identifying the legal
form of the business is not sufficient to distinguish it, although we may come
across such cases in practice.
Statutory organ
One or more executive officers constitute the company’s statutory organ. Each
of the executive officers, if there is more than one, has the right to act
independently in the name of the company, unless the partnership agreement or
the statutes ((§ 133 of the Commercial Code) provide otherwise, although such
restrictions are ineffective against third parties. Executive officers bear all
legal responsibility for the company’s business management, bookkeeping,
obligations against authorities, etc. Prohibition of competitive conduct applies
to executive officers, which may not be loosened under a Commercial Code
amendment (§ 136 of the Commercial Code). However, the saying “Where there
is no plaintiff, there is no judge” also comes to mind here as this
prohibition is often breached in practice.
General meeting
The general meeting of a company’s members is its highest organ. Its
decision-making scope includes some significant facts (§ 125 of the Commercial
Code). In particular, it includes the appointment and recall of the
company’s executive officers, changes to statutes and approval of the
company’s financial statements. A general meeting may also appoint members
of the supervisory board, which is a voluntary and rarely established organ of a
limited liability company.
Advantages of a limited liability company
- limited liability of the company’s obligations
- relatively low amount of minimum basic capital and
- low demands on administration
Disadvantages of a limited liability company
- a partial disadvantage for beginner entrepreneurs is in this case the necessity to use double-entry bookkeeping
- administratively demanding dealings with authorities
- the company’s profit is taxed under corporate income tax
How to establish a limited liability company in 10 steps
- Extracts from the police record for future managing directors
- Confirmation from the revenue authority for documents declaring that partners have no tax outstanding payments
- Statutory declaration and specimen signatures (authenticated) of future managing directors
- Establishment of the company's place of business (e.g. signing an occupational lease for using non-residential rooms, including documented landlord ownership by the real estate cadaster)
- Establishment of partnership articles at the first general meeting; signing and verification by the commissioner for oaths.
- Establishment of a bank account for basic capital deposit (the bank usually requires an original of the partnership agreement); the bank will issue a written document about the payment of deposits by each partner afterward.
- Reporting of trading at the Trade Licensing Office and license application (forms are on the Internet).
- Within 90 days of establishing a company, theremust be an application for
registration in the Commercial Register. The application has this enclosure:
- two copies of the partnership agreement signed and verified by the commissioner for oaths confirmation from the curator of deposits
- bank confirmation of ability to make deposits
- authorized copies of trade licenses
- documents about the legal title of using real property – occupational lease
- statutory declarations of managing directors and specimen signatures
- extracts from the police records for managing directors
- legal stamp valued at CZK 5,000
- Registration at the Social Security Administration and a selected health insurance company no later than eight days after registering in the Commercial Register (registering may take some time, even months)
- Registering at the revenue authority within 30 days of establishing a company