Incorporation and Liability of a Joint-Stock Company

Quick Overview: Who Is Liable for a Corporation’s Debts?

• A joint-stock company is liable for its debts with all of its assets.
• Shareholders are generally not liable for the debts of a.s., not even up to the amount of the unpaid share premium.
• However, a shareholder may lose the value of their investment and may be required to pay the outstanding portion of the share premium.
• Members of the board of directors or the administrative board may be held personally liable if they breach their statutory duties.
• In the event of impending bankruptcy, management must act in a timely manner. Delaying the filing of an insolvency petition may give rise to liability for damages.

The Business Corporations Act is based on the principle that shareholders are not liable for the debts of a joint-stock company. However, the company itself is liable to creditors with its assets. The protection of shareholders’ personal assets does not automatically extend to members of the statutory body, who must act loyally, knowledgeably, and with due care.

Are you unsure whether your company’s structure adequately protects your personal assets? Have our attorneys review your articles of incorporation, the liability of board members, and the risks associated with the company’s debts.

Limited Liability Company (S.r.o.) or Joint-Stock Company?

The most common legal form of a company in the Czech Republic is a limited liability company (S.r.o.). Logically, this is the legal form that aspiring entrepreneurs most often consider—and rightly so. Establishing an S.r.o. is disproportionately easier than establishing other types of companies, particularly a joint-stock company.

It should also be noted at the outset that the other differences between these two types of business entities are significant. Entrepreneurs generally don’t need to delve into the details of their legal frameworks; rather, they should assess their current financial capabilities and consider their future plans for the company and their business in general. This can be a decisive factor.

So, if you’re just starting your business, want to launch your first company, and your finances are rather limited, it stands to reason that a joint-stock company isn’t the right choice for you. You should instead consider establishing a limited liability company or, alternatively, registering as a sole proprietor.

Liability of a Joint-Stock Company and Its Shareholders

When assessing liability, it is necessary to distinguish between the joint-stock company itself, its shareholders, and the members of its governing bodies. Each of these groups has a different legal status.

What a Joint-Stock Company Is Liable For

A joint-stock company is a separate legal entity. It is liable for its debts with all of its assets, such as funds in bank accounts, real estate, receivables, or other corporate assets. Therefore, a creditor typically seeks payment from the company itself, not directly from its shareholders.

If the company does not have sufficient assets, this does not automatically mean that its owners or members of management must pay the debt. Their personal liability may arise only if certain additional legal conditions are met.

Shareholders’ Liability for the Debts of a Joint-Stock Company

Shareholders are generally not liable for the debts of a joint-stock company. Therefore, a creditor of the company cannot demand payment of the debt from a shareholder simply because the shareholder owns its shares. The separation of the company’s assets from the personal assets of its shareholders is one of the fundamental advantages of a joint-stock company.

However, shareholders still bear business risk. If the company performs poorly, the value of their shares may drop significantly or become virtually worthless. Furthermore, if the issue price of the shares has not been fully paid, the shareholder must properly fulfill their capital contribution obligation. This does not, however, constitute liability to creditors for any and all of the company’s debts.

How Does the Liability of Shareholders Differ from That of Partners in a Limited Liability Company (s.r.o.)?

The members of a limited liability company (s.r.o.) are jointly and severally liable for the company’s debts up to the amount of their unpaid capital contributions, as recorded in the Commercial Register. Once all capital contributions have been fully paid and the relevant entry has been made, their statutory liability generally ceases.

In the case of a joint-stock company, the law does not provide for similar liability of shareholders for the company’s debts. The legal distinction between the two forms therefore exists, even though the practical impact may be similar for a limited liability company with fully paid-up capital contributions.

Liability of Members of the Board of Directors and the Administrative Board

Members of the board of directors in a dualistic system and members of the administrative board in a monistic system are not merely shareholders. As members of an elected body, they must act with due care—that is, loyally, with the necessary knowledge and diligence.

If a member of such a body breaches this duty and causes damage to the company, he or she may be required to compensate the company for such damage. If the member fails to compensate the company for the damage and the creditor cannot obtain payment directly from the company, the member of the body may, under certain conditions, also become personally liable to the creditor.

The personal liability of board members may be particularly relevant when:

• they enter into contracts that are clearly disadvantageous to the company,
• they make decisions without sufficient information,
• they favor their own interests or the interests of another person,
• they improperly distribute profits,
• they ignore the company’s deteriorating financial situation,
• fail to file for insolvency in a timely manner.

The mere failure of a business decision does not automatically constitute a breach of duty. The primary consideration is whether the member of management acted with due diligence, in the justifiable interest of the company, and without a conflict of interest when making the decision.

The Civil Code and the Business Corporations Act link the performance of the duties of a member of an elected body to the duty of care of a prudent manager. At the same time, the Insolvency Act imposes on persons authorized to act on behalf of the debtor the obligation to respond to insolvency and file for insolvency without undue delay.

Are you concerned that a specific decision by the board of directors could give rise to personal liability? Have the procedure reviewed before the company enters into a contract or makes a disputed payment.

Example from Legal Practice

In practice, we often encounter the misconception that forming a corporation automatically protects the personal assets of everyone who manages the company. However, this applies primarily to passive shareholders. A member of the board of directors or the administrative board must be able to demonstrate what information they relied on when making an important decision and why they considered it beneficial for the company.

A typical mistake, for example, is continuing to take on additional obligations at a time when management already knows that the company will likely be unable to fulfill them. In such a situation, it is important to continuously document the company’s financial condition and assess in a timely manner whether the conditions for bankruptcy have already been met.

Administrative Burden and Complexity in Incorporating and Operating a Company

When establishing a joint-stock company, you must:

• draft the articles of incorporation and the company’s bylaws in the form of a notarial deed,
• obtain a business license,
• contribute the initial capital,
• register the joint-stock company in the Commercial Register.

At first glance, this short list does not seem particularly complicated, but the reality of establishing a joint-stock company is significantly more complex. The legal framework is complex, and managing the company itself is disproportionately more demanding compared to a limited liability company (s.r.o.). The complexity is primarily increased by the obligation to hold general meetings, the requirement for an audit, and various disclosure obligations. You must also not overlook the value-added tax liability and the relatively complicated accounting requirements.
A joint-stock company may have only one shareholder, but it usually has more from the outset. Thus, its structure is somewhat more complex right from the start.

Financial Costs of Establishing a Joint-Stock Company

The most fundamental difference—and often the deciding factor in choosing between a limited liability company (s.r.o.) and a joint-stock company—is the requirement for the amount of registered capital. Currently, this amount is 2 million crowns, whereas for a limited liability company it is only 1 Kč. The registered capital is divided among a predetermined number of shares.

In practice , the financial burden can be mitigated by the fact that establishing the company requires payment of only 30% of the contribution. For a joint-stock company, the law requires payment of 30% of the par value of the subscribed shares and any share premium. Payment must be made no later than the filing of the application for the company’s registration in the Commercial Register. For a limited liability company, at least 30% of the monetary contributions must be paid up no later than 5 years from the company’s formation or from the assumption of the contribution obligation.

Governing Bodies of a Joint-Stock Company

A joint-stock company has a statutory choice between two management systems:

• The first option is the so-called monistic system, in which a board of directors is established to serve as the statutory body.
• In the second, dualistic system, a board of directors and a supervisory board are established. Both bodies must have at least three members, unless the company’s articles of incorporation specify otherwise. In case of doubt, the dualistic system is presumed to have been adopted. This choice offers greater flexibility and the ability to select a more suitable corporate governance structure. This, in turn, impacts the effectiveness and success of the company’s management.

A joint-stock company must also regularly convene a general meeting. The general meeting decides, for example, on the election and removal of members of the relevant bodies, amendments to the articles of incorporation, the distribution of profits, or other matters entrusted to it by law or the articles of incorporation. However, the day-to-day management of the company falls to the statutory body.

Share in Profits or Losses

The goal of every business entity is, of course, to generate a profit, which would then be distributed among the shareholders. In most types of companies (such as a general partnership or a limited liability company), profits are distributed equally among the partners, unless otherwise agreed in the articles of association. In a joint-stock company, however, the general meeting of shareholders decides on the amount of each shareholder’s share of the profits.

Access to External Sources of Funding

Access to external financing refers to the ability to obtain additional sources of capital, such as various loans and credits. For a limited liability company, the amount of the initial capital contribution is one of the factors considered. And this applies generally: the stronger a company’s capital base, the easier it is for it to access financial resources. In this case, of course, this works in favor of the joint-stock company.

Company Stability and Future Transfer

In a joint-stock company, its formation is linked to shares purchased by various shareholders. These shareholders may, in essence, be completely independent of the company—and vice versa. As a result of this structure, changes in the ownership of individual shares do not lead to changes within the company. This ensures its relative stability. Conversely, even after the original founders are no longer with the company, it can continue to function effectively.
Transferring ownership interests, or individual shares, is generally a relatively straightforward process. In contrast, transferring ownership interests in a limited liability company requires contracts, entries in the commercial register, and other administrative procedures that complicate the process.

A joint-stock company is certainly suitable for launching a large-scale business. It lends your business prestige and credibility. On the other hand, however, it requires a much larger initial investment, a professional management team, and a responsible approach to management and administration. On the other hand, a limited liability company is definitely more advantageous for small and medium-sized entrepreneurs who need a quick and flexible start. The priorities are low costs and administrative tasks that can be managed by non-experts (usually with the help of an accountant and a lawyer).

Summary

A joint-stock company is liable for its debts with all of its assets, while its shareholders are generally not personally liable for the company’s debts. Their risk usually consists primarily of a loss in the value of their shares and the obligation to repay the full issue price. Members of the board of directors or the administrative board have a different status. If they breach their duty of care, cause damage to the company, approve an unlawful distribution of profits, or respond too late to insolvency, they may be held personally liable. A.s. is therefore particularly suitable for capital-intensive businesses, investor participation, and more complex ownership structures; however, it requires a higher amount of authorized capital, well-drafted articles of incorporation, and professional management.