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Establishment and liability of a public limited company

Are you considering setting up a company and don’t know what form to choose? Important factors for the decision are the financial and administrative complexity, the forms of liability of individual partners or the company in general, the method of taxation and the form of accounting. We will briefly look at these factors to see how setting up a joint stock company is worthwhile compared to other types of companies and what the disadvantages are.

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7 minutes of reading

Chapters of the article

LLC or joint-stock company?

The most common legal form of a company in the Czech Republic is a limited liability company. Logically, this legal form is the one most often considered by a starting entrepreneur. And rightly so. Its establishment is disproportionately easier than other types of companies, especially a joint stock company.

It must also be said at the outset that other differences between the two types of companies mentioned are also marked. As a rule, entrepreneurs do not need to examine the details of their legal regulations, but rather to ask themselves what their current financial possibilities are and what plans they have for the future with the company and their business in general. This can be critical.

So, if you are at the start of your business, want to start your first company and your finances are rather limited, it is obvious that a public limited company is not the right choice for you. Rather, setting up a limited company or even a sole trader is something to consider.

Tip: If you don’t know whether to choose a sole proprietorship or a limited liability company for your business, read our article on this topic. We provide clear arguments and counter-arguments to help you decide which is better for you.

Do you need a lawyer for your business from time to time?

Don’t you have time to look for it every time, catch up with it and deal with the billing? Or do you even want to have a lawyer available all the time? Contact us.

Liability in a public limited company

The members of a public limited company, i.e. the shareholders, are not liable for the company’s obligations. This is a definite advantage over a limited company. The only thing they can suffer is a reduction in the value of the shares they own. However, this is quite a pressing problem in today’s world. In contrast, the shareholders of an LLC are liable up to the amount of their outstanding contribution to the company’s share capital. Their liability is therefore in reality rather theoretical and from this point of view there is no fundamental difference in reality between a public limited company and a limited liability company.

Tip: We have discussed the issue of limited liability in detail in our blog article.

The administration and complexity of setting up and running a company

When setting up a public limited company, you must:

  • draw up the articles of incorporation and, in addition, the articles of association in the form of a notarial deed,
  • a trade license,
  • deposit the share capital,
  • register the joint stock company in the Commercial Register.

This short list does not look complicated at first sight, but the reality of establishing a joint stock company is much more complicated. The legal regulations are complex and the actual management of the company is disproportionately difficult compared to an LLC. The difficulty is increased by the obligation to hold general meetings, the need for an audit and various disclosure obligations. You must not neglect the value added tax obligation and the rather complicated bookkeeping.
A public limited company may have only one shareholder, but usually it has more than one from the start. So it has a slightly more complex structure when it is set up.

The financial complexity of setting up a public limited company

The very basic difference, which is often where the decision on whether to set up an LLC or a public limited company ends, is the requirement for the amount of share capital. At present, it amounts to CZK 2 million, while for a limited liability company it is only CZK 1. The share capital is distributed among a pre-specified number of shares. In the case of a public share buy-back offer, the minimum capital is CZK 20 million.

In practice, the financial burden can be mitigated by the fact that the incorporation of the company requires the repayment of only 30% of the deposit. In the case of a public limited company, the law requires the repayment of 30% of the nominal value of the subscribed shares and any share premium. The repayment must be made no later than when the application for registration of the company in the Commercial Register is filed. In the case of a limited liability company, at least 30 % of the cash contributions must be repaid no later than 5 years after the company’s incorporation or the assumption of the deposit obligation.

Bodies of a public limited company

A public limited company has a statutory choice of two systems of governance:

  • The first option is the so-called monistic system, where a board of directors is created to act as the statutory body.
  • In the second dualistic system, a board of directors and a supervisory board are created. Both bodies must have at least three members, unless the company’s articles of association provide otherwise. When in doubt, the dualist system is chosen. This choice brings a greater degree of variability and a choice of a more appropriate management structure. This in turn translates into the efficiency and success of the company’s management.

The shareholder must also convene a general meeting on a regular basis, during which, for example, the management of the entire company is determined or the members of the board of directors are elected.

Share of profit or loss

The aim of any company is, of course, to make a profit, which is then distributed to the shareholders. In most types of company (for example, a public company or an LLC), the profit is divided equally among the shareholders, unless otherwise agreed in the articles of association. However, in the case of a public limited company, the amount of the shareholder’s share of the profit is decided by the general meeting.

Access to foreign resources

Access to external resources refers to the possibility of obtaining other sources of capital, such as various loans and credits. In the case of a limited liability company, the amount of paid-in capital is considered, among other things. This is also true in general: the stronger the company is in terms of capital, the easier it can access financial resources. This, of course, plays to the advantage of the public limited company in this case.

Stability of the company and future transfer

The formation of a public limited company is linked to shares that are bought by different shareholders. They can then be essentially independent of the company and vice versa. The consequence of this set-up is that when the owners of individual shares change, there are no changes within the company. This ensures its relative stability. Conversely, even after the original founders are no longer in the company, the company can continue to function well.
As a rule, the transfer of shares or individual shares is relatively easy. Conversely, the transfer of shares in a limited liability company requires contracts, registrations in the commercial register and other paperwork that complicates the process.

A share company is certainly suitable for starting a business in a big way. It will add prestige and credibility to your business. But on the contrary, it requires many times more initial investment, multi-person professional management and a responsible approach to management and administration. On the other hand, a limited company is definitely preferable for small and medium-sized entrepreneurs who need a quick and flexible start. Low costs and manageable administration by a layman (usually with the help of an accountant and lawyer) are a priority.

Tip: Has your business grown and no longer suits you in its current form? Are you thinking of setting up a limited company but find it administratively and financially too complicated? You may be surprised to learn that it is far from it and there are some advantages over sole proprietorship. In our article we have summarised the procedure, costs and conditions for setting up a limited company.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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