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How are the Ltd. and its partners liable for debts?

Are you considering setting up a company and don’t know what form to choose? Apart from the financial and administrative complexity, the liability of individual shareholders or the company in general can be an important aspect of the decision. We will explain how this is the case with a limited liability company.

Stavební společnost založená formou s.r.o., ručení v s.r.o.
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Chapters of the article

The scope of liability is the biggest advantage

Limited liability is one of the biggest advantages of a limited liability company. It means that you, as the owner or shareholder, are not personally liable for the debts or liabilities of the company. You are therefore not at risk of family debt or personal bankruptcy. If trouble comes, you are only liable to the extent of the company’s assets. For many people considering setting up an LLC, this is the number one advantage. But as we’ll explain below, in some cases, a partner or managing member can also be held liable for the company’ s debts if the law so determines.

If a limited company has debts, it is liable for them with all of its assets. Of course, this consists not only of the funds in the bank account, but also of real estate, stocks, industrial rights, various equipment or machinery.

Tip: Are you a shareholder in a limited company? What does the share represent, what rights and obligations are associated with it and how can the share be transferred or otherwise disposed of? We have looked at this in our article.

Are you considering setting up an LLC?

Let the experts help you. The company you set up, including the memorandum or articles of association, will be exactly what you need for your business from the start. If you buy an existing company, you can never know its history in detail and risk unwanted liabilities or other historical residue appearing. With our company, you are guaranteed that nothing unwanted will be associated with your business.

When is a shareholder liable for the debts of an LLC and to what extent?

The liability of partners in an LLC is regulated by the Business Corporations Act. According to the law, they are jointly and severally (jointly and severally) liable with their private property only to the extent that they have not fulfilled their deposit obligation according to the status registered in the Commercial Register at the time they were called upon by the creditor to perform. The liability of the members of a limited liability company arises automatically by operation of law, as a rule, at the time of the company’s incorporation or when its share capital is increased.

However, joint and several liability is presumed , regardless of whether any of the partners have already paid their contribution. Of course, the creditor’s call does not have to be directed against all the partners; it is sufficient to call one of them to perform and the other partners will automatically be jointly and severally liable for the company’s debts (i.e. together with the called partner). The call may be made either in writing or orally. However, before a creditor does so against a shareholder, it should first call upon the company as such, as it is the primary debtor.

It is therefore primarily for the partners themselves to see to the repayment of the contribution of the others and to motivate them to complete it. Upon entry of the repayment of all contributions in the commercial register, this limited liability of the partners ceases.

Tip: For some time there was an unclear situation where a creditor called on one of the partners to perform, but immediately afterwards all deposits were paid. It was not clear at the time whether or not liability to the extent of the outstanding deposits would apply. However, the courts and now the law have sided with the creditors. Thus, the guarantee is now fixed at the time of the creditor’s call for performance (as entered in the commercial register) and thus provides creditors with the protection of their good faith in the entry in the commercial register. This means that a shareholder cannot get out of the guarantee by paying his deposit immediately after the call.

When is the managing director liable for the debts of the s.r.o.?

The managing director is responsible for the management of the company and is the statutory body within the limited liability company. He is obliged to perform his duties with due care. If he fails to do so, he is obliged to compensate for any damage caused. Should he fail to pay, the creditor may claim directly from him. However, this situation has an additional basic condition, namely that the creditor must first of all seek payment of the claim from the company and only then turn to the managing director.

If the claim was not caused by damage caused by the managing director, then the managing director is not liable for it.

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 a sole proprietorship. We’ve summarised the process, costs and conditions of setting up a limited company for you.

Unlimited liability of the managing director for the company’s debts

The Commercial Corporations Act also provides for two cases of unlimited liability of an executive for the debts of a company in bankruptcy.

The first is a situation where a person has been prohibited from acting as an executive officer on the grounds that the performance of the office has led to bankruptcy. However, the person in question breaches the prohibition. That executive is then liable for the debts of the company incurred during the period in which he or she acted as executive despite the prohibition.

The second case of unlimited liability of an executive officer is when the court so decides. It may do so if the limited liability company has been adjudicated bankrupt and the managing director knew or should have known that bankruptcy was imminent but, contrary to the care of a proper manager , failed to do everything necessary and reasonably foreseeable to avert such bankruptcy. It is therefore necessary for the court to declare bankruptcy. The liability of the managing director is decided by the court on the application of the entities listed in the list, which are the insolvency administrator or the creditor.

Other advantages of a limited liability company

Limited liability and the protection of your private assets are not the only positives worth forming an LLC for.

You should also consider certain tax advantages. Although a limited company has to pay a higher income tax rate than a sole trader, namely 19% corporation tax, and then has to pay 15% withholding tax on profit shares paid out, it can still offer tax advantages. With higher profits of approximately CZK 2,000,000, for example, it is worth investing the proceeds back into the company, which will reduce the profit and thus the income tax. In general, knowledge and use of tax optimisation can bring a number of benefits.

Owners of LLCs generally appreciate greater credibility if, for example, they bid for certain contracts as a company. Although in practice this may be a similarly sized business to that previously run as a sole trader, the impact can be incomparable. There are undeniable marketing advantages, the ability to work with the company name, logo and other attributes. Last but not least, an LLC also allows for at least partial concealment of the identity of the partners, whose names may not be immediately visible (although they are also traceable).

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

Are you solving a similar problem?

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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.

  • 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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