A limited liability company (s. r. o.) is the most common form of business in the Czech Republic. It combines the advantages of limited liability with relatively simple administration, making it an attractive choice for many entrepreneurs. We bring you a comprehensive overview of LLCs, including practical tips, up-to-date statistics and warnings about common mistakes.
A limited liability company (s. r. o.) is the most common form of business in the Czech Republic. It is ideal for smaller and medium-sized entrepreneurs who want to do business, but with limited risk. Unlike sole traders, partners do not guarantee their entire assets, but only up to the amount of their outstanding deposit.
Compared to a public limited company, an LLC is easier to set up and manage. This legal form is very popular in the Czech Republic due to the combination of limited liability and relatively simple administration. In the Czech legal system, it is regulated by the Commercial Corporations Act.
Like other forms of business, a limited liability company has its advantages and disadvantages. The most common ones include:
Advantages:
Disadvantages:
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A limited liability company can be established by a natural person or a legal entity, either by a single or multiple partners.
The minimum share capital is set by law at CZK 1. However, to increase the credibility of the company, it is definitely better to deposit a higher amount right at the beginning. The business plan then looks more serious.
We have written in detail about setting up an Ltd. in a separate article, so now we will just outline the process of setting it up. First of all, you need to draw up a memorandum of association. If there is only one founder in the company, then it is the deed of incorporation that is drawn up. However, once there are two or more shareholders joining the company, it must have a memorandum of association. Subsequently, a notarial deed needs to be made for legal validity. Then you can go to the relevant trade licensing office to register according to the subject of the business. Of course, the filing of a petition to the registry court to carry out the registration in the commercial register must not be missed. Finally, registration for taxes – after registration in the commercial register, you need to register the Ltd. with the tax office.
You can set up a limited liability company for business purposes as well as for other purposes – for example, if you want to carry out non-profit activities. However, bear in mind that one person can be the sole shareholder in a maximum of three LLCs.
As of 31 December 2024, more than half a million limited liability companies were registered in the Czech Republic, which represents the dominant share among commercial companies. For example, limited partnerships were only 630 two years earlier and their number is declining.
There is no clearly defined price for setting up an LLC. But we’ll give you at least a rough idea – the cost of setting up a limited company is not very high. You will spend about 5 to 10 thousand crowns on notary fees. In addition, prepare 6 thousand for the administrative fee for registration in the Commercial Register. And then the costs depend on what consultancy services you use, whether you already have a trade licence and so on.
Now let’s look at how such a limited company actually works. Let’s start with the partners. They are entitled to a share of the profits and also a share of the liquidation balance. At the same time, they are obliged to contribute to the share capital.
The managing director is the statutory body of the limited liability company. He manages the company. This is usually the person we associate with a particular company, although he or she may not be the owner, because the managing director represents the company externally. The managing director is responsible for compliance with the law and must act as a good steward according to Section 159 of the Civil Code.
And then there is the general meeting. This is the supreme body of the Ltd. The general meeting decides on fundamental issues such as the amendment of the articles of association or the distribution of profits.
Tip: Are you going to set up an LLC? We will help you! We have prepared for you a company formation service that will help you to establish a company smoothly and in the shortest possible time.
In the case of an LLC, the shareholders are liable for the debts. However, they are only liable up to the amount of their outstanding contribution, so they are not at risk of personal bankruptcy because they are only liable up to the amount of the company’s assets.
However, the managing directors may be personally liable if they cause damage through negligence, breach their duty of care or otherwise breach the law.
However, the LLC itself is liable for its debts with all of its assets.
As a legal entity, a limited liability company pays 21% income tax.
If the company’s turnover exceeds CZK 2,000,000 for 12 consecutive months, the company must pay VAT. However, voluntary VAT registration is possible even before this limit and may be advantageous for the company depending on the business model.
Dividends are subject to a 15% withholding tax when profits are paid to shareholders.
If the managing director is also an employee of the company, standard social security and health insurance contributions are payable on his remuneration.
There are several ways in which a limited company can be wound up:
Liquidation then takes place by the general meeting deciding to dissolve the company and a liquidator is appointed. The liquidation is then entered in the commercial register. The company’ s debts and liabilities are settled. The company pays what it owes to whom, at least up to the amount of its assets. If there is anything left of the assets, this liquidation balance is divided among the shareholders. The company is then removed from the commercial register.
Tip: If you are still hesitating whether to go the partner route or choose an LLC, read our article that will introduce you to business from the perspective of both of these forms.
Many entrepreneurs will use a generic template for a memorandum of association which does not address specific situations such as profit shares or terms of transfer of business shares. We therefore always strongly recommend having a bespoke memorandum of association or memorandum of association drafted by a solicitor who understands the issues in depth and knows what to look out for to protect you in the first instance.
At the same time, many articles of incorporation contain ambiguities about the relationship between the shareholders. If the articles of association lack an agreement on the rights and obligations of each partner, future disputes are inevitable.
Furthermore, tax obligations are underestimated. For example, entrepreneurs forget the obligation to register for VAT or fail to file a tax return. We then have to step in as legal representatives in court proceedings. Or, conversely, it happens that entrepreneurs do not pay their wages or advances and do not keep track of the company’s finances.
A limited company is therefore a great option for entrepreneurs who want to minimise personal risks and at the same time have a professional demeanour towards business partners. Although setting it up and running it requires some administration and compliance with legislation. If you are planning to set up an LLC, take advantage of our legal services to help you avoid common mistakes and ensure a smooth start to your business.
A limited liability company (s.r.o.) is the most common form of business in the Czech Republic, suitable for smaller and medium-sized entrepreneurs due to the limited liability of the partners, who are liable only up to the amount of the outstanding deposit. The main advantages include higher credibility with business partners, flexibility of ownership structure and the possibility of tax optimization compared to sole proprietorship. The disadvantages are the obligation to keep double-entry books, higher administrative burden and more complicated profit payment. Establishing a limited liability company requires the drafting of a memorandum of association or articles of association, notarial registration, registration in the commercial register and the tax office, with costs of around CZK 10-15 thousand. The managing director is the statutory body responsible for the management of the company, while the general meeting is the supreme body. The Ltd. is subject to corporate income tax of 21%, with a 15% withholding tax applied when profits are paid to the shareholders. The company may be dissolved by liquidation, merger or bankruptcy.
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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.
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