Types of business entities in the Czech Republic

Under the Czech Commercial Code the following structures are considered to be legal entities:

• General Commercial Partnership (Unlimited Partnership);
• Limited Partnership;
• Limited Liability Company;
• Joint Stock Company;
• Co-operative;
• European Joint Stock Company;
• European Economic Interest Grouping;
• European Cooperative Society.

All these companies start to exist as soon as they are registered in the Commercial Registry.

The Czech Commercial Code allows at least two persons (natural persons and/or legal entities) to establish a General Commercial Partnership. A General Commercial Partnership is a company of which each partner is entitled to act on behalf of the partnership and is unlimitedly, jointly and severally liable for the partnership obligation. Although a General Commercial Partnership is a legal entity, its existence remains dependent on that of its partners.

Company account do not need to be audited unless at least two out of three conditions are met (during the current or prior period): (1) turnover exceeds CZK 80 mil., (2) assets exceed CZK 40 mil., and (3) number of employees exceeds 50.

Limited Partnership is a form of a company which is similar to a General Commercial Partnership, however, unlike the General Commercial Partnership, at least one partner must have unlimited liability and at least one partner must have his liability limited to the amount of his/her registered investment (contribution) in the company. Only partners with unlimited liability are allowed to manage the company.

Company account do not need to be audited unless at least two out of three conditions are met (during the current or prior period): (1) turnover exceeds CZK 80 mil., (2) assets exceed CZK 40 mil., and (3) number of employees exceeds 50.

Under the Czech Commercial Code a Limited Liability Company is a company whose registered capital is made up of investments, agreed in advance, invested into the company by its members. A Limited Liability Company is similar to a private company under English law and comes into existence on the date of its entry into the Commercial Register. The company may also be founded by a sole founder, a legal entity or a natural person, while the maximum number of members is 50, no shares are issued; each member holds an “ownership interest”. A Limited Liability Company with a sole member cannot be a sole member of another Limited Liability Company. A natural person can be a sole member of a maximum of three Limited Liability Companies.

The minimum amount of registered capital is CZK 200,000 and the minimum of each member's investment in the company is CZK 20,000. Should there be more than one founder, at least 30 per cent of each monetary investment must be paid up and the total contributions paid up must not be less than CZK 100,000 before being registered in the Commercial Register. Should there be a sole founder, 100 per cent of registered capital of the Limited Liability Company must be paid up before the registration. Unless the Memorandum of Association stipulates otherwise, the ratio of a member's investment contribution to the company's registered capital determines the ownership interest which represents the rights and duties of a member. The members are not liable for the company’s obligations, except to the extent that they have not paid-up their investment contribution (total of unpaid investment contributions).

Company accounts do not need to be audited unless at least two out of following three conditions are met (during the current or prior accounting period): (1) turnover exceeds CZK 80 mil., (2) assets exceeds CZK 40 mil, and (3) number of employees exceeds 50.

For the registration of the company, a list of members, the amount of their contributions, their dates of birth and residence addresses (or registered office if a legal entity is a member), commercial name and the names and residence addresses of directors and the members of the supervisory board (if one is established) must be submitted to the Commercial Registry.

A reserve fund must be created in the amount of at least ten per cent of the net profit in the first profitable year of operations (however only up to an amount which equals five per cent of the registered capital. Furthermore, five per cent of net profit after tax must be transferred to the reserve fund every following year until the volume of the reserve fund reaches at least ten per cent of the registered capital. The members may voluntarily stipulate higher percentages in the Memorandum of Association (or in the Articles of Association if adopted) or decide that the reserve fund will be created already at the time of establishment of the company.

The body empowered to issue the most important decisions is a General Meeting (hereinafter “GM”). Amidst its activity, belongs: adopting Articles of Association (not obligatory) and changes in the Memorandum of Association, appointing, recalling and remunerating directors and members of the supervisory board and making decisions regarding division of proceeds. Unless the Memorandum of Association stipulates otherwise, each member has one vote per every CZK 1,000 of his/her contribution. GM can make decisions if the members with the minimum number of votes, that constitutes 50% of all votes, are present. These rules can be stipulated differently (typically more stringently) in the Memorandum of Association or in the Articles of Association (if adopted).

A director or directors compose the statuary body, they are appointed by the GM either out of the members or other individuals. Directors make decisions concerning the firm’s business administration. Other than those from EU countries, foreign persons must have an appropriate residency permit to be allowed to hold this function. EU citizens must also fulfil certain requirements, however their legal position is similar to Czech citizens.

The supervisory board is constituted if the Memorandum of Association provides so. This body is established to control the directors and can oversee and control commercial or accounting books and check the financial statements. It serves as an informative body to the GM.

The main advantages of a limited liability company are:

• Fewer regulations than a joint stock company
• Less registered capital and reserve fund required than for a joint stock company
• It can have one sole owner being either an individual or a legal entity
• It requires only a Memorandum of Association (not Articles of Association), unless the Memorandum stipulates otherwise
• It does not require a Supervisory Board (unless the Memorandum of Association stipulates otherwise – in practice Czech limited liability companies with supervisory board are very rare)

The main disadvantages are as follows:

• Ownership interests are not publicly tradable and cannot be listed on the Stock Exchange
• Transfer of ownership interests is less flexible than transfer of shares in a joint stock company
• Cannot give loans (or similar instruments) for use in purchasing its own ownership interest
• If there is a sole founder, then the total capital must be fully paid up before it may be entered in the Commercial Register

A joint stock company must have a minimum registered capital of CZK 2 million (CZK 20 mil. in case of public offering). At least 30 % of this amount must be subscribed for in cash and paid upon incorporation. It shall have both a board of directors and a supervisory board. It may be founded by a sole shareholder providing that sole founder is a legal entity; otherwise, the minimum number of founders is two. There must be a Memorandum of Association (Foundation Deed if sole founder) and Articles of Association. Liability is limited to the ownership of shares. The class, number and nominal value of shares along with the list of board of directors and supervisory board members with their dates of birth and residence addresses must be registered at the Commercial Registry. The supervisory board and the board of directors must each have at least three members, none of which can serve on both of them. If a company has only a sole shareholder the board of directors need not have three members (i.e. one director is sufficient in such cases), however the supervisory board must always have three members, even if the company has a sole shareholder. If the company has more than 50 employees then they have the right to elect one-third of the members of the supervisory board (for this purpose, only full-time employees and those part-time employees whose working hours exceed 50% of full-time employees’ working hours are considered employees). The Articles of Association may determine that the employees shall vote for more than one-third of the members of the supervisory board, but not more than one-half thereof. The Articles of Association may also entitle the employees to elect up to one-half of the supervisory board members even if the number of employees is lower than 50.

Trade licences are required and a reserve fund must be created amounting to at least twenty per cent of the net profit in the first profitable year of operations (however only to an amount which equals ten per cent of the registered share capital). Furthermore, at least five per cent of net profit after tax must be transferred to the reserve fund every following year until it reaches at least twenty per cent of the registered share capital. The above percentages may be increased by the Articles of Association.

Annual accounts must be audited by a registered auditor and published on condition that at least one of the following three conditions in the prior or current accounting period is met: (1) turnover exceeds CZK 80 mil., (2) assets exceeds CZK 40 mil., and (3) number of employees exceeds 50.

If shareholder owns 90% or more of company’s shares or has 9/10 of votes at the General Meeting, such shareholder has the right, under certain conditions, to propose and perform buy out rest of the shares owned by minority shareholders on the price determined by expert.

The main advantages are:

• Shares can be, under certain conditions, publicly traded on the stock exchange
• More flexible transfer of ownership through transfer of shares, although this depends on the type of shares
• Exists independently of its shareholders, who are not liable for the debts and obligations of the company

The main disadvantages are:

• More heavily regulated
• Requires both a Memorandum of Association and Articles of Association
• Larger reserve fund required
• Compulsory board of directors and supervisory board, which in the latter a percentage of members may be required to be elected by the employees

A Co-operative can be established by at least 5 natural persons or at least two legal entities. A Co-operative must have a registered capital at least of CZK 50,000; the amount of the registered capital as well as the amount of members' basic contribution must be registered in the Commercial Registry. An indivisible fund of at least 10 % of the registered capital must be created at the time of incorporation. At least 10 % of profits after tax must be transferred to the indivisible fund annually, until it reaches at least 50 % of the registered capital. Audit requirements are the same as for a Limited Liability Company.

European Joint Stock Company

The Czech Republic has implemented the Council Regulation (EC) No. 2157/2001 regulating a new type of legal entity – European (Joint Stock) Company, so called Societas Europeas (hereinafter "SE") by the Act no. 627/2004 Coll.

The companies carrying out a business activity that is not limited to satisfying purely local needs should be able to carry out the reorganisation of their business on a Community scale. The aim is to allow creation and management of companies with European dimension, free from obstacles arising from disparity and limited territorial application of national company law. The name of an SE shall be preceded or followed by the abbreviation "SE".

Joint Stock Company may found an SE by means of a merger, transformation or formation of a holding SE.

Such merger can be carried out in accordance with the procedure for merger by acquisition or the procedure for merger by the formation of a new company on the condition that there are at least two Joint Stock Companies governed by the law of different member states of the EU.

Transformation of an existing public limited liability Company (in Czech, Joint Stock Company) is another way of founding the SE if for at least two years it has had a subsidiary company governed by the law of another member state.

Public and private limited liability companies formed under the law of a member state, with registered offices and head offices within the Community, may promote a formation of a holding SE provided that each of at least two of the companies is governed by the law of a different member state, or has for at least two years had a subsidiary company governed by the law of another member state or branch situated in another Member State.

The regulation provides that the SE may operate in two systems: the one-tier system and the two-tier system. The common body for both systems is a General Meeting (hereinafter the "GM") of the shareholders. In the one-tier system an administrative organ operates besides the GM, whereas in the two-tier system there is a supervisory organ and a management organ.

The Regulation allows reacting on the commercial needs of the company by the possibility of transferring its seat, which should not result in the winding up of the company or in the creation of a new legal entity.

In the Czech Republic, the SE must have its seat in the location of its management and must be registered in the Commercial Register. The registered capital of an SE is divided into shares. No shareholder is liable for more than the amount he has subscribed. The minimum of subscribed capital is EUR 120 000.

The subscribed capital and the main financial statement must be expressed in CZK until the Czech Republic enters into the third stage of the European Economic and Monetary Union. There is still the possibility to prepare and make public financial statements in EUR also.

European Economic Interest Grouping

European Economic Interest Grouping (hereinafter referred to as "EHZA" or "grouping") can be established by at least two companies (or specified natural persons or combination), which have their central administration in different Member States or of which the first has its central administration in one Member State and the second carries on its principal activity in another Member State.

Parties intending to form a grouping must conclude a contract and register in the Commercial Register. Only companies or firms and natural persons who carry industrial, commercial, craft or agricultural activity or provide professional or other services may be members of a grouping. The contract on formation of grouping shall include at least the name of a the grouping (preceded or followed by abbreviation "EHZA"), the address, the objects for which the grouping is formed, specified information regarding each member and the intended duration of the grouping, except where this is indefinite. The official address of a grouping must be situated in the Community.

The purpose of EHZA shall be to facilitate or develop the economic activities of its members and to improve the results of those activities. Its activity shall be related to the economic activities of its members. Consequently, a grouping may not exercise powers of management or supervision over its members' own activities, hold shares of any kind in a member undertaking, employ more than 500 persons or be a member of another European Economic Interest Grouping.

The statutory body of the grouping shall be the members acting collectively and the manager or managers. A contract for the formation may provide for other organs (and determine their powers). Members, acting as a body, may take any decision for the purpose of achieving the objects of the grouping. Each member shall have one vote, however the contract for formation may give more than one vote to certain members, provided that no one member holds a majority of the votes. For certain decisions a unanimous decision by the members shall be required (eg. to alter the objects of a grouping, alter the number of votes allotted to each member, etc)

Each member is entitled to obtain information from the manager/managers concerning the grouping's business and to inspect its books and business records.

Profits resulting from grouping's activities are deemed to be profits of the members and shall be apportioned among them in equal shares, unless the contract for formation states otherwise. The members of a grouping have unlimited joint and several liability for its debts and other liabilities. The profits or losses of a grouping shall be taxable only in the hands of its members.

European Cooperative Society

A European Cooperative Society (hereinafter referred to as “ECS”) can be established by at least 5 natural persons or legal entities: these must be residents (or governed by the laws) of at least two different EU Member States. Other ways of founding an ECS are (i) a merger of cooperatives formed under the laws of two different Member States and with their registered offices and head offices within the EU, or (ii) by conversion of a cooperative formed under the laws of a Member State, which has its registered office and head office within the EU if, for at least two years, it has had an establishment or subsidiary governed by the laws of another Member State. An ECS must have registered capital of at least EUR 30,000: the amount of registered capital as well as the amount of members’ basic contribution must be registered in the Commercial Registry. A reserve fund in the amount of at least EUR 30,000 must be created: at least 15% of profits after tax and deduction of any losses carried over must be transferred to the reserve fund annually until at least EUR 30,000 is reached. This amount and the above percentage may be increased by the statutes of the particular ECS.