Setting Up a Business in the Czech Republic

Steps for setting up for business in the Czech Republic.

Opening for business consists of two stages:

- Setting up a trading partnership (contract between partners)

- Incorporation of a trading partnership (incorporation into Register)

Setting up a company

1. by a partnership contract signed by all the partners and authenticated by a notary public;
2. by a deed of foundation authenticated by the notary public (if permitted by the law that the company may be founded by a sole founder).

In case of a limited liability company the Commercial Code enables, and in the case of a joint-stock company it orders, the issue of the articles of association of the company, specifying in detail the relations among partners, namely their share in profit and compensation for the possible loss of the company.

A set-up trading partnership is not entitled to enter legal relations because, from the legal point of view, its existence starts only after its incorporation into the Companies Register. Any legal acts made by individual partners within the period from setting up till the incorporation of the legal entity are made only by physical entities with unlimited liability. Within this period the company also has to obtain any necessary trade licences in accordance with the Small Business Act and enclose them to the application for the incorporation into the Companies Register.

Incorporation of a company
- since the date of incorporation into the Companies Register,
- a proposal for incorporation into the Companies Register should be presented within 90 days after setting up the company.

Important terms connected with setting up a trading partnership:

Registered capital - financial expression of a sum of both monetary and non-monetary investments of individual partners.

Anything that may be expressed in money and used for the given sphere of business may be used as an investment into the company. Buildings, machinery, securities, know-how, inventions, copyrights or even claims (somebody owes you money). In the case that a partner deposits a claim into the registered capital, he/she shall be responsible for its recovery (he/she answers for the fact that the debtor will really pay the money to the firm) up to the amount of valuation of the claim. If you deposit anything else than money to the firm, you have to have a written expert valuation elaborated, in some cases even by two independent experts.

Its formation is compulsory in limited partnerships, s. r. o. (limited liability company) and a. s. (joint-stock company).
Registered capital is a part of equity capital of the firm (you will use the information in bookkeeping).
Its amount is registered in the Companies Register (so it is publicly known);

Share of a partner - the share represents the participation of a partner in the company and his/her rights and obligations resulting from this fact. For the purposes of this act a share is valuated as the extent of participation of the partner in net assets of the company (after obligations are settled).

Reserve fund - Capital trading partnerships are obliged to form reserve funds, which in the case of s.r.o. is at least 10% of the registered capital and in the case of a.s. at least 20% of the registered capital. The reserve fund serves exclusively for covering losses of the company (it is not allowed to use it for some other purposes). However, the fund needn't be formed at the beginning of business activities. Money is transferred to the fund net of tax from profits of the current year. This fact has two effects. If the firm does not create profit as a result of its activities, there is nothing that may be transferred to the reserve fund. The other important feature of the reserve fund is that money is transferred there only after payment of a legal entity income tax, which means money that fully belong to the firm (it is not burdened by any obligation to the state). You will use the characteristics in bookkeeping when you distinguish your own and foreign sources.

The approved amendment to the Commercial Code dated 2000 deals in detail with problems of relations among shareholders, their rights of vote; there are terms such as controlling person, controlled person, controlling contract, misuse of position, persons acting in agreement, etc.

Companies have been formed, working, merging, separating, sold and ceasing to exist. It is important to be familiar with the procedures and even at the time of the incorporation of a company be familiar with possible risks and advantages of individual forms of companies.
Personal trading company is closely connected with its founder and that is why it is difficult to sell such a company. This type of companies is suitable for small family firms. Its advantage is trading without the necessity of compulsory initial investment.

Stock corporation is not bound to a particular founder and shares may be sold easily. An entrepreneur should be aware of this fact from the very beginning and purposefully increase not only profits, but also the value of the firm itself (the value of a firm consists of material and non-material elements, good name, market share, wide distribution network, etc.). You have to know that more than a half of stock corporations change their owners within three years, merge with other companies, etc.

Source: Ministry of Foreign Affairs of the Czech Republic

For further information on setting up a business in the Czech Republic, check out Companies.cz.

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