Živnostenský List or SRO?

If you want to work for yourself in the Czech Republic, would you better off getting a trade license or setting up a limited liability company?

Živnostenský List

Prague TV has already explained how to obtain a živnostenský list (trade license) but do you want to bother?

For non-EU citizens getting a "živno" can involve what seems like an endless paper chase as you run to various offices getting documents stamped, notarized, and signed.

One obvious benefit of a license is that you are free to work for who you want. This is particularly beneficial if a company doesn't give you enough hours.

If you have a work permit, you technically require your employer's permission to work elsewhere. This is not the case with a živnostenský list.

A trade license also means that you can engage in a number of different business activities. If you are a teacher who translates on the side, an IT specialist who also offers consultancy, or someone who contributes to magazines from time to time, the trade license means you can do all of this legally.

But beware! If you have your fingers in a lot of pies, make sure those pies are listed on your license. The Živnostenský úřad (trade license office) must be notified of whatever business you intend to engage in.

The good news is that this situation should be changing, from January 1st, 2008. One of the main changes is that it should no longer be necessary to register all your business activities and, hopefully, it will be enough to have a single license that covers all your jobs.

This isn't guaranteed, however, so contact your local Živnostenský úřad to stay informed about these changes.

(For Czech-speakers, there's additional information about the change in this PDF prepared by the Hospodářská komora České republiky (Czech Republic Chamber of Commerce).)

Apart from freeing you up to work, a trade license entitles the holder to some tax exemptions. The first 50% of your income is tax-free.

But while freelancers pay lower taxes, they also have to pay their own health and social insurance.

Having a trade license can make you more attractive to employers, because they don't have to pay employee tax. Because of this saving, some freelancers negotiate a bonus for themselves but it'll be your powers of persuasion rather than your trade license that determine whether or not you get this!

If you're anything like me, the major disadvantage with having a živnostenský list is keeping a record of your income and expenses. Come February, your documents should be in order and submitted to the tax office. The financially challenged can, of course, hire an accountant but this is a further expense.

Another disadvantage may be that you don't have the full protection of a regular full-time employee. Apart from having to pay for your health insurance and social security contributions you may miss out on discounted meals or find that you're not entitled to the same holidays as others.

S.R.O. (Limited Liability Company)

To give yourself another level of protection you may consider setting up a limited liability company -- in Czech, a společnost s ručením omezeným or s.r.o.

Like many things in the Czech Republic establishing an s.r.o. will require some paperwork.

There's a brief guide to establishing a company on the Foreign Ministry's official Czech Republic website but these are the basics:

• A (clean) Czech police record (rejstřík trestů)

• Confirmation that you have no outstanding tax bills

• Premises in the Czech Republic to do business from

• A bank account

• A živnostenský list (trade license)

• Registration with the Obchodní rejstřík (Business Register) at a cost of 5,000 CZK

• Registration with the health, social, and tax offices -- you must register with the tax office within 30 days of establishing your company

• Starting capital of 200,000 CZK

Once your s.r.o. is established you must maintain 10% of your net profit as reserve capital, (though this sum is capped at 5% of your registered capital).

Your company must undergo an audit if two of the following three situations arise:

• The balance sheets for the current and immediately preceding accounting periods exceed 40 million CZK

• The net turnover exceeds 80 million CZK

• The average number of employees exceeds 50

If you decide to set up an s.r.o. with others, the maximum number of owners is 50 and each must contribute at least 20,000 CZK. This contribution can be in the form of equipment but it must be appraised by a professional.

Please note that an s.r.o. offers its owner(s) less protection than a limited liability company in the USA or UK. According to an article on limited liability companies on the Foreign Ministry's official Czech Republic website, "members [of an s.r.o.] are not liable only for their unpaid investment contributions, but they are jointly liable for the total of all unpaid funds."

Another drawback is that taxes are quite high. As of October 2007, corporate income tax was set at 24% and, unlike an individual's income, that rate isn't adjusted to take into account how much (or how little) you earn.

One advantage of establishing an s.r.o. is that you can purchase property in the Czech Republic.

Even with a trade license you may be exempt from buying Czech property if you aren't an EU citizen or a citizen from a "favored nation" such as the United States, or if you don't have a residency permit.

For the novice, the administration an s.r.o requires can be quite demanding. Of course, this is one of the burdens of starting a company anywhere, but in the Czech Republic the levels of bureaucracy remain quite high.

Ultimately, whether you decide to get a trade license or set up an s.r.o. will depend on the amount of capital you need, the investments you need to protect, and the size of your business.

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