What is an s.r.o.?

An s.r.o., or limited liability company, is the most common type of company. It can have any number of owners (known as shareholders). The company itself is represented by a managing director. The managing director and shareholder may, but need not, be the same person. 

The minimum share capital of a company is CZK 1. This share capital is meant to serve as an initial budget to get the company started. It is therefore clear that CZK 1 is not enough. 😊 Even so, people often establish s.r.o. companies with very low share capital and then lend the company money interest-free.

The main advantages of an s.r.o. undoubtedly include the fact that a shareholder’s liability is limited to the unpaid share capital. Compared with being self-employed, where you are liable with all your assets, a company owner is much better protected against possible missteps.  

Of course, operating through an s.r.o. also brings several disadvantages. One of the main drawbacks is higher taxation of profits. Companies pay 19% tax, while self-employed people pay only 15%. Under the government’s current proposal, corporation tax is set to rise to 21%. 

Another disadvantage is taking profits out of the company. Say your s.r.o. made a profit of CZK 100,000 last year. That profit is subject to 19% corporation tax. After tax, the company is left with a net profit of CZK 81,000. If you want to withdraw that profit as a shareholder, you must also pay 15% withholding tax on it. Only CZK 68,850 therefore reaches your personal account. If you carried out the same business as a self-employed person, your profit would be taxed just once at 15%, leaving you the full CZK 85,000. Social and health insurance contributions then also enter the picture for the self-employed, making the comparison more complicated. In each case, it is therefore necessary to assess individually which business structure is the most economical. If you would like a calculation of which business structure would be more advantageous in your situation, please get in touch. 😊

The standard process of setting up an s.r.o.

The obvious first step is deciding your company’s details: its name, how many shareholders it will have, who will be managing directors, the amount of share capital, where its registered office will be and what activities it will carry out. These details must then be included in the memorandum of association, which a notary prepares with you. Next, you go to a bank to open a company account and deposit the share capital. 

Your next stop is the trade licensing office. If you want to operate in one of the regulated or concession-based trades, you must also bring proof that you are authorised to carry out that activity. 😊 After obtaining the trade licence, return with all the documents to your notary, who submits the application to enter your company in the Commercial Register. The state charges CZK 1,000 for this registration. 

A data box will be activated automatically for all communication with public authorities and the state. 😊 The final step is registering for corporate income tax at the tax office and reporting your business bank account. If everything goes smoothly, you are done and can celebrate becoming a shareholder in your own s.r.o.

How can you simplify the process?

You can make this standard procedure easier. These days, there are many companies that will set up your s.r.o. as a turnkey service. You give them all the required information and sign a power of attorney authorising them to establish the company. They then handle the mandatory administrative rounds on your behalf. 😊

Another simplification is the fairly new option to pay share capital of up to CZK 20,000 in cash. During incorporation, you give the share capital to the notary in cash, and once the s.r.o. formation process is complete, the notary releases the money back to you. It remains the company’s money, but you can easily use it to cover the incorporation costs. 

This year also brings a new option to establish a company using an official memorandum of association template. Using this template makes incorporation cheaper, as you do not have to pay the notary to draft the agreement. The amendment sets the cost of all notarial services at CZK 2,000 when this template is used. Under this procedure, entry in the Commercial Register is free of charge.  

Registered office

I would also like to mention the company’s registered office briefly. This is an address publicly available for every company. For example, if you plan to run your company from home, you probably will not want your private address displayed publicly. Some companies offer a virtual registered office for these situations. In practice, they let you use their address for an annual fee. 

Virtual registered offices are often offered by the same companies that provide turnkey s.r.o. formation, so feel free to look at their websites. 😊 On the other hand, I must mention that companies using virtual registered offices face a higher risk of inspection by the tax office. 

If you are unsure what to do, please get in touch and we can look at it together. 🙂