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Limited liability company

 
photo:  (sxc.hu)
 

Basic information about the legal form of business called a limited liability company.

 
 

Basic information

A limited liability company is the simplest type of capital company despite the fact that it contains many elements of a personal company. A limited liability company may have between one and 50 members.

The legal regulations of a limited liability company are primarily set forth in the Commercial Code. The Commercial Code defines a common basis for all business companies in § 56 and following. Specific regulations for a limited liability company are contained in § 105 and following.

Basic capital

The basic capital of a limited liability company must amount to no less than CZK 200,000. Each member may contribute in the basic capital of the company with only one investment. The amount of the individual member’s investment contribution must be at least CZK 20,000. The amount of individual members' investment contributions may be determined differently, but each such amount must be divisible by 1,000 without a remainder. <0} The sum of all contributions must correspond with the total amount of the company’s basic capital.

If a nonmonetary investment contribution is to be used to pay up an investment contribution, the partnership contract or a written statement on increasing a contribution or a written statement on acceptance of this contribution must specify the object of such nonmonetary contribution and the amount to be included as the payment of the member’s investment contribution.

Before submitting an application for the registration of the company with the Commercial Register, the full premium and at least 30% of each monetary investment contribution must be paid up.The total of paid-up investment contributions and the value of nonmonetary investment contributions must amount to at least CZK 100,000. In the case that a company is formed by one person, it may be entered in the Commercial Register only when its basic capital has been fully paid up.  

A typical misunderstanding we come across in practice is the false concept of the untouchability of the basic capital of business companies (e.g. it is permanently deposited in bank accounts).The basic capital becomes the property of the company and the company disposes of it freely, e.g. uses this money to purchase office equipment and goods, pay regular bills, etc.

Another frequent question is about the amortization of nonmonetary contributions. Does the value of the basic capital decrease as they are depreciated?  No, it does not, as the basic capital is “the financial expression of nonmonetary contributions," not nonmonetary contributions as such. The basic capital appears in the balance sheet as a liability (source) and its particular form is no longer important.

Liability

The members are jointly and severely liable for their company’s obligations up to the unpaid portions of their investment contributions according to the entry in the Commercial Register.

During extended revision, there was a significant change as of January 1, 2001, which often remained unnoticed by entrepreneurs. Today, members are not liable only for their unpaid investment contributions, but they are jointly liable for the total of all unpaid funds.A situation may then arise when a creditor of the company successfully seeks payment from you despite the fact that you have long paid up your contribution.

A business company

A business company in the form of a limited liability company must include the designation “společnost s ručením omezeným” (“limited liability company”) or its abbreviated form “spol. s r.o.” or “s.r.o.” in its commercial name(§ 107 of the Commercial Code). The business company must comply with general requirements as a matter of course; in particular, it must not be interchangeable with another enterprise and must not act deceptively. According to the Commercial Code, a differing designation identifying the legal form of the business is not sufficient to distinguish it, although we may come across such cases in practice.

Statutory organ

One or more executive officers constitute the company’s statutory organ. Each of the executive officers, if there is more than one, has the right to act independently in the name of the company, unless the partnership agreement or the statutes ((§ 133 of the Commercial Code) provide otherwise, although such restrictions are ineffective against third parties. Executive officers bear all legal responsibility for the company’s business management, bookkeeping, obligations against authorities, etc. Prohibition of competitive conduct applies to executive officers, which may not be loosened under a Commercial Code amendment (§ 136 of the Commercial Code). However, the saying “Where there is no plaintiff, there is no judge” also comes to mind here as this prohibition is often breached in practice.

General meeting

The general meeting of a company’s members is its highest organ. Its decision-making scope includes some significant facts (§ 125 of the Commercial Code). In particular, it includes the appointment and recall of the company’s executive officers, changes to statutes and approval of the company’s financial statements.A general meeting may also appoint members of the supervisory board, which is a voluntary and rarely established organ of a limited liability company.

Advantages of a limited liability company

  • limited liability of the company’s obligations
  • relatively low amount of minimum basic capital and
  • low demands on administration

Disadvantages of a limited liability company

  • a partial disadvantage for beginner entrepreneurs is in this case the necessity to use double-entry bookkeeping
  • administratively demanding dealings with authorities  
  • the company’s profit is taxed under corporate income tax


A limited liability company is the most popular form of a business company in the Czech


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Añadido: 04.01.2010