Starting a Business: Company Formation in the Czech Republic
2008/06/02,
A recent global comparative study carried out by the World Bank shows that it takes on average seventeen days to form a new company in the Czech Republic. However, significant changes were introduced into the process of company formation during previous years in order to improve the investment climate in the Czech Republic. As a result of these efforts, the process of establishing a business has become faster and more efficient. Investors who embark on the process of forming a company with a clear view of how the prospective company is to be organised and operated have a distinct advantage and can have their company established in a relatively short period. A brief overview of the process of establishing a company should thus be useful.
Investors can form four types of companies under the Czech Commercial Code. Of these, the form of the limited liability company (společnost s ručením omezeným) and the joint-stock company (akciová společnost) are the most preferred legal forms as they give their shareholders the advantage of having only limited liability for the company's obligations. There is, however, a substantial number of investors who run their businesses in the form of a general partnership (veřejná obchodní společnost) or limited partnership (komanditní společnost). The company formation process is generally comparable for all company forms and similar general rules are followed. We would like to outline these general principles, although the process varies in number of cases, according to its particular circumstances.
The process of company formation is basically divided into two phases. First, the Memorandum of Association, or the Founders’ Deed in the case of a one-man company, is signed by the partners or the shareholders and second, the company is registered in the Commercial Register. In the meantime, several further steps have to be taken to meet the requirements stipulated by law.
Memorandum of Association
The process of setting up a company starts with the signing of a written Memorandum of Association that explicitly states the essential details of the established company and its organisation, such as its legal form, business name, registered seat, business activities, names of partners/shareholders and sizes of their ownership interests, registered capital if required, names of the persons appointed to the company's bodies and some other details. The Memorandum of Association of a limited liability company or a joint stock company has to be prepared in the form of a notarial record. Whereas, the only formal requirement in case of general or limited partnership is that the signatures of the partners on the Memorandum are certified by a local authority or a notary public.
Investors need to pay proper attention to the process of drafting the Memorandum, as this legal document, together with the Articles of Association, governs the entire future life of the company, from decision-making processes, business management and financial issues to the internal relationships between the partners or shareholders. Therefore they should have a clear vision of how the company is to be operated before they entrust their lawyer with the task of drawing up a Memorandum of Association. The task of the lawyer is then to adjust the default legal rules of corporate law so that they meet the needs of the particular investor as precisely as possible.
After the Memorandum is signed, it becomes legally binding only upon the shareholders and the company does not yet exist as a separate legal entity. Any person who undertakes any legal act, such as concluding a contract in the company's name, in the interim period before the company's incorporation becomes the sole party that is obliged under such legal act. This holds true for the lease contract for the premises where the company's registered seat will be situated. Such contract is usually signed by the founders of the company before its formation because it is usually submitted to the registration court as proof of the company's registered seat. The company itself becomes obliged under the contract only if it ratifies the contract within three months after its incorporation.
Trade Authorisations
In the next step of formation, the company has to obtain the appropriate trade authorisations or – for several types of business activities – licenses, that entitle the company to undertake in a particular area of business. The application is filed with the local Trades Licensing Office. Standard unified forms published on the Internet (see the official website of the Ministry of Industry and Trade at www.mpo.cz) are used for this purpose. Trade authorisations are then issued within fifteen days from the filing of the application form. Trade authorisations or licenses have to be submitted to the registration court as an appendix to the registration form. For the purposes of the proper execution and supervision of the business activities that are subject to a trade authorisation, a responsible representative of the company has to be appointed. The responsible representative has to be free of criminal convictions and legally competent. Furthermore, he is required to demonstrate his qualifications by an appropriate diploma or vocational certificate. In the case of so-called unregulated trade authorisations, the appointment of a responsible person is not required.
Registered Capital
With the exception of a general partnership, all company forms are required by law to create registered capital comprising the contributions of the partners or shareholders. They are required to pay at least thirty percent of the contributions they undertook to make in the Memorandum before the company is incorporated. These payments are then deposited in a bank account that is opened with a commercial bank in the name of the future company for this purpose. The bank-account contract can be concluded with any commercial bank by the prospective executives or their agents on the basis of the Memorandum of Association submitted to the bank. Only after the contributions are deposited, the bank issues an account statement which is then submitted to the registration court together with the registration form. A person, usually one of the partners or executives, is also appointed as the administrator of the contributions. The administrator guarantees that all contributions are duly paid up or handed over to the company before its incorporation.
Executives
The members of the executive and supervisory bodies of the company are explicitly appointed by the company's founders in the Memorandum of Association. There are no restrictions regarding the citizenship of any member of these bodies. However, members have to be at least eighteen years old, legally competent and free of criminal convictions. As proof that the person is free of any criminal convictions, an extract from the Czech Criminal Records Register, similar document proving that a foreign national is free of criminal convictions in his or her home country or a written affidavit has to be submitted to the registration court as an appendix to the registration form.
Registration of the Company
In the final phase of formation, the company is registered in the Commercial Register administered by the regional registration court. The application is submitted by the company's executive body within ninety days from the signing of the Memorandum or the date when the trade authorisations were issued. For the purposes of registration, standardised registration forms were created by the Ministry of Justice. These forms are published on the internet (See the official website of the Ministry of Justice at www.justice.cz.). All of the aforementioned documents that demonstrate the content of the registration have to be attached to the application, some of them in electronic form for the purposes of their publication on the internet. The court shall register the company within five business days after the filing, provided that the filing is complete and contains all required appendices. If the company has not been registered within this period, it is presumed to be registered by the end of the fifth business day. An extract from the Commercial Register on the newly formed company is delivered to the company afterwards as evidence of its incorporation.
The company is further obliged to register with the local tax authority within thirty days following its incorporation. The law presently allows a company to choose to undertake such registration together with the application for trade authorisations at the Trade Licensing Office (see above) before the incorporation date. In addition to registering with the tax office, a company is also obliged to register with the local social security and the health insurance authorities within eight days following its incorporation.
Residency Permits
EU citizens and citizens of Switzerland, Norway, Iceland and Liechtenstein can freely enter and reside in the Czech Republic without any visa on the basis of the freedom of movement regulation. They can apply for a long-term residency permit, though they are not obliged to do so. National of other states who intend to reside and work in the Czech Republic are required to apply for a residency visa. For the purposes of conducting business, applicants are usually issued a residency visa for a period of ninety days to one year. After this period, the visa can be either repeatedly extended or a long-term residency permit can be issued for an additional period of two years. The foreign citizen is allowed to use an agent in the application process.
Jan Čížek, Junior lawyer at
NÖRR STIEFENHOFER LUTZ v. o. s.
Contact:
NÖRR STIEFENHOFER LUTZ v.o.s.
Na Příkopě 15
CZ-110 00 Praha 1
Tel.: +420 233 112 111
Fax: +420 233 112 112
www.noerr.com
Investors can form four types of companies under the Czech Commercial Code. Of these, the form of the limited liability company (společnost s ručením omezeným) and the joint-stock company (akciová společnost) are the most preferred legal forms as they give their shareholders the advantage of having only limited liability for the company's obligations. There is, however, a substantial number of investors who run their businesses in the form of a general partnership (veřejná obchodní společnost) or limited partnership (komanditní společnost). The company formation process is generally comparable for all company forms and similar general rules are followed. We would like to outline these general principles, although the process varies in number of cases, according to its particular circumstances.
The process of company formation is basically divided into two phases. First, the Memorandum of Association, or the Founders’ Deed in the case of a one-man company, is signed by the partners or the shareholders and second, the company is registered in the Commercial Register. In the meantime, several further steps have to be taken to meet the requirements stipulated by law.
Memorandum of Association
The process of setting up a company starts with the signing of a written Memorandum of Association that explicitly states the essential details of the established company and its organisation, such as its legal form, business name, registered seat, business activities, names of partners/shareholders and sizes of their ownership interests, registered capital if required, names of the persons appointed to the company's bodies and some other details. The Memorandum of Association of a limited liability company or a joint stock company has to be prepared in the form of a notarial record. Whereas, the only formal requirement in case of general or limited partnership is that the signatures of the partners on the Memorandum are certified by a local authority or a notary public. Investors need to pay proper attention to the process of drafting the Memorandum, as this legal document, together with the Articles of Association, governs the entire future life of the company, from decision-making processes, business management and financial issues to the internal relationships between the partners or shareholders. Therefore they should have a clear vision of how the company is to be operated before they entrust their lawyer with the task of drawing up a Memorandum of Association. The task of the lawyer is then to adjust the default legal rules of corporate law so that they meet the needs of the particular investor as precisely as possible.
After the Memorandum is signed, it becomes legally binding only upon the shareholders and the company does not yet exist as a separate legal entity. Any person who undertakes any legal act, such as concluding a contract in the company's name, in the interim period before the company's incorporation becomes the sole party that is obliged under such legal act. This holds true for the lease contract for the premises where the company's registered seat will be situated. Such contract is usually signed by the founders of the company before its formation because it is usually submitted to the registration court as proof of the company's registered seat. The company itself becomes obliged under the contract only if it ratifies the contract within three months after its incorporation.
Trade Authorisations
In the next step of formation, the company has to obtain the appropriate trade authorisations or – for several types of business activities – licenses, that entitle the company to undertake in a particular area of business. The application is filed with the local Trades Licensing Office. Standard unified forms published on the Internet (see the official website of the Ministry of Industry and Trade at www.mpo.cz) are used for this purpose. Trade authorisations are then issued within fifteen days from the filing of the application form. Trade authorisations or licenses have to be submitted to the registration court as an appendix to the registration form. For the purposes of the proper execution and supervision of the business activities that are subject to a trade authorisation, a responsible representative of the company has to be appointed. The responsible representative has to be free of criminal convictions and legally competent. Furthermore, he is required to demonstrate his qualifications by an appropriate diploma or vocational certificate. In the case of so-called unregulated trade authorisations, the appointment of a responsible person is not required.Registered Capital
With the exception of a general partnership, all company forms are required by law to create registered capital comprising the contributions of the partners or shareholders. They are required to pay at least thirty percent of the contributions they undertook to make in the Memorandum before the company is incorporated. These payments are then deposited in a bank account that is opened with a commercial bank in the name of the future company for this purpose. The bank-account contract can be concluded with any commercial bank by the prospective executives or their agents on the basis of the Memorandum of Association submitted to the bank. Only after the contributions are deposited, the bank issues an account statement which is then submitted to the registration court together with the registration form. A person, usually one of the partners or executives, is also appointed as the administrator of the contributions. The administrator guarantees that all contributions are duly paid up or handed over to the company before its incorporation.Executives
The members of the executive and supervisory bodies of the company are explicitly appointed by the company's founders in the Memorandum of Association. There are no restrictions regarding the citizenship of any member of these bodies. However, members have to be at least eighteen years old, legally competent and free of criminal convictions. As proof that the person is free of any criminal convictions, an extract from the Czech Criminal Records Register, similar document proving that a foreign national is free of criminal convictions in his or her home country or a written affidavit has to be submitted to the registration court as an appendix to the registration form.Registration of the Company
In the final phase of formation, the company is registered in the Commercial Register administered by the regional registration court. The application is submitted by the company's executive body within ninety days from the signing of the Memorandum or the date when the trade authorisations were issued. For the purposes of registration, standardised registration forms were created by the Ministry of Justice. These forms are published on the internet (See the official website of the Ministry of Justice at www.justice.cz.). All of the aforementioned documents that demonstrate the content of the registration have to be attached to the application, some of them in electronic form for the purposes of their publication on the internet. The court shall register the company within five business days after the filing, provided that the filing is complete and contains all required appendices. If the company has not been registered within this period, it is presumed to be registered by the end of the fifth business day. An extract from the Commercial Register on the newly formed company is delivered to the company afterwards as evidence of its incorporation.The company is further obliged to register with the local tax authority within thirty days following its incorporation. The law presently allows a company to choose to undertake such registration together with the application for trade authorisations at the Trade Licensing Office (see above) before the incorporation date. In addition to registering with the tax office, a company is also obliged to register with the local social security and the health insurance authorities within eight days following its incorporation.
Residency Permits
EU citizens and citizens of Switzerland, Norway, Iceland and Liechtenstein can freely enter and reside in the Czech Republic without any visa on the basis of the freedom of movement regulation. They can apply for a long-term residency permit, though they are not obliged to do so. National of other states who intend to reside and work in the Czech Republic are required to apply for a residency visa. For the purposes of conducting business, applicants are usually issued a residency visa for a period of ninety days to one year. After this period, the visa can be either repeatedly extended or a long-term residency permit can be issued for an additional period of two years. The foreign citizen is allowed to use an agent in the application process.Jan Čížek, Junior lawyer at
NÖRR STIEFENHOFER LUTZ v. o. s.
Contact:
NÖRR STIEFENHOFER LUTZ v.o.s.
Na Příkopě 15
CZ-110 00 Praha 1
Tel.: +420 233 112 111
Fax: +420 233 112 112
www.noerr.com