Basic differences between Czech Joint Stock Company, Czech Limited Liability Company and Czech Branch Office in the Czech Republic
1. Introduction - Joint-Stock Company, Limited Liability Company (LLC) and Branch Office in Czech Republic
This article provides for basic information on the the principle differences between a Czech joint stock company, a Czech limited liability company and a Czech branch office and evaluates the basic advantages and disadvantages of each type of each legal entity in Czech Republic.
This article is divided into three basic parts, each of which deals with one type of each legal entity. Basic points are summarized in the Conclusion.
2. Czech Joint Stock Company
2.1 Basic Information
A Czech joint stock company (in Czech: “akciová společnost”) is defined by Act No. 90/2012 Coll., on commercial companies and cooperatives, as amended (hereinafter the “Act on Commercial Corporations”) as a company registered capital of which is divided into certain number of shares of certain nominal value. The Czech joint stock company is liable for breaches of its obligations by its entire property. Its shareholders are not liable for breaches of the company´s obligations at all. The Czech joint stock company is a widely used type of business entity in the Czech Republic.
The minimum amount of its registered capital is CZK 2,000,000 or EUR 80,000).
2.2 Company Bodies of Czech Joint Stock Company
A Czech joint stock company has three statutory bodies: General Meeting, Board of Directors and Supervisory Board.
General Meeting is a meeting of all shareholders and it is the supreme body of a joint stock company. It decides on all matters entrusted to it by law or by the Articles of Association (e.g. the change of Articles of Association, the increase or decrease of the registered capital of the company, the election and recall members of the Board of Directors and the Supervisory Board). Ordinary General Meeting must take place at least once a year. Extraordinary General Meeting must be called if asked by shareholders who own at least 3% of the registered capital if the registered capital of the company is more than CZK 100,000,000, or who own at least 5% of the registered capital if the registered capital of the company is CZK 100,000,000 and less or who own at least 1% of the registered capital if the registered capital of the company is CZK 500,000,000 and more.
Board of Directors is a collective statutory body which manages a company´s activity and acts in its name. Board of Directors ensures proper management of the company's business. It decides all company matters, unless they fall within the competence of the General Meeting or Supervisory Boards. Unless the Articles of Association provide otherwise, any member of the Board of Directors may act in the name of the company toward other parties. The names of the members of the Board of Directors whose acts are binding on the company and the nature of such acts are entered in the Czech Commercial Register.
Board of Directors must consist at least of three members; however the Articles of Association may determine lower number of members of the Board of Directors. Members of the Board of Directors are elected and recalled by the General Meeting, unless the Articles of Association determine that they shall be elected and recalled by the Supervisory Board. The tenure for members of the Board of Directors is one year, unless the Articles of Association determine otherwise.
Supervisory Board is statutory body monitoring how the Board of Directors exercises its range of powers and how the business activity of the company is conducted. It is primarily an inspection organ. It is entitled to examine all documents and records relating to the company´s activities and to check whether bookkeeping entries are made in accordance with the actual facts and that the business activities of the company conform to the statutory provisions, the statutes and the instructions of the general meeting.
Supervisory Board must consist at least from three members however the Articles of Association may determine lower number of members of the Supervisory Board. Members of the Supervisory Board are elected and recalled by the General Meeting. Tenure for members of the Supervisory Board shall be three years, unless the Articles of Association determine otherwise.
The new Act on Commercial Corporations newly makes it possible to choose between a 'monistic' and 'dualistic' model of corporate governance. Previously, the above mentioned dualistic model with Board of Directors and Supervisory Board was the only permissible model. The monistic model is based on a single body known as the Management Board, in which the powers of both the Board of Directors and of the Supervisory Board are vested. The Management Board elects a chairman from among its members and appoints a Statutory Director (who may be an individual outside the Management Board). The Statutory Director acts on the company's behalf towards third parties. The chairman of the Management Board may be the same individual as the Statutory Director.
2.3 Advantages and Disadvantages
Main advantages of a Czech joint stock company are: cleanly capital nature of the company, shares may be under certain circumstances listed on a stock exchange, no liability of shareholders. Shareholders are protected from the company´s creditors by a corporate veil.
Main disadvantages of a Czech joint stock company are: high registered capital, quite complicated process of foundation and incorporation of the joint stock company.
3. Czech Limited Liability Company
3.1 Basic Information
A Czech limited liability company (in Czech: “společnost s ručením omezeným”) is the simplest and the most common type of business entity in the Czech Republic. By definition of Act No. 90/2012 Coll., on commercial companies and cooperatives, as amended (hereinafter the “Act on Commercial Corporations”), it is an Czech corporation whose registered capital is made up of its members' investment contributions and whose members are liable (as sureties) for the company's obligations only until their contributions are paid up and registered in the Commercial Register. The Czech limited liability company is liable for breaches of its obligations with its entire property, which can be higher and is not necessarily equal to the registered capital. Its members are jointly and severally liable for the company's obligations only up to the unpaid investment contributions of all members according to the entry in the Commercial Register.
The minimum amount of registered capital is CZK 1. The minimum contribution of each member to the registered capital is CZK 1, however we recommend to use at least CZK 1,000. The Czech limited liability company is a very popular legal form for small and medium sized businesses in the Czech Republic.
3.2 Company Bodies of Czech Limited Liability Company
Limited Liability Company has two statutory bodies, General Meeting and Executives, and one voluntary organ, Supervisory Board.
General Meeting is a meeting of all shareholders and it is the supreme body of the Limited Liability Company. It decides on all matters entrusted to it by law or by the Articles of Association (e.g. the change of Articles of Association, the increase or decrease of the registered capital of the company, the choice and recall members of the Executives). Ordinary General Meeting must take place at least once a year.
Executives of a limited liability company are the company´s statutory organ. The Executive can be one or there can be more Executives. Each of the Executives, if there is more than one, has the right to act independently in the name of the company, unless the Deed of Association or the Statutes provide otherwise. The Executive officer of a company is responsible for its business management. Should the company have appointed several Executives, the mutual consent of a majority of them is required for a decision on the company's business management, unless the deed of association provides otherwise. Executives are elected and recalled by the General Meeting from the members of the company or other natural persons.
Supervisory Board is an optional statutory body in a limited liability company which shall be established only if stipulated in the Deed of Association.
3.3 Advantages and Disadvantages
Main advantages of a limited liability company are: low registered capital, relatively low administrative requirements, protection of the members from the company´s creditors by a corporate veil, optional Supervisory Board.
Main disadvantages of a limited liability company are: shareholders are jointly and severally liable up to the amount of the unpaid registered capital as recorded in the Commercial Register if the full payment of the registered capital has not been registered in the Commercial Register yet; the procedure of the transfer of the ownership interest is more complicated than in the Joint Stock Company.
4. Czech Branch Office
4.1 Basic Information
A Czech branch office (in Czech: “organizační složka, odštěpný závod”) is usually an adequate vehicle for low cost projects. It is not the ideal choice for substantial projects because the parent company and branch office´s activities are not separate entity and thus the parent company is fully liable for the branch liabilities. According to the Section 44 of the Act on public registers, a branch of non EU residing company shall be registered in the commercial register.
A branch office is not a separate legal entity, but functions as the representative of the establishing company and incurs obligations on the company's behalf. The law under which the branch's parent entity was founded also applies to the branch's internal dealings. The founder plays the key role in the whole process of the establishment and throughout the whole life of the branch.
A branch office must have a special identification – its name must be the same as the name of the establishing company plus it must also include the information that it is a branch office. A branch office must also have its seat and a head.
4.2 Head of Czech Branch Office
For the establishment and the existence of the branch office it is necessary to authorize a natural person as a Head of the branch office. Such individual shall be entered in the Commercial Register and is entitled to undertake all acts concerning the branch office on behalf of the founder. In fact, the Head of the branch office is a legal representative of the establishing company. The Head of the branch office can be only one person.
4.3 Advantages and Disadvantages
A branch office is not a separate legal entity, which can be considered as both advantage and disadvantage (depending on circumstances).
Main advantage of a branch office is that for the internal dealings of the branch office the law of the establishing company is applicable and that no registered capital is required for a branch office.
Main disadvantage of a branch office is that it can be established only by a business entity which is registered in the Commercial Register.
The Czech joint stock company and limited liability company are legal persons, whereas branch office is not a separate legal entity.
As far as a company´s liability is concerned, both the Czech joint stock company and limited liability company are liable with its entire property for its breach of obligations. However, shareholders of a joint stock company are not liable for breaches of company´s obligations at all. Members of a limited liability company are jointly and severally liable for the company´s obligations up to the unpaid contributions of all members to the registered capital. Branch office is not liable for breach of its obligations; the parent company is liable for it.
The Czech joint stock company´s minimum amount of the registered capital is CZK 2,000,000. Limited liability company´s minimum amount of the registered capital is CZK 1. For the establishment of Czech branch office, there is no registered capital required.
Obligatory bodies of a Czech joint stock company are General Meeting, Board of Directors and Supervisory Board. Obligatory bodies of a Czech limited liability company are General Meeting and Executives. The Czech Branch office must have a Head of branch office who is entitled to act on behalf of the parent company as regards the branch office.
For more information, please contact:
JUDr. Mojmír Ježek, Ph.D.
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