The Czech Republic has long been praised as a country that supports entrepreneurship. Recent changes to legislation have even reduced the bureaucracy required to do business in Czechia. Its foreign residents, however, may be uncertain about which type of legal self-employment best suits their particular situation.
We asked Jiří Melkus of MELKUS KEJLA & PARTNERS about legal forms of entrepreneurship in the Czech Republic. Melkus told us that, essentially, there are two options: Establishing a company or getting a trade license. Both options come with their respective pros and cons. Here, Mr. Melkus walks us through them.
HOW TO ESTABLISH A COMPANY
According to Melkus, an attorney is best equipped to guide you through the whole process of establishing your own společnost s ručením omezeným (limited liability company), abbreviated in Czechia as an s.r.o., and similar to what is known as an LLC in the United States.
This includes preparing articles of incorporation for your company and fulfilling all other statutory obligations. At the end of the process, a notary will inscribe your new company in the business register.
HOW TO GET A TRADE LICENSE
Acquiring a trade license is even simpler. Simply visit any trade licensing office (odbor obecní živnostenský úřad), fill out a form, and pay a fee. If your trade is unqualified (meaning there is no professional competence required for carrying it out), it is sufficient to “notify the trade,” which includes filling out the areas of trade for your activity.
If you're a foreigner, an extract from a criminal registry of your home country is typically required – the trade licensing office usually obtains the extract automatically if you are a Czech citizen. An attorney can certainly help with the whole process, and Melkus says that for more advanced trades where the process is not so simple, their firm is equipped to handle these requests.
PROS AND CONS OF EACH TYPE OF ENTREPRENEURSHIP
Limited liability company
The main advantage of s.r.o. is that your liability is limited by your initial investment in the company, whereas with a trade you are personally liable for all the debts resulting from your business. Therefore, if you know that there are considerable liability risks inherent to your business, or that your business operations will be quite complex, you might prefer a s.r.o.
If you plan to do business in manufacturing, for instance, then the initial investment is much higher (e.g., equipment costs, etc.) and the day-to-day operations carry more liability risks (e.g., employees on your payroll, you need to buy large volumes of material from different partners and suppliers, your products might be faulty and cause injury, cash-flow levels may require you to take on a large loan, etc.).
Simply put, more things can go wrong in manufacturing than for an English teacher, so it makes sense to limit your personal liability by establishing an s.r.o.
On the other hand, a trade license is much easier and cheaper to set up and run. The tax rate will generally be lower, and you even have the option, under certain conditions, of bundling your tax, social security, and health insurance payments into a single payment, which makes everything very simple from an administrative point of view.
In general, every business involves a certain degree of risk, but some are riskier than others. For example, if you plan to do business as an English teacher, florist, or barber, it will usually make sense to do this on a trade license.
The initial investment to start your business is relatively low and the day-to-day operations do not carry any significant liability risks.
The decision on which form of business to establish requires careful consideration. Visit the Licensed Trades Portal, where you can get basic information about trade licenses, including the process of obtaining one, and also get an idea as to whether it’s preferable or not to establish a company.
Author: Prepared by the team from the foreign office CzechTrade Scandinavia.
Source: Expapts staff (in cooperation with Melkus, Kejla & Partners, https://www.expats.cz/