When registering a business in the Czech Republic, most foreign individuals will choose from either starting out as a sole proprietor or as a company. The latter is more common as the company vehicle offers protection of personal assets since the company is a separate legal entity. However due to the higher start up costs, you may wish to consider first setting up as a sole trader and then at a later stage converting to a company.

 

We set out below information on the key differences between operating as a sole trader v company, together with the advantages and disadvantages of both.

 

SOLE TRADER (Zivnostensky List)

 

Advantages

 

·        Administration - There is less of an administrative burden involved in operating as a sole trader compared to a company. There is no need to hold an Annual General Meeting or to file accounts with the commercial register, and you may avoid running a book-keeping system, as there is only need to keep evidence of income and expenses.

·        Professional fees - The professional fees for handling accounting and tax compliance issues are generally lower compared to that of a company.

·        Tax allowable expenses - You are able to deduct more expenses for tax purposes as the tax rules are not as strict. For example, travel expenses from home to place of business and back home are basically allowable for tax purposes (if home is your official seat) whereas operating as a company such expenses are disallowable for tax.

·        Save on Employer´s Social & Health Insurance Payments - If you work for the company, you would have to pay yourself a salary which would be subject to 35% employer´s social and health insurance contributions which is avoided operating as a sole trader.

·        Privacy - Operating as a sole trader offers great privacy as there is no requirement to make the accounts public.

 

Disadvantages

 

·        You are personally liable for the business´ liabilities and are unable to protect your own personal assets.

·        The top rate of income tax at 32% is higher than the 2005 rate of corporation tax of 26% (to reduce to 24% in 2006).

 

 

LIMITED LIABILTIY COMPANY (s.r.o.)

 

Advantages

 

·        Separate Legal Entity - A company is a separate legal entity and therefore offers protection to your personal assets. Since the company is independent of its shareholders, your liability in the company (as the owner of the company) would be restricted to the amount of share capital invested - this being a minimum of CZK 200,000.

·        Lower profits tax - The tax rate payable on profits (26% for 2005 to reduce to 24% for 2006) is lower than the top personal income tax rate of 32% (for income exceeding around CZK 331,200).

·        Lower personal tax - On the distribution of profits there is withholding tax of 15% (but this can be reduced if there is a double tax treaty. Consequently the owner of the company can reduce his overall tax liabilities by taking money out of the company by way of dividends as opposed to paying wages.

 

Disadvantages

 

·        Minimum investment - You are required to pay in a minimum share capital of CZK 200,000. However, once the share capital has been paid up, you can use it for the company´s operational activities.

·        Administration - It is more of an administrative burden to run a company due to the requirements to comply with additional accounting laws, tax laws and company laws. For instance, it has to hold an Annual General Meeting and is obliged to file the accounts with the commercial register available for the general public to view, and so on.

·        Higher running costs - The professional fees involved in maintaining a company are higher.

·        Higher set up costs - You will incur one-off set up costs in setting up the company that are considerably higher than setting up as a sole trader.

·        Statutory Audits - Companies are obliged to have a statutory audit if two of three of the following conditions are met for both the year in question and the preceding year :

-         turnover exceeds CZK 80 million.

-         assets exceed CZK 40 million.

-         the average number of employees exceeds 50.

 

CONCLUSION

 

In conclusion, there are many regulatory and other requirements that apply to both sole traders and companies. However, the final decision will be based on your own investment criteria and the market that you operate in. So if you are considering starting a business in the Czech Republic and fee that you need a guiding hand on various start-up issues, please feel free to contact us, as we would be only too pleased to hear from you.