Amendment to the Business Corporations Act: #1 Low registered capital LLC

19. 8. 2020
3 minutes

Introduction

Business corporations in the Czech Republic are regulated in Act No. 90/2012 Coll., On Business Corporations and Cooperatives (hereinafter referred to as the Business Corporations Act or BCA). It entered into force on 1 January 2014 together with the “new” Civil Code. Now, after more than 6,5 years of existing within our legal system, further fundamental changes are awaiting us with the amendment No. 33/2020 Coll., with the date of entry into force on 1 January 2021.

As a part of this legal series, we will introduce you to the individual novelties. In today’s first part, we will state the reasons that led to the amendment and present the first novelty, the changes in paying up the contribution in limited liability companies with low registered capital (hereinafter referred to as LLC).

Explanatory memorandum

The Czech Ministry of Justice, from which the draft of the amendment was submitted to the Chamber of Deputies, provides a list of several points in the explanatory memorandum that critically assess the current form and functioning of the Business Corporations Act and justify the importance of the amendment.

Points in the explanatory memorandum are as follows:

  1. revision of definitions used in the statute, especially clarifying the legal terminology for the purpose of accuracy, clarity and unambiguity of the text for its better use in practice; this includes removing redundant provisions and legislative gaps;
  2. a significant effort to reduce the administrative burden for companies, especially for small businesses and entrepreneurs;
  3. increase dispositivity of legal obligations for business corporations, which are now strictly mandatory, i.e. bring more space for the autonomy of will of company bodies, which is critical for private law;
  4. amendments to the monistic system of joint-stock companies according to foreign regulations to increase their attractiveness on the international market;
  5. increase the transparency of company bodies and their structures in order to protect (especially minor) shareholders and third parties;
  6. adjustment of processes of authorities in the event of finding a “dead” company in connection with non-fulfillment of obligations with the filing of documents into the Czech Commercial Register,
  7. better incorporation of EU Directives as well as the interconnection of the Czech Commercial Register with other similar registers within the European Union by creating an EU unified system between the Member States.

Contribution management of low registered capital LLC

A contribution is the monetary value of the subject of the contribution into the registered capital of a business corporation, which is “brought“ into the business corporation, and if this obligation is fulfilled with cash, it is called a cash contribution. The sum of all contributions, whether cash or of any kind, makes up the total sum of capital of the business corporation.

In accordance with the provisions of Section 23, Paragraph 1 of BCA, it was mandatory to pay up the cash contribution of a capital company in any nominal amount to a designated account held with a bank opened by the contribution administrator. The current provisions of Section 142, Para. 1 of BCA already provide the possibility of a minimum contribution to the registered capital of a limited liability company in the amount of CZK 1. If the shareholders of a newly formed LLC wanted to use this low registered capital option, the requirement to open a designated bank account to pay up the contribution seemed as a disproportionate burden for the newly formed company, complicating its formation process.

For the reasons mentioned above, the amendment includes a new Section 23 Para. 2 of BCA which allows limited liability companies where the sum of all cash contributions does not exceed CZK 20 000 to pay up these contributions also in other ways, for example directly into the hands of the contribution administrator (who can be one of the founders of the limited liability company or a notary).

Conclusion

The discussed part of the amendment will simplify the establishment of limited liability companies with cash contributions to the share capital of up to CZK 20 000 (inclusive). Thanks to that, it may be more interesting for domestic or foreign entrepreneurs to establish new limited liability companies which helps the Czech market be more accessible. Abandoning the obligation to pay up the registered capital to a bank account established only for this purpose will significantly simplify and speed up the process of forming a new company.

This was the first part of the series on the news that the amendment to the Business Corporations Act brings to the Czech Legal System. If you are interested in the topic, feel free to follow our blog or subscribe to the newsletter.

 


Author:

Michaela Hálová

Michaela Hálová works at Mgr. Jiri Cisek’s law firm as a paralegal. She is currently studying 5th grade of the Faculty of Law at Masaryk University. Considering her former job experience, she is interested in enforcement and insolvency law, but also criminal law.

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