Share capital of an LLC: how much, why and how to pay it back
Drawing up of the contract, the trade, the deposit of the registered capital and registration in the Commercial Register. These are the steps that lead to the successful establishment of a new company. Are you looking forward to it, and don't know what to do with the share capital? In this article, we will look at it in detail - what it is, what it is actually used for, how to determine its amount and how to pay it off.
WHAT IS CORE CAPITAL?
The share capital (SC) is part of the company's equity and represents the value of the individual owners' contributions to the newly established company. These contributions can be:
- Cash (cash or money in bank accounts)
- Non-monetary (movable and immovable assets valued by an expert opinion).
The amount of the share capital is governed by the Business Corporations Act and the minimum contribution of each shareholder of the s.r.o. is CZK 1. Until 2014, it was CZK 200,000 - the reduction of the share capital of an LLC facilitated access to business for those who were limited by the original amount.
If there are several owners of the company, they agree on the amount of the share capital in the articles of association and pay back the capital according to the amount of their shares in the company. In the case of a single owner, the ROE is set out in the memorandum of association and the entire contribution is then paid by one shareholder.
WHAT IS THE PURPOSE OF SHARE CAPITAL?
If the share capital of CZK 1 is sufficient to establish a limited liability company, the question arises: why do companies voluntarily choose a capital many times higher?
In order to answer this question, we need to clarify what the shareholders' contributions are actually used for. The company draws money from the share capital to cover all the expenses it will incur in the first months of operation. And these exceed the value of CZK 1 by a considerable margin.
COSTS OF SETTING UP A COMPANY
The first cost item is the establishment of the company itself. If you decide to set up an LLC yourself with a notary, you should expect several payments:
- Expenses for notaries - they vary depending on whether you are setting up a single-member LLC or there will be more founders. On average, you will pay CZK 6,000 for the services of a notary.
- The administrative fee for the issuance of a trade licence is CZK 1,000.
- Fee for registration of the company in the Commercial Register - you do not pay if the incorporation document contains only basic information about the company. Otherwise, the court fee is CZK 2,700.
- Other fees - hundred-crown items include criminal record statements, bank confirmation of deposit requirement and more.
Starting a company can cost you around 6-10 000 CZK in total. Another way to get a company is to order a customized LLC from a consulting company. This will save you time and hassle with administration. A complete company formation including registration in the Commercial Register starts at CZK 5,993 excluding VAT.
Whichever way you choose, 1 CZK will definitely not be enough. Without sufficient capital, you would have to take out a loan to start a company, which is not only a financial burden, but also an administrative and time burden.
OTHER INPUT COSTSIn addition to the costs of setting up a company, the subject of the business also plays a significant role. Calculate how much it will cost you to start a company. Start-up expenses vary from industry to industry; for example, you will probably need less to provide online consulting than you would to run a restaurant.
HOW MUCH CAPITAL TO CHOOSE?
Put enough money in the share capital so that you have a sufficient reserve for the initial costs before your business starts to make money (i.e. not just the administrative costs - think also about the first payments for renting the premises, equipment, promotion, etc.). Most often this is a few tens of thousands of crowns.
Consider one more factor. Since 2021, it is possible to repay the share capital up to CZK 20,000 in cash at a notary. What does this mean in practice? You will not have to worry about opening a bank account before the company is established, so the whole process will be accelerated. Consider whether you are in a hurry to set up your company and thus choose a capital stock of up to CZK 20,000, or whether you do not mind the minor delays associated with arranging a bank account.
Other reasons for choosing a higher than statutory share capital are:
- The credibility of the company. Even though today the share capital is basically just an accounting item and you don't have to keep the money in a company account (so it doesn't serve the function of creditor protection), the minimum amount of CZK 1 seems unreliable to many people.
- Better conditions for obtaining a loan. Banks control the capital base. You can increase it in the future, but such a change involves additional fees and your time.
- Shareholder structure. Because of the possibility of transfers, changes of shares or the entry of an investor, the value of the capital should be divisible by the expected number of shareholders.
WHEN AND HOW TO REDEEM DEPOSITS?
- Each shareholder must pay at least 30% of the cash contributions before the application for registration of the company in the Commercial Register is filed. The remaining part is to be paid within the period specified in the articles of association or the deed of incorporation, but no later than 5 years after the incorporation of the Ltd.
- In-kind contributions must be fully contributed to the LLC before its formation.
After the registration of the Ltd. in the Commercial Register, the deposits become the property of the company and you can dispose of them freely, e.g. pay the first invoices immediately.
DEPOSIT OF THE ZK INTO A BANK ACCOUNT
You open a company account, deposit the amount of the share capital into it, submit the memorandum of association or articles of incorporation to the bank and, upon request, it will issue you a certificate of deposit and the amount of the deposit.
The confirmation then serves as one of the founding documents and is documented when filing a petition for registration of the LLC in the Commercial Register.
The share capital of up to CZK 20,000 can be paid in cash at the custodian of the cash deposit - for example, at a notary. At the registration of the company in the Commercial Register, it is sufficient to provide a written declaration of the deposit administrator on the payment of the share capital in cash. You will open a bank account for the company afterwards. As soon as the company is established (registered in the Commercial Register), the deposit administrator will, according to the law, hand over the deposit to the statutory body of the company - in the case of an LLC, the managing director.
This change was brought about by the amendment to the Commercial Corporations Act effective from 1 January 2021 - thanks to it, the establishment of a company is a bit faster and easier. Foreigners who had problems with opening an account in a Czech bank will also appreciate the possibility of redeeming the deposit in cash.
NEED HELP WITH YOUR BUSINESS?
If you are still hesitant about how much capital to choose or how to repay it, contact us. We will help you with the establishment of the company from drawing up contracts to registration in the Commercial Register. Our specialists will make sure that your business runs smoothly and hassle-free from the start.