The Czech Republic has taken a big step at removing what has hitherto been seen as one of the biggest initial burdens to creating new companies. The basic capital required for founding firms has been slashed from Kč 200,000 to just Kč 1.
The dramatic shrinkage in the basic capital needed to create a limited liability company, or sro as they are known locally, is part of the wave of changes brought in at the start of the year with the new civil code. The move has been welcomed as tackling one of the major obstacles for creating firms, especially for young entrepreneurs faced with many other start up costs.
But the Czech Republic is not alone in having reduced basic capital demands to one crown or even less. Many other countries have already taken similar steps, or have even gone further, in an attempt to encourage companies to register locally rather than abroad and safeguard valuable tax income.
There is currently no requirement for any basic capital at all in Britain for its equivalent of the sro, the limited liability company, or in France for its counterpart, the so-called SARL. In Germany since 2008, the capital requirement for a new type of mini limited liability company is just EUR 1. But the change in the Czech law is seen by experts as a belated admission of the fact that the earlier high demands for initial capital did not in fact represent any real protection for creditors in the case that a company went bust with outstanding debts.
In fact, under the previous rules, the Kč 200,000 just had to exist on the company account one day but could disappear from it the next and be spent. ‘It was very much a virtual guarantee in the past,’ commented David Šeich, the president of the SME Union Czech Republic. ‘I think the new legislation is a good idea but there will have to be some new instruments to deal with the issue of guarantees,’ he added.
Some experts have also pointed out that although the legal demand to demonstrate a sizeable amount of capital up front has disappeared, those companies that only declare the minimum capital requirement will still be looked upon skeptically when casting around for partners or approaching banks or other institutions for start up cash.
The Czech Republic is now expected to follow the situation in Germany following the introduction of the minimal capital requirements: an initial rush of registrations is expected to settle down fairly soon to a steady, albeit possibly higher, momentum of new company creation. The alteration in capital requirement is not the only new year change for
Czech limited liability companies. The previous rules limiting the number of shareholders to 50 has been abolished and the regulations on how ownership of the company can be represented and shareholdings distributed have also been relaxed.
In itself the changes will not brake the Czech Republic’s recent slide down the international rankings of competitiveness, but it is a step in the right direction.