The current EU Commissioner for the internal market and services, Charlie McCreevy, said back in 2007 that founding a company should take no longer than one week in Europe. The reality of the Slovak legal environment is a little different and the process of establishing a company takes about one month, depending on the type of company, on the quality of the founding documents, and also sometimes on the mood of the court official at the Commercial Register.
But it must also be said that with Slovakia’s admission to the European Union and with the ongoing harmonisation of Slovak law with EU legislation, this process has become more and more effective, flexible and transparent.
The current legal framework, which envelopes the whole process of founding and operating a Slovak commercial company and is valid for both domestic and foreign investors alike, consists mainly of these laws: the Commercial Code, the Act on the Commercial Register, the Trade Licence Act, the Civil Code, the Act on Accountancy and various tax laws. The latter includes the Acts on Income Tax, on the Value Added Tax (VAT), on Tax Administration and Tax Fees, and others.
The Commercial Code, as the key legal norm, authorises four basic types of corporate entities and a cooperative form. These are considered independent legal entities which have their own legal personality and thus they can enter business-legal relations independently and undertake operations in their own name.
The Commercial Code differentiates two fundamental steps in the process of founding a company: its foundation and its incorporation. The first step is the legal act of founding a company itself – by signing founding documents in the form stipulated by the law. The next step is with the applicable district office, the department of trade licenses to file an application containing the list of business activities that will be undertaken by the company. The office requires and grants a separate license to operate for each activity.
For the company to be incorporated, i.e. to become a legal entity and thus to be able to fully carry out its business activities, it must file a proposal for registry in the Commercial Register within 90 days after being founded or after the license to carry out business activities has been delivered. Currently, it is possible under certain circumstances to file an electronic application with the Commercial Register. The day of being registered in the Commercial Register is the date when the company is formed, and from then on it acquires not just rights but also duties. From its incorporation – at the latest – the company is obliged to start performing double-entry bookkeeping and it is also obliged to register at the relevant tax office within 30 days for the purpose of corporate income taxes. The company can also voluntarily register for value added tax purposes.
The various legal forms for a company under Slovak law provide various advantages as well as disadvantages connected to the process of their founding or their consequent operation and their connected duties. The following highlights the basic characteristics of the individual types of companies under Slovak’s legislation.
A general partnership (v. o. s.) is the typical, so-called personal company with the participation of at least two persons, while the maximum number of persons – partners – is not stipulated. The advantage of the general partner form can be the possibility to found it without initial investments; but on the other hand, each partner is held liable for all liabilities of the company with his/her whole private property. The profit of the company is divided among the partners in the manner specified in the founding deed; otherwise it is divided equally.
A limited partnership (k. s.) is a company that blends a certain combination between a general partnership and a limited liability company. It has at least two shareholders, one of whom is a limited partner and the other a general partner. The main difference in their status is that the limited partner is in a position similar to that of an shareholder in a limited liability company and the liability of the limited partner is limited to the amount of his unpaid mandatory contribution (€250 at least) registered in the Commercial Register while the position of the general partner is identical to that of a partner in a public company and even though he/she does not have to render the company contribution, the general partner is liable with his/her whole private property, like a partner in a public company. Also, due to this unlimited guarantee, the general partner has the position of a statutory body and thus relatively greater decision-making authority. The company’s profit is divided fifty-fifty among limited partner and the general partner, and subsequently, they divide it among themselves, if not stipulated otherwise in the company agreement. Shares in the profit are taxed in different ways among partners.
A joint-stock company (a. s.) is, relatively, the most complicated type of company for both its founding and administration; but on the other hand, it divides the responsibility – the commitments of its shareholders concerning the company’s liabilities. This type is a company that is liable for its liabilities only through its own property. The registered capital is divided among a certain number of shares with a certain nominal value. A legal person as well as an individual, and also the state, can become an owner of the shares – a shareholder – and the number of shareholders is, in principle, not limited. This type of commercial company has the highest minimum registered capital stipulated by law and this must be at least to €25,000. Specific kinds of duties for this type of company stem from the law: for example, review of the financial statements by an auditor and preparing an annual report, while other types of companies only must do so after meeting certain conditions.
A limited liability company (s. r. o.) is a company for which the owners are liable for its liabilities only to the amount of their unpaid contribution to the registered capital, registered with the Commercial Register. The fact that the minimum sum of the registered capital is only €5,000, much less than for a joint-stock company while the liabilities of its shareholders are significantly limited, makes this type of company more attractive, especially for small businesses.
Generally, it can be said that a limited liability company is the type of company which is popular also among mid-sized and often larger businesses. Its operation is administratively simpler when compared with a joint-stock company. Having the financial statements approved by an auditor becomes a requirement only after certain conditions have been met. It is also attractive due to its limits on the liabilities of the owners for the company’s liabilities, as its name implies.
In practice, choosing the company’s type is usually conditioned by the nature and, even more so, by the extent of the company’s business activities. To put it very simply, it could be said that forms of trade companies like the general partnership or the limited partnership are often used for smaller, “family-type” enterprises. But this type of company is stipulated by law also for certain kinds of enterprises, for instance as one of the prescribed company types for tax consultancy or advocacy firms. On the other hand, a limited liability company or a joint-stock company is popular especially because they separate the business and its liabilities from the private spheres of the owners.
Generally, it can be stated that the process of founding the various types of companies is similar but the administration and costs associated with each process are different. From this viewpoint, the most simple and also the relatively easiest to administer seems to be the limited liability company – which in reality is the most common type of commercial company in Slovakia. In an ideal case, the process of founding a limited liability company does not take more than three weeks, which presupposes, however, that the registry court evaluates the filed founding documents and their supplements as sufficient and flawless.
Miroslava Terem Greštiaková, Manager, Tax & Legal Services, PricewaterhouseCoopers
More information about Slovak business environment you can find in our Investment Advisory Guide.