Establishment of a New s.r.o. (Not a “Transformation”)

The process of establishing an s.r.o. includes:
the preparation of founding documents (a deed of foundation for a single-member company or a memorandum of association for multiple shareholders),
the selection of the company’s business activities (from free, craft, or regulated trades) and a unique company name, as well as the determination of its registered office.

It is crucial to understand that from a legislative point of view, there is no direct “transformation” from a sole proprietorship to an s.r.o.
Neither the Commercial Code nor the Trade Licensing Act regulates such a procedure.
In reality, it is the creation of a completely new legal entity – an s.r.o. – and the subsequent termination or suspension of the existing trade license.

One common myth is that it is necessary to deposit €5,000 as share capital into a bank account and provide proof by a bank statement; however, it is sufficient to declare that the capital was deposited in cash into the company’s treasury.

Transfer of Assets and Liabilities

If the sole proprietor owns assets (e.g. machinery, vehicles, real estate, inventory) or has existing contractual relationships (with suppliers, customers, or employees), it is necessary to formally transfer them to the newly established s.r.o.

Methods of asset transfer:

• Sale:
  This is the most common and often the simplest method.
  The assets are transferred based on a purchase agreement between the sole proprietor and the s.r.o.
  It is important that the sale price corresponds to the market value to avoid potential issues with the tax authorities, although an expert valuation is not always required unless the asset is being contributed to the share capital.

• Contribution to share capital:
  Assets previously used for business can be used as a non-monetary contribution to the company’s share capital at the time of establishment or when increasing capital.
  This method, however, requires the asset to be valued by an expert opinion.

• Donation:
  Assets can also be donated to the company.
  In such a case, they are valued at replacement cost, but the entry value of donated assets is not a tax-deductible expense for the donor.

Existing contracts (e.g. lease agreements, client contracts) are transferred to the s.r.o. through amendments to contracts or by signing new agreements with the new entity.
For a comprehensive and advantageous transfer of all tangible and intangible assets of the business, including employees, it is recommended to conclude a contract for the sale of a business (transfer of enterprise).

Termination or Suspension of the Sole Proprietorship

After successfully establishing the s.r.o. and transferring all necessary assets and liabilities, the final step is the formal termination or suspension of the sole proprietorship.

• Termination of the trade license:
  This is a simple process with no administrative fee.
  A notice of termination can be submitted in person at the Trade Licensing Office or electronically from home.
  The office will then issue a confirmation of deletion of the trade license from the Trade Register.

• Suspension of the trade license:
  If the entrepreneur is considering returning to the sole proprietorship later, they can simply suspend the activity.
  The amendment to the Trade Licensing Act abolished previous time limits, so a trade license can now be suspended for an unlimited period.
  The fee for suspension is €4 (or €2 electronically).

Obligations Toward Authorities After Termination of the Sole Proprietorship

After the trade license is terminated, the Trade Licensing Office automatically notifies the Health Insurance Company and the Tax Office of this step.
However, the entrepreneur is still obliged, within 15 days of termination, to return the tax identification card (DIČ) to the Tax Office and must also deregister from VAT and vehicle tax if they were a registered payer.
The deregistration from the Health Insurance Company must also be done by the entrepreneur personally.