New legislation aims to untangle the legal snarl of establishing a business
By Frantisek Bouc
Staff Writer, The Prague Post
March 2, 2005
Locals hoping to launch a business and foreign investors considering investing their money here received some good news earlier this month. The Chamber of Deputies passed a breakthrough bill Feb. 9 aimed at speeding up the notoriously slow process of registering companies here.
While getting a new business registered in other European Union countries is typically a matter of days, the process can take months in the Czech Republic. It's a critical delay, as companies are prohibited from transacting any business until they're registered. The lengthy registration process has earned criticism from both Czech and foreign companies, as well as the World Bank.
Tomas Chrobak is director of Spolecnosti Online s.r.o., a service firm that shortcuts the process of getting a new company established and registered in the Czech Republic.
"The issue [of lengthy registration] has been a big problem for Czech businesses," said Jana Viskova, spokeswoman for investment agency CzechInvest. "While in some countries, such as France, the process of making an entry into the business register usually takes no longer than one day. It used to take two to three months on average here."
The root of the delay has been a lack of deadlines for business courts to approve additions or changes in the business register. As a result, the new bill implements a "five-day rule" that forces business courts to make decisions about companies' registration requests within that amount of time. If the court fails to rule within five days, the company can start operations without waiting for the court's approval.
Although some business lawyers worry that empowering companies to do business prior to court approval could bring about chaos, shadow Justice Minister Jiri Pospisil of the Civic Democratic Party (ODS) insists that a similar practice has worked well in Slovakia.
"We were inspired by a similar move in Slovakia one year ago which helped to make the system [of companies registering] much more effective," Pospisil said.
Vladimir Jasek, a partner in the Nocarova, Jasek & Partners law firm, said that reducing paperwork is another challenge in streamlining the process of company registration.
"There are still a lot of documents that one needs to compile and present to the [business] court to support the application," Jasek said.
Business courts' inconsistency in requesting particular documents needed for registering certain businesses have caused unnecessary delays in the process, according to attorney Robert Nemec of the Prochazka, Randl, Kubr law firm.
"[Business] courts' differing requirements have often caused the length of the business registration process to vary in various regions," Nemec said. "In Prague, a registry was done within a few weeks, while it took months somewhere else."
In its reform plans, the Justice Ministry is introducing a unified form process that will be valid countrywide. The forms will be available on the Justice Ministry's Web site (www.justice.cz).
The lengthy process of registering businesses in the Czech Republic has led to a market for intermediaries helping aspiring companies through the process. They make a profit by selling "ready-made" companies that help their clients avoid the long wait to launch a business.
Australian business-consulting firm Myall Consulting's need for quicker registration here led to the establishment of the business service firm Companies.cz, according to the firm's marketing director, Martin Benik. Myall established Companies.cz in cooperation with Prague-based law firm Zizka & Partners.
"Myall Consulting was used to the quick turnaround in other countries and the ease of online systems there in establishing a company," said Benik. "Here, it found that 'online' service meant only that information was available on a Web site, not that you could actually establish a company via the Internet. In addition to this, there were constant complications and hidden fees. So we decided to build our own software to help clients establish business entities."
Service companies abroad inspired the idea of selling ready-made companies in this country, said Tomas Chrobak, director of Spolecnosti Online (Companies Online), a firm that specializes in off-the-shelf businesses. Specialized firms offer already-established companies in such wealthy foreign markets as the United Kingdom, the United States and Germany.
In the Czech Republic, ready-made companies are basically legal shells that have been incorporated and registered in the commercial registry exclusively to be sold to an end user. Such companies have fully paid-up share capital, so a client can acquire and use them to conduct business immediately.
But that's not the only attraction for foreign clients, to whom the bulk of such companies are sold. If a foreigner wishes to incorporate a limited-liability company and become its director, he has to apply for a long-term visa. The visa application procedure usually takes two to three months, and only then can the registration of a new company "which takes another month" take place. However, if a foreigner becomes the director of a ready-made company, he can act immediately on the company's behalf while the visa application and business registration are processed separately.
There are around 700 limited-liability companies established each month in this country, said Companies.cz's Benik. Prices range from 30,000 Kc ($1,323) to 150,000 Kc, depending on the intermediary and the type of company.
Typically, according to Chrobak and Benik, foreigners acquire a ready-made company to buy real estate or start a small business. "Foreigners cannot own real estate in this country unless they've got a long-term or permanent residency permit," Chrobak noted. "However, by purchasing a ready-made company, they can buy property immediately, without any limitations or delays."
Barring unforeseen difficulties, the bill on business registration should become effective July 1. It still needs to be passed by the Senate and signed into law by the president.
Currently, foreigners have only two options for launching a Czech company:
* Slow version: Assemble all necessary documents, including the company's registration in its homeland, rental or other contracts establishing the firm's Czech site, a statement from the Criminal Registry and long-term visas for the company's statutory representatives. Then file an application for registration with a local Business Court. The process can take several months
* Fast version: Buy a "ready-made" company with all the paperwork and registration already completed. After paying the price to an intermediary, you can start transacting business within a couple days "Companies' applications for registering will be possible to submit on-line, in order to make the process time-effective," said Justice Ministry spokesman Petr Dimun.