Sole Proprietorship vs. Limited Liability Company (s.r.o.): Key Differences, Advantages, and Disadvantages for Your Business in the Czech republic

Are you deciding whether to start your business as a sole proprietor (OSVČ) or to set up a limited liability company (s.r.o.)? This article breaks down the major differences between these two business structures in the Czech Republic, highlighting their respective benefits and drawbacks. Whether you're planning for a small turnover or aiming for substantial profits, choosing the right form can significantly impact your financial and legal security.

Kateřina Potměšilová, Tax Advisor, CEG

What’s the main difference between a sole proprietorship (OSVČ) and a s.r.o.?

The biggest distinction lies in liability. A sole trader (OSVČ) is personally liable for all business obligations with their entire personal assets. This exposes them to significant financial risk, which can be mitigated through professional liability insurance.

By contrast, an owner/shareholder of an s.r.o. is only liable up to the amount of the unpaid share capital. If the capital is fully paid at the outset, the owner bears no personal liability for company debts—providing strong personal asset protection.

Other key differences include:

• OSVČ: Easier to set up, lower costs, simpler administration, but higher personal risk and potentially higher tax burden.

• s.r.o.: Greater legal protection, lower corporate tax, but higher operational and compliance costs.

  
  

How do you register as an OSVČ or start a s.r.o.?

Setting up as an OSVČ is very simple—just fill out a unified registration form, choose a trade license (business field), and pay a CZK 1,000 fee at the trade licensing office.

Starting an s.r.o. is more complex and expensive. It requires a notarial deed, articles of association, depositing share capital, and registering the company in the Commercial Register.

Should I start as an OSVČ or form a s.r.o.?

It depends on your business goals. For someone just starting out with limited capital, registering as an OSVČ may be more practical. You should consider:

• The nature of your business

• Who your partners and clients will be

• Whether you plan to hire employees

• Your expected revenue

• Whether you want to draw profits or reinvest

• Whether you’ll act as the executive director (jednatel)

  
  

If you're planning for significant growth or want to work with corporate clients, starting with an s.r.o. may save you the hassle of transitioning from OSVČ later.

Freelancers with minimal expenses and no employees often benefit from remaining as OSVČ, especially when using simplified tax regimes and flat-rate expense allowances.

What are the pros and cons of OSVČ and s.r.o.?

Advantages of OSVČ:

• Quick and inexpensive to start

• Easier administration

• Direct customer relationships

• Easier to pause or terminate business

Disadvantages of OSVČ:

• Full personal liability

• Income taxed at 15% (or 23% for high earnings)

• Mandatory social and health insurance contributions

Advantages of s.r.o.:

• Limited liability to the amount of share capital

• More credible in the eyes of business partners

• Easier transfer of ownership

• Allows multiple partners under one company

Disadvantages of s.r.o.:

• More administrative workload

• Must use double-entry bookkeeping

• Profit distribution is taxed

• Complex and costly to close

What are the tax and administrative differences?

OSVČ have it easier:

• Can use flat-rate tax regime and lump-sum expense deductions

• No obligation for double-entry bookkeeping

• Taxed at 15%, rising to 23% for higher income brackets

• Must pay both health and social insurance from profits

s.r.o.:

• Pays 21% corporate tax

• Dividends to shareholders are subject to an additional 15% withholding tax

• More effective for profit optimization, especially when reinvesting

When is it better to set up an s.r.o., and when to stay as OSVČ?

Choose a s.r.o. if:

• You're entering a higher-risk industry

• Expect high profits

• Plan to eventually sell the company

• Want to protect personal assets

Stay OSVČ if:

• You're offering consulting or personal services (e.g. hairdressing, massage)

• Your brand is closely tied to you as a person

• You prefer administrative simplicity

How do you transition from OSVČ to an s.r.o.?

Switching from OSVČ to an s.r.o. isn't simple or free. You have several options:

1. Cease your sole proprietorship and start a new s.r.o.—but this breaks business continuity.

2. Transfer your business (enterprise) to the new s.r.o. as a contribution in kind—requires a valuation report.

3. Sell your sole proprietorship as a going concern to the s.r.o.—requires a purchase agreement.

In both cases, you’ll need:

• Legal advice

• Tax consulting

• Accounting support

  
  

At a minimum, you'll need to cover the cost of expert valuation or the purchase of your own business at fair market value.

While it’s possible to manage the transition independently, you must be very resourceful and willing to accept the legal and financial risks. In most cases, it's better to consult professionals—it will likely save you time, stress, and money in the long run.

The timeline varies: in ideal cases, it might take a week, but it can easily extend to several months, depending on the complexity of your business.

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About the Author:

Ing. Šárka Pelikánová

Managing Director and Tax Specialist at Connect Economic Group s.r.o.

Šárka is dedicated to improving the financial literacy of entrepreneurs in the Czech Republic through the publication of expert articles and by leading popular seminars such as Accounting and Tax Basics for Entrepreneurs. She founded CEG at the age of 22 and has since focused on its development. Her professional background includes work in Japan as an analyst for an investment fund, alongside completing part of her MBA studies there.

For companies and many entrepreneurs, accounting is a legal obligation. For our team of professionals, it's also a passion. We’re ready to help you—whether you’re a sole trader (OSVČ) or run a company with employees. Learn more about the accounting and tax services we offer our clients.