Ready made companies are scam
There is a big business in the Czech Republic with so called ready-made companies. All over the internet you can find offers for purchasing already existing company. The alleged declared benefits for purchasing existing company instead of establishing a brand new one are mainly cost saving (you are told you get the company for minimum costs) and the speed of the process, as it is presented as the fastest way.
Nothing from above mentioned is true! This article was made because we experience the hardships of our clients on the daily basis. It should provide you the main reasons why it is always better to establish a brand new company.
Even if when the seller looks as a serious partner such as a law company, an attorney etc., do not ever buy the ready-made company.
Why is this kind of business even possible in Czech Republic and is not common in your country?
Unlike in most developed countries there is no minimum corporate income tax or compulsory membership in any Chamber of Commerce, etc. Moreover if you choose an appropriate core of business you do not even need any trade license, which is the most case of ready-made companies.
Common practice of ready made sellers
The founded company pretends to be a serious one during the process. After capital formation (notarized Articles of Association/Partnership Agreement) the basic capital is paid to the bank. Although since 1.1.2014 the minimum capital is 1,- CZK, most of the ready-made companies are established with higher amount similar to the previous minimum capital of 200.000,- CZK. Sometimes they apply for free trade license or more often they choose administration of own properties that does not need any. Further they register the new company to corporate income tax. That is it. That is where the activities of founder (seller) end.
One company in the portfolio is not attractive as it does not generate much profit. Better is to establish dozens of companies to be ready for the demand. Anyway no one wants to block the capital; that would be too costly. Consequently the shareholder withdraws all the funds from the bank account and uses that for settlement of the next one.
Obligations of all corporate entities that are usually not met by the ready-made seller
We believe that in the most systems in the world, all legal entities must abide by set of laws that determine compulsory legal acts and hence generate also some costs for the company. These are typically not performed by ready-made companies. For instance
- Immediately after establishing the company, the shareholder/CEO withdraws and cancels bank account. The withdrawal is booked as cash in hand or liability of the shareholder, although the reality is different.
- The company must immediately after establishment start to keeping books and submit Annual Accounts including Corporate Income Tax Returns. This happens very rarely. In fact it is even worse. The seller should hand over the complete accounting by the sale of the company which almost never happens.
- All companies must publish their Annual Accounts in Business register. Anyone can check online whether the company for sale fulfills this obligation. You will rather find out that the company does not do accounting at all.
- Moreover if you buy company registered to VAT, you should take over all VAT returns that must be submitted monthly.
So what are the risks?
Well until nowadays the Czech Republic and responsible institutions do not take much action, i.e. their duties. That does not mean they will not in the future. In such case there is a variety of penalties how to fine the new shareholder of the company based on diverse laws such as fine for not publishing annual accounts, submitting tax returns or other declarations, penalties for not keeping the books etc.
Financial penalties are not the only risks. Think of secret liabilities and commitments
The new owner bears much more risks anyway. Since the establishment each corporate entity has electronic mail box (called Datová schránka) by law. It serves as sole way how all public institutions communicate with the company. In most cases the new owner even does not know there is some mail box not to mention that all documents are marked as delivered after 10 days, no matter if anyone has read them. So they come into force automatically. Even if the new owner would be familiar with electronic mail box he cannot anticipate any secret liabilities of the company he bought that are due in the future. This can typically be different notes or bills of exchange.
Except the past risks there is still the risk in the future. In worst case, when the seller goes bankrupt, the insolvency administrator is under certain conditions entitled to include the sold company in bankruptcy assets.
Nevertheless, all risks are carried by the new CEO. Seller’s statutory declarations of honour can give the buyer some peace but they do not eliminate the risks.
Ready made is usually not cheaper than establishing new company
It is not even true that the purchasing of already established company with limited liability is cheap. While establishing founding the company on your own with expert assistance will cost you about 1.300,- EUR, price for ready-made companies range between 1.000,- to 1.800,- EUR. These are however by no means final costs. Once you buy it you must change the articles of association and hence notarial record, you will very likely change trade licenses and you will definitely need to update company’s entry in the business register. If the new shareholder is foreigner, it is necessary to translate documents to Czech. Changing the business address to other city means reregistration to different Tax Offices, Social Security Office etc. All these steps cost money and time. Total costs of these modifications are often almost the same as the costs for a brand new company and they are typically not entirely included in the purchase price.
Moreover a part of the sale very often concludes the buyer lease contract that guarantees him virtual office (business address) for certain period. These lease contracts seem to be disadvantageous.
Because of the language barrier and unawareness of the situation the risks are higher for foreigners.
Unique selling point is speed of the process
You are often told that establishing a new company takes much time and therefore buying the company speeds the process up. Nowadays trade license offices, notaries and courts work are very fast. E-governance is in the Czech Republic on a very high level comparing the rest of the Europe. Except one visit of notary, legal acts can be performed solely electronically by certified digital signatures. The incorporation of company to the business register is entitled to do in most cases directly the notary (the company is incorporated immediately). If that is not possible, we submit the application to relevant court which has legal period of 5 working days.
Once you have prepared all materials, the whole process of establishing the company will not take more than 2 weeks often much shorter. Time necessary for establishing a new company is therefore comparable to purchase of a company.
From our experience the lengthiest part of the whole process is the preparation of relevant foreign documents and their translation. But you will need these documents no matter whether you establish brand new company or purchase an already existing company.
To sum it up, ready-made companies are scams. And nasties are also those who sell these companies.
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