Different types of shares in a limited liability company

Basic vs. Special Shares: What Does the Law Say?

The Business Corporations Act (BCA) expressly allows the articles of association to permit the creation of different types of shares. A single person can even own multiple shares simultaneously, including different types, if the articles of association allow it. This is a major difference from the situation before the recodification – until 2014, the strict rule "one partner = one share" applied, and special arrangements for rights attached to shares were not permitted by law. Now, partners can "tailor" their mutual rights within the legal framework precisely through different types of shares.

Example: Imagine two startup founders – Jana and Petr. Jana is contributing a unique idea to the company and will manage it, while Petr is contributing more capital. They want to do business together but have different priorities: Jana wants to maintain control over the company even though her contribution is smaller, and Petr would like to receive the highest possible share of the profits from the company's future success. Thanks to the option of creating different types of shares, they can set up their articles of association to suit both of them – for example, by giving Jana a share with higher voting rights (control) and Petr a share with a higher right to profits than would correspond to his contribution.

Of course, the law also sets limits on these arrangements. There are two basic constraints: first, the content of the different types of shares must be precisely defined in the articles of association (Section 136 of the BCA). This means that the articles of association of your s.r.o. (limited liability company) must state what types of shares the company has, what they are called, and what special rights or obligations are associated with them. Second, certain rights cannot be completely removed from all shares – for example, there must be at least one share with voting rights in the company. Below, we will discuss in more detail which specific rights can be modified for shares and to what extent.

Options for Modifying Shares in an s.r.o.

The following is an overview of the most common areas in which different rights or obligations associated with a business share in an s.r.o. can be established. Compared to the standard setup (a basic share), the articles of association can agree on the following in particular:

1. Different Voting Rights:

By default, each partner votes at the general meeting according to the ratio of their share in the registered capital (both profits and voting rights are by default distributed in proportion to the shares). However, the articles of association may specify a different number of votes per share. You can thus create a share that has more votes (e.g., 1 share = 5 votes) or, conversely, fewer votes, or even a share with no voting rights.

The BCA permits these options – it even allows for the issuance of a share with no voting rights, as long as you do not remove voting rights from all shares at once (there must be at least one share with a vote in the company). In practice, you can use this, for example, when you want to reward a strategic partner with a small share in the company but do not want to weaken your decision-making powers – you can give them a share with no voting rights (they will be entitled to profits but will not interfere in management). 

2. Modified Share of Profits (Dividend):

The default setting is that profits are divided according to the size of the shares, unless otherwise stated in the articles of association. However, partners can agree on different variants of profit distribution. A higher share of profits for a certain share means that the partner in question will receive a larger percentage of the annual profit than would correspond to their contribution (for example, instead of 30%, they may be entitled to 50% of the profits). A preferential share of profits ensures the priority payment of a dividend to this partner – for instance, a fixed amount or percentage is paid to them first, and the others divide the rest.

A fixed share of profits is a special type where a partner is entitled to a fixed amount or percentage of the profit automatically, regardless of the general meeting's vote. The BCA even stipulates that for shares with a fixed share of profits, it is not necessary for the general meeting to approve the profit distribution each year – the partner is entitled to this "fixed dividend" directly by law. Is a share with no right to profit possible? Theoretically, yes – one can imagine a share for which the right to a share of profits is explicitly excluded. If you were considering this (e.g., you want to give someone a share purely with voting rights but without a share of profits), you should definitely consult a lawyer from our Prague-based team – such a provision must be formulated carefully.

3. Transferability of Shares and Pre-emptive Rights:

The BCA regulates the transfer of shares in an s.r.o. in considerable detail. Within the company (among existing partners), the transfer of a share is unrestricted – any partner can transfer their share to another partner without the consent of the others. Externally (to a person outside the circle of partners), the opposite is true: the default rule states that the transfer of a share to a third party is possible only with the consent of the general meeting.

However, the articles of association can change these rules. You can simplify transferability (e.g., completely free transfer even to third parties without necessary consent) or, conversely, make it stricter (for example, requiring the consent of the general meeting even for transfers within the company).

If you establish any restriction on transferability (e.g., a prohibition on transfer until a certain year), remember that a transfer agreement concluded in violation of such a restriction would be invalid. It is also recommended to include a pre-emptive right in the articles of association: when a partner decides to sell their share, they must first offer it to the existing partners under the same conditions. The pre-emptive right protects the remaining partners from the risk of the share falling into the hands of a stranger without their knowledge.

Tip: If a share is completely freely transferable (without restrictions and consent), you can use the institution of a common certificate (kmenový list) – this is a security representing the share. A common certificate significantly facilitates the transfer of such a share (it is sold by endorsement like a stock), but it can only be issued for a share whose transferability is not restricted.

4. Other Special Rights Associated with a Share:

In addition to votes and profits, you can also grant certain shares special advantages in the management and control of the company. These are usually provisions tailored to specific situations. For example, you can agree that the holder of a certain share has a veto right in some key decisions – without their consent, the general meeting could not decide on strategic issues (typically amending the articles of association, selling the enterprise, etc.). Or a partner with a specific share may have the right to appoint a member of a company body (e.g., an executive director or a member of the supervisory board, if you have one).

Another possible advantage is an extended right to information – the law gives every partner the right to inspect documents and accounting records, but you can specify that one partner will receive, for example, more detailed reports on business performance or is entitled to consultations with management beyond the statutory obligations. Such individual rights are usually given to investors or partners who want to better protect their investment.

Example from practice: If a major investor enters the company with a minority share, they can obtain a share with a veto right on fundamental decisions and with the right to appoint an executive director to have control over the management. The founders, on the other hand, can retain shares that guarantee that the company cannot be steered in a different direction without them. Good to know: Although the right of veto or nomination of a body member is not explicitly mentioned in the law, it stems from contractual freedom and is permissible – it is known and used in practice.

5. Special Obligations Associated with a Share:

Not only rights, but also obligations can be associated with certain shares. In addition to the basic obligation to pay up the contribution, the articles of association may impose, for example, a so-called contribution obligation on partners – that is, the obligation to provide an additional financial contribution to the company beyond the initial contribution, if the general meeting so decides (typically when the company needs additional capital).

This obligation can be tied only to certain shares – the articles of association can specify which shares are associated with the contribution obligation. In practice, this might mean that only shares owned by the founders have a contribution obligation (the founders commit to "top up" the company with money if needed), while an investor's share is exempt from this obligation. For all special obligations, it is necessary that they are formulated clearly and reasonably – they cannot be contrary to the law or good morals.

Advantages and Risks of Different Share Arrangements

The ability to define different types of shares gives partners great flexibility. You can motivate investors, for example, with a guaranteed fixed share of profits without having to hand over decision-making control. Founders, in turn, can maintain influence in the company through shares with greater voting power or a veto, even if they bring in other partners.

Different shares also make it easier to resolve situations where one partner contributes mainly labour and another mainly capital – each can have a "tailor-made" share corresponding to their contribution. In the case of share transfers, correctly set pre-emptive rights and transfer restrictions ensure the stability of the ownership structure and prevent unwanted surprises where a foreign person might enter the company.

On the other hand, this freedom also carries risks and pitfalls. The more complex and non-standard the arrangements in your articles of association, the greater the risk of ambiguity or future disputes. Every special right or obligation must be defined unambiguously – any gaps or ambiguities can lead to different interpretations and conflicts between partners.

An excessive imbalance can also disrupt relationships within the company: if one partner has significantly limited rights (e.g., no voting rights at all or no share of profits), they may eventually feel disadvantaged and look for a way to change the situation or leave the company. Let's not forget the practical side: if you decide to attract more investors or sell a share in the future, a too-complicated share structure can deter investors or slow down the whole process (it will require detailed legal due diligence and adjustments).

Summary of advantages: The ability to customize share rights allows for fairer conditions for different types of partners, attracting investment and maintaining control over the company.

Summary of risks: Complexity can lead to misunderstandings and disputes, extreme limitations of rights may be invalid or problematic, and without expert knowledge, there is a risk that the provisions in the articles of association will be formulated vaguely or in conflict with the law.

In Conclusion

Modifying the types of shares is a powerful tool, but it should be used with caution and a full understanding of the legal consequences. Every company is different, and there is no one-size-fits-all solution – therefore, it is advisable to discuss the share setup with a lawyer experienced in corporate law. An expert from our Czech legal team will help you assess which ideas are feasible and legal, and which might run into problems.

For example, they can confirm how to correctly draft a provision for a share with a fixed share of profits to comply with the BCA, or whether your intended restriction on transferability is valid. Have your articles of association reviewed or drafted to measure – it's worth it. You will save yourself a lot of trouble in the future and prevent costly disputes or invalid agreements.

Do you need advice on setting up the rights and obligations of partners in your company? Do not hesitate to contact our law firm. We will be happy to go through your articles of association with you, point out possible improvements or risks, and propose an optimal solution in accordance with the law and your business goals. Contact us today – together we will ensure that your s.r.o. stands on a solid foundation and takes advantage of all the benefits that modern Czech legislation offers.