How to Properly Distribute Profit from a Limited Liability Company in 2025

You've Made a Profit. What Now? Basic Strategies and Why the Right Procedure is Key

The main advantage of a limited liability company is precisely that "limited liability." As a shareholder, you are not liable for the company's debts with your personal assets, but only up to the amount of your unpaid contribution. However, this protection is not unconditional. It comes at the cost of a strict separation of the company's assets from your personal assets.

The money in the company's bank account, even if you are the sole owner, does not belong to you, but to the company as a separate legal entity. In this area, ARROWS provides comprehensive tax advisory services to help you set up your relationship with the company correctly. Any informal withdrawal of money, for example, by a simple transfer to a personal account, is not only a tax offense but, above all, an unauthorized interference with the company's assets, which can have fatal legal and financial consequences.

Three Main Ways to Access Money from Your Company

The law offers several legal ways to access profits. You might be interested to know that ARROWS offers services in the field of corporate law, holdings, and structures, which optimize asset management. Each has its own specific rules, advantages, and disadvantages. Here are the three most common:

1. Share of profit (dividend): This is the traditional and most common way for shareholders to distribute profits. However, the process is administratively and legally quite demanding and requires meeting several conditions and tests. You can find details on the responsibilities of company management in the article Practical Duties of Executive Directors. Experiences of Corporate Lawyers.

2. Remuneration for the performance of the executive director's duties: An executive director (who can also be a shareholder) can receive regular monthly remuneration. This path is associated with a higher tax and social security contribution burden, but for the company, it represents a tax-deductible expense and entitles the executive director to social security benefits.

3. Loan to a shareholder: A seemingly simple option to quickly obtain company funds. In reality, however, it is a very risky and strictly regulated option that can easily lead to problems with the tax authorities.

At ARROWS, we understand that your goal is not just to comply with the law, but to find the best and most effective solution for you and your company. We have guided hundreds of clients through this process and know that every situation is unique. Our daily bread is translating complex legal and tax realities into understandable and safe steps for our clients.

Step by Step: The Safe Payout of a Share of Profit (Dividend)

Paying out a share of profit is not a one-off act, but a carefully regulated process that can be compared to a precise recipe – omitting a single step can ruin the entire effort and lead to serious complications. Let's go through the entire procedure step by step.

Financial Statements – The Cornerstone of Everything

It all starts with the numbers. Our experts in accounting services can help you with this, ensuring the flawless preparation of all documents. Without properly prepared, approved, and published financial statements, the distribution of profit cannot even be considered.

• Preparation and responsibility: The statutory body, i.e., the executive director(s) of the company, is fully responsible for preparing the financial statements.

• Approval by the General Meeting: The completed statements must then be discussed and approved by the company's supreme body – the General Meeting. The law stipulates that this should happen no later than 6 months after the last day of the accounting period. It is crucial to realize that only approved financial statements can serve as a basis for the decision to distribute profits.

• Publication in the Collection of Deeds: After approval, you are obliged to file the financial statements in the Collection of Deeds maintained by the competent Registry Court. This obligation can also be fulfilled by filing them with the tax administrator as an attachment to the tax return. Neglecting this duty is not just a formal offense. It carries significant penalties:

• A fine from the tax office: Up to 3% of the company's total assets.

• A fine from the Registry Court: Up to CZK 100,000.

• Dissolution of the company: If the company fails to publish financial statements for two consecutive periods and does not respond to the court's calls, the court may initiate proceedings to dissolve the company and put it into liquidation.

The General Meeting – The Key Decision on the Fate of the Profit

With the approved financial statements in hand, the key decision comes next.

• Authority: The distribution of profits and other equity is decided exclusively by the General Meeting, or by a sole shareholder acting as the General Meeting. The executive director cannot decide on the distribution of profits alone.

• Flexible timing: Thanks to an amendment to the Business Corporations Act (BCA) effective from 2021, the old rule that financial statements must not be older than 6 months no longer applies. Now, a decision on profit distribution can be made at any time until the end of the accounting period following the one for which the statements were prepared. This gives companies much more flexibility – you don't have to distribute the profit immediately but can wait for a more suitable moment during the year.

• What can be distributed: The General Meeting can decide to distribute not only the profit for the last accounting period but also retained earnings from previous years or other equity sources, such as share premium or funds created from profit.

• Formality is key: It is absolutely essential to comply with all formal requirements for convening and holding a General Meeting (deadlines, invitations, quorum). If a resolution on profit distribution were adopted at an improperly convened or non-quorate General Meeting, it could be challenged for invalidity. Worse, if the decision were contrary to the statutory tests (see below), it is treated as if it had never been adopted (it is null and void). Any payment based on a null and void decision would be unjust enrichment, which the shareholders would have to return.

The Executive Director's Three Tests – Your Personal Protective Shield

This part is the most important for every executive director. Imagine the profit payout process as unlocking a safe with two keys. The General Meeting turns the first key with its decision. But you, as the executive director, hold the second key.

And the law commands you to turn it (i.e., pay out the money) only if all safety tests are met. If they are not, you not only have the right but a direct duty not to make the payment, even if all the shareholders in the world are pressuring you. By violating this "braking function," you expose yourself to the risk of personal liability with all your assets for any potential damage.

Before each payout, you must perform these checks:

• Balance sheet tests: These rules are already checked by the General Meeting when making its decision, but the executive director must be sure they have been followed.

• Equity test: The amount to be distributed must not be so high that the company's equity after the payout would fall below the amount of the subscribed share capital, increased by any funds that cannot be legally distributed.

• Development costs test: If your company's balance sheet shows so-called development costs, the amount to be distributed is reduced by their unamortized portion.

• Insolvency test – The most important reality check: This is your key task. You must assess whether the company would cause its own bankruptcy by paying out the profit. Bankruptcy has two basic forms:

1. Inability to pay (insolvency): Does the company have enough cash (liquidity) to pay its due debts (invoices to suppliers, wages, social security contributions, loan installments)? Beware, a high accounting profit does not automatically mean enough money in the bank.

2. Over-indebtedness: Does the sum of all the company's liabilities exceed the value of its assets?
You must perform this test just before the planned payout, as the company's financial situation can change quickly.

Register of Beneficial Owners – A new but crucial condition: Since 2021, another important rule has been in effect. A company may not pay a share of profit (or any other benefit) to a person who is its beneficial owner if that person is not properly registered in the Register of Beneficial Owners. This also applies if the shareholder is another company – the profit cannot be paid to it if its beneficial owner is not registered. It is therefore absolutely necessary to check the registration status before any payout.

Payout and Deadlines

If all tests have been passed, you can proceed with the payout.

• Due date: The share of profit is payable within 3 months from the day the General Meeting decided on it, unless the articles of association or the General Meeting itself specify otherwise.

• What happens if the General Meeting distributes the profit, but you, as the executive director, correctly assess that due to a poor financial situation (failed insolvency test), you cannot pay out the money? The shareholder's right to this share of profit does not expire immediately. You wait. However, if the situation does not improve and the profit cannot be paid out by the end of the following accounting period, the shareholder's right to this specific share of profit expires. 

• The profit is thus returned to the company's retained earnings account. This mechanism protects the company's financial stability and, at the same time, protects you as the executive director from constant pressure to pay out at an inappropriate time.

Practical tip from ARROWS: We prepare complete documentation for the General Meeting for our clients and assist executive directors in evaluating all tests. We create a written record of the insolvency test, which serves as key evidence that the executive director acted with the duty of due managerial care. This provides them with crucial legal certainty and protection for their personal assets.

Taxes, Taxes, and More Taxes: How Much of Your Profit Will You Actually Keep?

Legally mastering the process is only half the battle. The other, equally important, half is the tax side of things. This is often where it is decided how much money will actually land in your account.

The Principle of Double Taxation: Why CZK 100 of Profit Isn't CZK 85 in Your Pocket

When paying out a share of profit, you must account for so-called double taxation. This means that the same money is taxed twice – once at the company level and a second time at the shareholder level.

1. First taxation (at the company level): The company must first pay corporate income tax (CIT) on its profit. The tax rate for tax periods starting from January 1, 2024, was increased from 19% to 21%.

2. Second taxation (at the shareholder level): From the amount remaining after CIT, a 15% withholding tax is deducted when paid out to a shareholder (a natural person). This tax is withheld and paid directly by your company. For you as a shareholder, this taxation is final, and you do not need to report this income in your personal tax return.

Comparison: Profit Share Payout vs. Executive Director Remuneration (2025)

To illustrate the differences in practice, let's compare both options using an example where we want to get CZK 100,000 out of the company. 

At first glance, it seems that paying out a share of profit is clearly more advantageous. The net income is significantly higher. But that's not the whole story. The executive director's remuneration is a tax-deductible expense for the company. This means that the company can reduce its corporate income tax base by the full amount of the remuneration (in our example, CZK 100,000) and the related contributions (CZK 34,000), thus saving 21% of this amount. Moreover, for a shareholder who has no other income and wants to ensure participation in the pension and health system, regular remuneration may be a strategically better choice despite the higher taxation.

Advances on Profit Shares: How to Do It Safely

The law allows for the payment of profit shares in the form of advances during the year, which can help with the shareholders' cash flow. However, this procedure has its own strict rules:

• They can only be paid based on interim financial statements, which must show that the company has sufficient resources.

• The insolvency test also applies to the payment of advances. The executive director must not pay an advance if it would cause the company to go bankrupt.

• The biggest risk is that the final profit at the end of the year will be lower than the sum of the advances paid. In such a case, the shareholder is obliged to return the overpayment within 3 months of the approval of the regular financial statements.

The lawyers at ARROWS work closely with tax advisors. We help clients not only with the legal side of the payout but also with setting up an optimal and legal remuneration structure that reflects their long-term personal and business goals.

The Minefield: The Most Common Mistakes, Risks, and Penalties

We now come to the part that many entrepreneurs underestimate, yet it is here that the greatest risks lie. Imagine an executive director, Petra. At the request of the shareholders, she paid out all of last year's profit. She did a cursory check but didn't conduct a detailed analysis of future cash flows.

Three months later, a key client was late with a large payment, the company lacked money for a loan installment and wages, and it became insolvent. Creditors are now demanding compensation directly from Petra because by paying out the profit at an inappropriate time, she breached her duty of due managerial care and contributed to the company's bankruptcy.

Personal Liability of the Executive Director: More Than Just a Scare Tactic

The fundamental duty of every executive director is to act with the duty of due managerial care. This is not just an empty phrase. It means you must act in an informed manner, in the best interest of the company (loyally), and with the necessary diligence.

If you breach this duty – for example, by approving a profit payout contrary to the law or without a thorough assessment of the financial situation – and the company suffers damage as a result, you are liable for this damage with all your personal assets. Importantly, in any potential dispute, the burden of proof lies with you. You must prove that you acted with the duty of due managerial care.

The Biggest Pitfalls and How to Avoid Them

• A loan instead of a dividend: Many entrepreneurs try to avoid the administration and taxes associated with profit distribution by "borrowing" money from the company. However, since 2021, the law explicitly prohibits providing gratuitous benefits to shareholders and persons close to them. Therefore, if you take out a loan, it must be at a
  customary (market) interest rate. Otherwise, you risk a tax assessment for both the company (on fictitious interest income) and yourself (taxation of the material benefit).

• The "Švarc system": Another popular, but illegal, method is when an executive director-shareholder invoices the company for services that actually fall within the scope of their executive duties. This is considered a circumvention of the law (the "Švarc system" for disguised employment) and carries high penalties.

• Ignoring formal steps: As we described in Part 2, every step has its purpose. Skipping the General Meeting's approval or failing to perform the tests can invalidate the entire process and lead to an obligation to return the money.

It is important to realize that individual mistakes often chain together, creating a "domino effect." For example, failing to register a beneficial owner leads to a ban on profit distribution. If the executive director pays out the profit anyway, they breach the duty of due managerial care and become personally liable for any resulting damage. Thus, even a seemingly small administrative error can, at the end of this chain, threaten your personal assets.

At ARROWS, we know that prevention is always cheaper than solving problems. We specialize in preventive legal and tax reviews and in setting up internal processes to prevent these risks from occurring in the first place. We protect not only your company but, above all, you personally.

Not Sure? Get Advice.

The process of distributing profit is complex and full of pitfalls. Even though you now know the basic rules, in practice you may encounter situations that require individual assessment.

Summary of Key Points for a Safe Profit Payout

To be sure, let's recap the most important rules in the form of a simple checklist:

• Always based on proper financial statements approved by the General Meeting.

• Always after a formal decision by the General Meeting on the distribution of profit.

• Always after careful execution and ideally written documentation of all statutory tests (balance sheet, insolvency) by the executive director.

• Always after checking that all recipients (and their beneficial owners) are properly registered in the Register of Beneficial Owners.

• Always with the correct and timely withholding and payment of the 15% withholding tax.

• Always with the financial statements published in the Collection of Deeds.

When is it high time to call a lawyer?

If you answer "yes" to any of the following questions, it is appropriate to consider a professional consultation:

• Are you planning to pay out profits for the first time and are unsure of the procedure?

• Is your company's financial situation tight, or do you have doubts about its liquidity?

• Do you have a more complex ownership structure (multiple shareholders, foreign owners)?

• Are you not 100% sure about any step in the process or the interpretation of the law?

• Are you considering a combination of different remuneration methods (dividend, executive director's remuneration, loan)?

How can we at ARROWS specifically help you?

Our experts are ready to provide you with comprehensive support throughout the entire process:

• Preparation of complete documentation for convening and holding the General Meeting.

• Assistance to the executive director in conducting and documenting the statutory tests to protect their personal assets.

• Review and setup of contracts on the performance of the executive director's duties to be tax and legally optimal.

• Tax optimization in cooperation with our tax advisors to find the most advantageous solution.

• Resolution of disputes between shareholders regarding the distribution of profit.

• Representation before authorities in case of an inspection by the tax office or the Registry Court.

Your business is the result of your hard work. Don't risk your assets and peace of mind over a formal error or ignorance of complex rules. Take the first step towards the safe and effective management of your company. Arrange a no-obligation consultation with our experts at ARROWS today.