Rozdělování zisku a záloh na podíly v s.r.o.

General Meeting, Directors and Rules for Profit Distribution in an s.r.o.

In practice, this means that the shareholders at the general meeting approve the amount to be distributed and the specific shares for individual shareholders (or other persons, if permitted by the memorandum of association – see below). Subsequently, it is the task of the statutory body (the director or directors) to ensure the actual payment of the approved share of profit to the authorized persons. Simply put: the general meeting instructs "what and to whom to pay" and the directors must arrange "that it is actually paid".

Directors also have the duty to prepare the documents for the general meeting – in particular, the annual financial statements and the proposal for profit distribution. However, their work does not end with the decision of the general meeting. Before the actual payment, the statutory body must verify that the distribution meets all legal conditions and will not jeopardize the company or its creditors. The directors therefore act as a safety valve – even if the general meeting approves the profit distribution, the director must not execute it if doing so would violate legal rules (for example, if they find that the company does not pass the so-called insolvency test or other conditions). 

In practice, the Prague-based legal team at ARROWS frequently helps directors evaluate these situations and set up internal procedures to ensure the distribution is carried out correctly – for example, by drafting internal guidelines for profit distribution or providing legal assessments of compliance with conditions prior to payment. This helps you avoid unauthorized distributions that would be difficult to resolve later.

To Whom Profit Can Be Distributed and Shareholders' Preferential Rights

By default, a share of profit in an s.r.o. can only be paid to shareholders, in proportion to their shareholdings. However, the memorandum of association may determine a different method of profit distribution. In practice, we may encounter preferential rights or different types of shares – for example, a certain shareholder may be entitled to a higher share of profit than corresponds to their contribution, or there may be shares with a preferential dividend. 

It is also possible to stipulate in the memorandum of association that a portion of the profit will be distributed to persons other than shareholders – for example, to members of the statutory body in the form of royalties/bonuses (tantièmes) or to employees as a motivational bonus. Without such an agreement, distributing profit to "non-shareholders" would not be legal. 

If you plan to reward a director or employee from profits, for example, have your memorandum of association reviewed or modified by the Czech legal team at ARROWS to ensure it contains the necessary provisions. ARROWS lawyers can prepare all documentation and contractual materials so that the payment of bonuses beyond the standard share of profit is fully in line with the law and the company's internal rules.

Legal Restrictions on Profit Distribution (Balance Sheet Tests)

The decision of the general meeting on profit distribution is not entirely unrestricted – the law sets financial criteria (so-called balance sheet tests) that must be met for any distribution of profit to be carried out. The general meeting must not approve the distribution of an amount higher than the company's disposable profit according to the latest financial statements. 

Simply put, the amount to be distributed among shareholders must not exceed the sum of the net profit of the last closed financial year, undistributed profits from previous years (after deducting any accumulated losses), and free equity funds that can be used. In addition, mandatory allocations to reserve funds under the law or the memorandum of association are deducted from this sum – this gives us the maximum amount that can be distributed at all. 

If the general meeting votes for a distribution higher than allowed by this balance sheet test, the resolution on profit distribution has no legal effect – it is treated as if it had not been adopted. In practice, shareholders would have to return such unlawfully paid funds to the company. Thus, even a seemingly simple decision on profit distribution can hide many legal pitfalls, and an erroneous decision of the general meeting can lead to an obligation to return the already distributed funds. 

To prevent such situations, it is worth consulting the intended dividend amount with a lawyer – for example, ARROWS provides legal opinions on the intended profit distribution, which verify compliance with legal tests and thus protect directors from subsequent claims.

However, the balance sheet test is not the only restriction. For capital companies, an equity test also applies: the profit distribution must not cause the company's equity to fall below the level of registered capital increased by mandatory funds. In other words, after the profit distribution, the accounting equity must remain at least at the level of the sum of the registered capital and indivisible funds – it must not be "paid out" into the negative. 

This requirement protects the registered capital and financial stability of the company. A decision contrary to this rule is also ineffective, so a distribution made despite the equity falling below the specified threshold would be unauthorized and would also have to be returned.

The third crucial criterion is the insolvency test. This differs from the previous ones: while the balance sheet and equity tests are evaluated by the general meeting based on the financial statements (i.e., as of a certain date, usually the end of the last year), the insolvency test is assessed by the directors based on the current financial situation at the moment of payment. The company must not distribute a share of profit if doing so would cause its bankruptcy. Before the distribution, directors must check that the company will have enough money even after the payment to cover all due liabilities – there must be no insolvency or over-indebtedness of the company.

In practice, this includes checking cash flow, the outlook for invoice payments, loan installments, etc. If the profit distribution would cause the company to lack funds for further operations and debt settlement, the payment must not take place. The insolvency test must also be met when paying an advance on profit (which we will discuss below). This test lies mainly on the shoulders of the directors – if they make the distribution despite imminent insolvency, they violate the law and expose themselves to serious consequences (see below). 

The ARROWS law firm therefore offers legal consultations to assess the threat of bankruptcy during a planned distribution – we will help you analyze the financial situation of the company from a legal perspective to ensure that by distributing profit you do not jeopardize the existence of the company or yourself.

Summary of restrictions: The general meeting can decide on profit distribution only on the basis of regular (or extraordinary) financial statements and only up to the amount permitted by the above tests. If these are not met, the directors must not distribute the profit, even if the general meeting voted for it. Failure to respect these rules may result in the invalidity of the general meeting's resolution and the obligation to return the paid amounts, or even lawsuits or penalties against the directors. Below is an overview of the main risks that can arise in the event of an incorrect profit distribution – and how our ARROWS law firm can help you in such a situation.

Advances on Profit Shares: Can You Pay Out Profit in Advance?

Many shareholders ask whether they have to wait until the end of the year and the approval of the annual financial statements, or whether they can pay out part of the profit in the form of an advance earlier. Czech legislation recognizes this option – we refer to it as an advance on a share of profit or an interim dividend. However, strict rules apply here. 

The decision to pay an advance is not made by the general meeting, but directly by the statutory body (directors). However, directors can only pay an advance based on interim financial statements proving that the company has sufficient funds. These interim financial statements (unlike the regular annual ones) do not need to be approved by the general meeting, but they should be as up-to-date as possible – caution dictates having them prepared just before the intended payment of advances. Furthermore, directors must perform the same financial tests for advances as for regular profit distributions. 

The law explicitly requires compliance with the insolvency test and sets a limit on the maximum total of advances using a calculation similar to the one used for the balance sheet test. It is good practice to perform all tests – both balance sheet and insolvency – before paying an advance, so that directors are certain they are not distributing something the company cannot actually afford.

Advances on profit shares can also be paid repeatedly during the year (monthly, quarterly, etc.), but always with new interim financial statements and subject to meeting the tests. It is also important to settle the advances after the accounting period expires and the general meeting decides on the distribution of actual profit. For example, if the company paid advances to shareholders in a certain amount during the year and the general meeting subsequently approves a smaller share of profit (or even decides not to distribute profit at all), the situation must be settled. The law provides for several scenarios:

• If the general meeting does not distribute any profit, shareholders must return all received advances within 3 months of the date of the general meeting (or the time it should have been held) that discussed the financial statements.

• If profit was distributed but the total of advances paid during the year exceeded the resulting share of profit, shareholders must return part of the advances, namely the amount by which the advances exceed their approved share. Here, too, a 3-month period from the decision of the general meeting applies for returning the excess.

• If, on the other hand, the approved share of profit is higher than the paid advances, the shareholder simply receives the remaining amount up to the full sum (the paid advances are offset against the share of profit).

• If the advances corresponded exactly to the approved profit, no additional payments or returns are resolved – the advances are offset and it is done.

From the above, it is clear that advances on profit can help get money to shareholders earlier, but they carry certain risks and additional administration. Directors must carefully monitor that the paid advances do not exceed the final share of profit, otherwise they will have to recover the overpaid amounts. 

The Prague-based legal team at ARROWS often advises clients on the optimal procedure – for example, setting up a share transfer agreement to address the return of advances (if a shareholder sells their share after an advance is paid but before the decision on profit, it is advisable to regulate who returns the overpayment). If the obligation to return the advance arises and the former shareholder does not want to comply voluntarily, ARROWS will secure the recovery of these claims through legal channels.

Case Law: Lessons from Cases of Unauthorized Excess Profit Distributions

There is already a number of court decisions on the issue of profit distribution and compliance with rules, providing valuable lessons for companies. The Supreme Court has repeatedly emphasized that if the general meeting decides on profit distribution in violation of legal conditions, such a resolution has no legal effect. 

In one recent case, for example, the general meeting of an s.r.o. tried to additionally distribute "extra" profit based on financial statements older than 1 year, i.e., after the expiry of the period within which profit can be distributed based on those statements. A minority shareholder challenged the validity of such a decision – and succeeded. The court stated that a decision on profit distribution based on outdated (unsuitable) financial statements is invalid and is treated as if it had not been adopted. 

As a result, even though the dividend had been paid in the meantime, the shareholders had to return the money to the company. This case clearly shows that bypassing the rules (e.g., convening a second general meeting and "catching up" on the distribution of last year's profit, which had not been distributed before) does not pay off.

Another ruling of the Supreme Court dealt with the rights of minority shareholders to profit and confirmed that in an s.r.o. there is no obligation to distribute all generated profit if there are legitimate reasons for keeping part of the profit in the company. While for joint-stock companies it was previously inferred that non-distribution of profit must be justified (so that the majority does not harm the minority), for limited liability companies the court allowed a more flexible approach. The general meeting can therefore decide not to distribute part of the profit and keep it in the undistributed profits of previous years without having to explicitly have a "serious reason" – however, it must not constitute harassment of the minority. 

Even so, it is advisable to inform the minority about these decisions in advance and communicate the reasons (e.g., planned investments, creation of reserves, etc.) to prevent disputes. The Prague-based lawyers at ARROWS can help moderate shareholder negotiations in similar situations or prepare justifications for decisions that will stand up even in the event of judicial review.

Tax Obligations and Personal Liability of Directors in Profit Distribution

The distribution of a share of profit also creates certain tax obligations for the company. If the shares of profit are received by individuals (typically shareholders – citizens), these are so-called dividends, which are subject to a withholding tax of 15%. The company, as the payer, must withhold this tax from the paid amount and remit it to the state. Directors should therefore remember to pay the withholding tax on time – neglect could lead to tax reassessment, penalties, and other inconveniences during a potential tax audit. 

For legal entities acting as shareholders, the situation may differ (dividends between companies are often exempt if conditions are met), which requires an individual tax consultation. At ARROWS, we work closely with tax advisors and can handle the tax aspects of profit distribution so that you comply with regulations and avoid sanctions.

The final, but crucial area, is the liability of directors in the entire process. The law requires directors to perform their duties with due managerial care, i.e., carefully and with loyalty to the company. If directors distribute profit in violation of the law, they breach this duty and may bear personal liability. The consequence may be an obligation to compensate for damage caused to the company or its creditors. 

For example, paying a dividend despite imminent insolvency can result in creditors not being paid – and directors may bear the consequences. In extreme cases, directors can be sued by the insolvency trustee or creditors for causing bankruptcy or may be banned from performing their duties. Legal restrictions on profit distribution should therefore not be taken lightly – directors should double-check every planned distribution. 

If you are unsure, contact the experts – ARROWS lawyers routinely provide legal opinions and consultations to help directors make the right decision and protect them from personal risk. In addition, ARROWS also offers representation in potential disputes or proceedings – whether it involves challenging a general meeting resolution in court, recovering unlawfully distributed profit, or representing a director in damage compensation proceedings.

Conclusion: Safe Profit Distribution with Professional Help

Distributing profit and paying out shares to shareholders is a joyful event in a company's life – but it requires compliance with a number of rules and formalities. Once a mistake is made in the process, joy can quickly turn into a legal problem. However, with the correct legal setup, risks can be minimized and the entire profit distribution process can be handled smoothly. 

Whether you need to prepare documentation for the general meeting, set up internal rules for profit distribution, or consult on more complex situations (such as advance payments or disputes between shareholders), do not hesitate to contact experienced experts. 

The Czech legal team at ARROWS has extensive experience in corporate matters, including profit distribution, and will be happy to help you too – they will ensure everything is carried out in accordance with current legislation, point out potential pitfalls, and propose solutions tailored to your company. Contact us for a non-binding consultation and get advice on how to safely and effectively distribute profit from your business. Your satisfaction and the certainty that everything is in order are worth it.