Financing options for capital companies in the Czech Republic

Entrepreneurs and owners of limited liability companies (s.r.o.) or joint stock companies (a.s.) have more options available to them to raise capital to grow their business or bridge a difficult period. Each form of financing has its advantages and disadvantages from a legal and business perspective. In this overview, we will present the main financing methods - from traditional bank loans to capital increases or shareholder bonuses to investor input, convertible loan and silent partnership (or other off-balance sheet forms of financing).

For each option, we will highlight the legal aspects (e.g. company decision-making processes, registration requirements, contractual requirements or deposit requirements) and the business pros and cons. There are also practical examples illustrating the use of each instrument in practice. The aim is to provide clear and useful information that builds confidence - and motivates you to seek professional legal advice to get your chosen financing set up correctly.

Author of the article: ARROWS (JUDr. Kateřina Müllerová, office@arws.cz, +420 245 007 740)

Bank loans

A bank loan is one of the most common forms of external financing for a company. It is a loan from a bank (or other financial institution) which the company gradually repays with interest according to an agreed repayment schedule. Banks offer different types of loans - for example, investment loans for long-term projects, operating loans to finance inventories, overdrafts for short-term cash needs, etc. Before granting a loan, the bank usually requires thorough documentation (financial statements, business plan) and often security for the loan (e.g. pledge of property, machinery or personal guarantee). The approval process can be lengthy, especially for smaller or riskier businesses.

Business benefits: bank financing makes it possible to raise a larger amount of money at once without the existing owners having to transfer part of their stake in the company. In addition, the interest on the loan is a tax-deductible expense, which reduces the tax base. Bank loans have a lower cost of capital (interest) compared to venture capitalists, especially if the company has a good credit rating. Repayment can be spread over a longer period, which facilitates cash flow planning. The firm also retains full control - the bank does not interfere in the management of the business (unlike some investors).

Disadvantages and risks: the bank's collateral and administrative requirements are a disadvantage - pledging of assets, surety statements and detailed documentation are common requirements. Indebtedness increases the financial risk of the firm: regular repayments are a fixed burden that must be met regardless of current profitability. In the event of non-payment, there is a risk of loss of the pledged assets or insolvency. The bank may also impose various conditions (covenants) - e.g. maintaining a certain amount of equity or limiting further borrowing. Legally, however, arranging a loan does not require any decision by the general meeting or interference with the company's structure.

The loan agreement is usually concluded by the statutory body (managing directors in the case of an LLC, board of directors in the case of a JSC) within the limits of its authority. Registration in the Commercial Register is not required. However,beware of the establishment of pledges - e.g. a mortgage on real estate is entered in the Land Register, a pledge of a business share in the Commercial Register and a pledge of shares would be reflected in the Pledge Register. These steps require careful contractual treatment.

Practical example: an Alfa Ltd. plans to open a new branch and needs CZK 5 million to renovate the premises and equipment. It approached a bank which, after assessing the business plan, offered an investment loan with a 5-year maturity and an interest rate of 6% per annum. The advantage for the company is that it gets the funds relatively cheaply and can repay them gradually from future profits. The disadvantage is the terms of the loan - the bank requires a pledge of the company's real estate and a personal guarantee of the owner. The company does not thus disturb the ownership structure, but takes on the obligation of fixed repayment. If the company fails to generate sufficient income, it would be at risk of financial difficulties. Therefore, Alfa s.r.o. carefully considers its business plan and, if necessary, consults with legal counsel before signing a loan agreement.

Increase in share capital (new contributions)

Another classic financing option is to increase the company' s share capital. This is where the company receives capital from existing or new shareholders in exchange for a share in the company. In the case of an LLC, this is done by increasing the shareholders' contributions (or by adding a new shareholder with a contribution), in the case of an Inc. by issuing new shares. The capital can be increased either by a monetary contribution (injection of funds) or by a non-monetary contribution (injection of assets - e.g. real estate, machinery, patents, etc.). Non-cash contributions must be valued by an expert according to the law to avoid overvaluation and to protect creditors and other shareholders. A cash contribution is usually the most straightforward - the shareholders deposit money in a special account of the company in the approved amount. A non-cash contribution requires an expert's report and a precise description of the thing to be contributed in a contract or notarial deed.

Legal process. The decision must be in the form of a notarial deed as it is an amendment to the articles of association or the articles of association (it is a fundamental change in the share capital). The resolution shall specify the amount by which the share capital is increased, the form of the contributions, the time limits for their repayment and, if applicable, which interested party shall subscribe for the new shares. Existing partners and shareholders often have a pre-emptive subscription right - that is, the possibility to participate in the capital increase in proportion to their shareholding in order to avoid undesirable dilution of their shareholding. Upon receipt of the contributions, the company will file a petition for registration of the increased share capital in the Commercial Register. Only upon registration does the new amount of capital (and possibly the new shareholder) become official. The whole process therefore involves legal preparation (notary, subscription/assumption agreements), the actual deposit of the contributions and administration with the Registry Court.

Advantages: increasing the share capital increases the company's equity - the company has more resources "from within", which improves its creditworthiness. Unlike a loan, the company is not indebted by the additional contribution (it is not foreign funds, but equity). This removes the obligation to repay the loan and pay interest - the new capital remains in the company permanently (until the share capital is eventually reduced). The positive for the existing owners is that the company gets the money it needs to grow without increasing the risk of insolvency. If capital is raised by existing shareholders, they retain control and strengthen the stability of the firm. From a legal point of view, a capital increase can act as a signal of confidence in the firm and a "cushion" is strengthened to cover potential losses. In-kind contributions can also have the advantage of giving the company ownership of a specific asset it may need for its business (e.g. a machine or software) without having to spend cash on it.

Disadvantages: the complexity and time-consuming nature of the process is a disadvantage - raising share capital can be quite lengthy from a corporate law perspective. It is necessary to convene a general meeting, obtain a notarial deed, fulfil the deposit obligations and wait for the entry in the register. This can take up to weeks, which is not always acceptable, especially if the company needs money quickly. If the increase is linked to the entry of a new investor, the existing owners have to accept the dilution of their shares and the possible dilution of their influence.

The new investor may interfere in the running of the company or require certain decisions, which may not be comfortable for the original owners. Also, the costs of implementation (notary, expert's report for in-kind contribution, fees) are not negligible. Last but not least, if the company would like to return the funds to the shareholders at a later date, this is only possible through a reduction of the share capital, which is again a lengthy and administratively demanding process. From a tax point of view, the capital contribution itself is not taxable, but, for example, a contribution in kind may have tax implications for the depositor (e.g. VAT on the contribution of real estate or income tax on the contribution of assets with a significantly higher value than the purchase price).

Practical example: beta s.r.o. is a family-owned furniture manufacturing company that has won a large order abroad. In order to finance the purchase of new machinery and materials, the three partners decided to increase the share capital. At a general meeting (with the presence of a notary), they unanimously approved a capital increase of CZK 2 million with cash contributions from the existing shareholders in proportion to their existing shares. Each shareholder deposited the specified amount into the company's special account within 30 days. After the registration of the new amount of the share capital in the Commercial Register, Beta s.r.o. has a stronger capital base - this will help it in its dealings with banks and business partners as it operates in a more financially stable manner. Advantage: the company has not gone into debt, but still has the means to expand. Disadvantage: the shareholders had to raise significant sums from their own resources and the whole process took almost two months. If one of them had no funds available, they would have had to either bring in an investor or choose another form of financing.

Shareholder surcharge (surcharge obligation)

A specific internal form of capital company financing is a surcharge outside the share capital. This is a cash contribution by the partners to the equity of the company that does not increase the share capital (no new shares are issued in exchange). Surcharges allow the firm to receive cash from the current owners more quickly and with less administration than a formal capital increase. The legislation distinguishes between a voluntary top-up (a shareholder decides to inject additional funds of his/her own free will with the company's consent) and a mandatory top-up (a so-called top-up obligation imposed by the general meeting if permitted by the articles of association).

Legal aspects: in the case of a limited liability company, the articles of association may provide that the general meeting is entitled to impose on the shareholders an obligation to make a supplementary contribution to the shareholders' equity in excess of their contributions. If this option is not in the articles of association, it can be added by amendment (with the consent of all the shareholders). Previously, the law limited the mandatory supplement to 50% of the share capital - the new regulation no longer sets a specific limit, but the limit must be specified in the articles of association.

The general meeting then decides on the specific amount of the surcharge (and the repayment period) usually by a simple majority. A shareholder may also granta voluntary supplement without reference to the articles of association if the general meeting agrees. In the case of a.s., the law does not expressly provide for surcharges, but in practice they are admitted by agreement of the shareholders (e.g. in the form of a donation to the company's capital funds). Importantly, such contributions are not registered as an increase in the share capital and are therefore not entered in the Commercial Register. They are accounted for in equity.

Advantages: a shareholder contribution is a very flexible and quick way to strengthen the company financially from within. It gives the company its own resources without taking on debt (no more loans to repay). Unlike a loan, there is therefore no need to repay the premium - unless the parties have agreed this in advance or the general meeting decides to repay it later, if the situation permits. The surcharge does not change the shareholders' interest in the company - each gives "extra" money, but their ownership percentage remains the same (it is not a capital increase). There is thus no dilution or entry of a foreign person. From a corporate governance point of view, the surcharge does not strengthen the position of the shareholder - the shareholder may provide funds, but does not automatically receive, for example, additional voting rights in return (unless otherwise agreed). The administration is simpler and the costs lower than for a share capital increase (there is no need to amend the articles of association by notarial deed each time if the framework already allows for surcharges and no new shares are created). This is why this instrument is popular, for example, to solve temporary financial difficulties of a company - the shareholders "pour" money into the company to bridge the crisis without going into debt.

Disadvantages: the main limitation is that the additional payment must come from the existing partners. The firm is therefore dependent on the owners having spare funds and being willing to invest them. With a compulsory surcharge, there can be a problem if a partner does not have enough cash - while the surcharge is binding, forcing a partner to perform can lead to the expulsion of the partner or the sale of his or her shares, which are extreme and complicated scenarios. In addition, the funds invested are tied up in the company with no interest or other remuneration (the shareholders benefit only indirectly if the company starts to make a profit). The premium can later be returned to the shareholders only if it does not jeopardize the company's performance - the law says that only what exceeds the company's potential loss can be returned. From a tax point of view, neither the granting nor the return of the bonus is taxable income (it is not a gain, but a movement in equity), but care must always be taken to ensure that the return does not contravene the rules on capital protection (otherwise it could qualify, for example, as a profit share with tax consequences).

Practical example: Delta s.r.o. (a manufacturer of sporting goods) went into a temporary loss due to a drop in sales. The accounts indicated that unless the shareholders quickly raised equity, the company could have problems with its credit ratings and credibility with suppliers. The company therefore used a provision in its memorandum of association for a surcharge. The general meeting approved that each of the four shareholders would provide a premium of CZK 250,000 (a total of CZK 1 million) in addition to the share capital, within 15 days. The partners transferred the amounts to the company's account, which booked them to equity. The result: Delta s.r.o. strengthened its own resources without having to take out a loan or issue new shares. Benefit: The company avoided further debt and the process was completed in a matter of weeks. Disadvantage: The shareholders temporarily sacrificed their own money and will bear the risk that they may never get it back if the company is in more permanent trouble. However, if the financial situation improves, the general meeting may decide in the future to refund the extra payments if the company has sufficient reserves.

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Investor input (capital injection)

Investor entry is financing in the form of the sale of part of the company to a new partner. This can be an individual, a venture capital fund, a private equity fund, or perhaps a strategic investor (another company looking for synergies). The investor will provide money to the company in exchange for an ownership stake - either a share in the LLC or shares in the plc. This makes the investor a co-owner of the company with all the rights of a shareholder (profit share, voting rights, etc., depending on the size of the share acquired).

Technically, the investor's entry can be done in two main ways - by buying the shares from the existing owners or by increasing the capital with subscription of new shares by the investor. Buying out (transferring) part of the share means that the money goes to the original owner, not to the company - the company itself does not get the capital, but the ownership structure changes. In practice, therefore, the second option makes more sense for financing a company: a capital increase where the investor's funds go directly into the company and the investor gets a new share in return. In the case of an LLC, this is done by an agreement on the accession of a new shareholder with a new contribution (approved by the general meeting, with a notarial deed, see above), in the case of an a.s. by subscription of new shares (publicly or privately). In both cases, it is necessary to register the changes in the Commercial Register (new shareholder, new amount of capital). Alternatively, the investor can combine both ways - give part of the money directly to the owners for the purchase of part of their share and put part of it into the company as a capital increase.

The benefits from a business point of view: the involvement of an investor can bring more than just finance to the company. In addition to a quick capital injection (investors can often make decisions and release money faster than banks), the company often gains know-how, contacts and strategic support. An experienced investor can help with expansion into new markets, professionalisation of management or marketing. Unlike a loan, the company does not have to repay the money or pay interest - the investor only receives his return eventually in the form of a profit share (dividend) or by appreciating his shareholding (if he sells his stake in the future). If the project fails, the investor bears the risk of losing the capital invested (he cannot reclaim the money as a lender, unless it is a combination with a loan). Thus, for a company with an uncertain or innovative project, the entry of an investor is often the only realistic way of financing (banks would not grant a loan without a history or collateral).

Disadvantages and risks. The investor usually demands a significant stake in the company or other profit sharing (e.g. preferred stock) - thus the original owners lose exclusive control of the business. The new shareholder may push for changes in strategy, interfere in decision-making or demand a place in management. It is therefore necessary to detail the mutual rights and obligations in the articles of association or shareholders' agreement. This includes, for example, provisions on the investor's veto rights on major decisions, restrictions on the transfer of shares, how profits are to be distributed, investment tranches, targets to be achieved by the company, etc.

The process of attracting an investor can be a long and demanding negotiation - from the initial approach, through the preparation of a business plan, due diligence (legal and financial due diligence by the investor) to structuring the transaction and finalising the agreements. Costs (lawyers, advisors, commissions to intermediaries) must also be taken into account. Another risk is that the expectations of the investor and the entrepreneur may differ - for example, if the investor is pushing for rapid growth and an early sale of the company, while the founder would prefer organic growth, there may be conflicts. From a legal point of view, it is necessary to comply with all the formalities of a new shareholder's entry - in the case of an LLC, to obtain the approval of the general meeting for the transfer of shares to the new investor (if he buys shares) or for his participation in the capital increase.

The signatures on the share transfer agreement must be officially certified and the change entered in the register. In the case of an a.s., a general meeting is typically convened to increase the capital to the exclusion of the pre-emptive rights of the existing shareholders (if the investor is to be given a share in excess of what would have gone to the existing shareholders) - here too a notarial deed is required.

Practical example: gammma s.r.o. is a fast-growing technology startup that develops innovative software. The founders need capital for global expansion, but the amount of funds (CZK 20 million) is far beyond their means and a bank loan without collateral. Therefore, they decide to find an investor. After a series of negotiations, an investor enters Gammma s.r.o. and invests CZK 20 million. CZK in exchange for a 30% stake in the company. The transaction was implemented by a combination - partly by buying the shares from the founders (who sold 10% for CZK 5 million directly to the investor) and partly by increasing the share capital by CZK 15 million. CZK, which was subscribed by the investment company (for an additional 20% stake). As a result, the investment fund now owns 30% of Gammma s.r.o. and has gained one seat on the company's supervisory board. The founders retained 70%, but gained the necessary capital and a valuable partner.

Benefits: the company received a large financial injection and professional support - the investor helps to establish contacts abroad, advises on financial management and prepares the company for a future stock market entry. Cons: The founders sacrifice some control and have to share profits. They had to enshrine the investor's protective rights in the articles of association (e.g. that they cannot sell know-how or fundamentally change the line of business without the investor's consent). If there were disputes in the future, this could hamper the company - which is why both parties had the contractual documentation prepared by a law firm to avoid any ambiguity. The investor's entry has thus taken Gamma Ltd. to a new level, but at the same time it has increased the pressure to deliver good results as the investor expects to see an appreciation of his investment.

Convertible loan (loan convertible into shares)

A convertible loan (or convertible loan) is a hybrid between a loan and an equity investment. It works by a company borrowing money from an investor now, but instead of a traditional repayment of the money, the debt can later be converted into shares in the company. Typically, this tool is used in startups and growing companies where it is difficult to determine the current value of the company. A convertible loan allows you to get funding now and postpone the issue of valuing the company (valuation) until later - for example, when a larger investor comes in or when the company reaches a certain milestone. At that point, the investor's loan (plus any agreed interest) is converted into a share: instead of a cash refund, the investor receives newly issued shares or stock in the company in a predetermined proportion. If the conversion does not take place within the agreed period (e.g. the next investment round does not come), the loan can be repaid in classic cash - this depends on the agreed terms.

Legal aspect: At the outset, a convertible loan is a loan/credit agreement between the investor (lender) and the company (borrower). In addition to the usual formalities, this agreement must also contain the terms of the conversion - i.e. when and how the conversion into equity can/will take place. Usually a trigger event is set, which is usually the next investment round of financing (entry of a larger investor) or the achievement of a certain date or performance. Next, a conversion rate is agreed - e.g. that the investor will receive a share for his loan at the valuation of company X, with a certain discount (e.g. a 20% discount to the new share price for a large investor) or a valuation cap (a maximum valuation from which the share will be calculated so that the investor does not dilute too much if the value rises a lot in the meantime).

At the time of conversion, the company must formally make a capital increase (or sell its own shares) to the investor in order to receive the agreed shareholding. This is often done by obtaining the approval of the general meeting in advance or by working with legal instruments such as conditional capital increases or the issue of convertible bonds (a legally cleaner form in the case of a.s.). In any case, the cooperation of the existing shareholders is required, who must allow the investor to enter in the future - this is usually dealt with in a comprehensive investment agreement. If conversion does not take place, the relationship remains a loan - the investor is then entitled to repayment of principal and interest. For the company, this then means a classic debt.

Advantages: a convertible loan brings time and process savings compared to direct investor input in exchange for shares. It can be arranged relatively quickly, often within weeks, as the documentation is usually simpler and there is no need to immediately deal with detailed shareholder arrangements or company due diligence. The company quickly obtains funds that it can use immediately. There is no need for complex negotiations on the valuation of the company at an early stage - this is an advantage for both parties, as determining a fair value for the startup can be premature and lead to a dispute (the founder thinks the investor is offering too little, the investor thinks he is giving too much). A convertible loan postpones the valuation discussion until later, when the company's results are clearer. It is also advantageous to the firm that until the conversion, the investor has no voting rights or direct influence on management - acting as a de facto lender, not a shareholder. This does not distribute ownership at a critical early stage.

From the investor's point of view, the convertible loan has the advantage of retaining some freedom - if the company stops doing well, he may rather want to repay the loan (if this option is contractually given) and minimise the loss. Conversely, if the company does well, it converts and gets a share with potentially high appreciation. The investor is thus partially protected, but at the same time shares in the future success. The positive for the founder is that there are no regular cash outflows (as with interest on a conventional loan), and he often agrees that the interest on a convertible loan is only payable on conversion or repayment (he can capitalise). Summary: a convertible loan allows you to get an investment right away, even without knowing the value of the company, with the formal entry into ownership to be resolved later.

Disadvantages: a convertible loan carries the risk for the company that if the conversion does not occur (e.g. another investment is not raised in time), the debt will have to be repaid - which can be difficult if this was not foreseen and the company has already spent the money. In such a case, the initial benefit (deferred ownership solution) may turn into a serious burden as the company would have to find the cash to repay or come under pressure from the investor to extend the maturity. If the conversion occurs, the founders have to account for dilution of shares - the investor will usually get a relative bargain thanks to the discount, which means that the original shareholders will receive a smaller portion of the company for their money than the current market price would have been (this is the "price" for the risk the investor took when he borrowed earlier).

Legally, preparing a convertible loan is easier than a full investment, but it must not be underestimated - the agreement must be carefully drafted to cover different scenarios (what if a partial investment occurs? what if the company is sold before the conversion occurs? does the investor have priority for repayment over the other shareholders if liquidation occurs? etc.). Convertible loans can contain quite complicated formulas for calculating the shareholding that need to be legally and mathematically correct. It is also important to remember that when the time comes for conversion, formal action will again be required - to call a general meeting, approve a capital increase and amend the articles of association. Should the original shareholders suddenly disagree with the conversion, conflict may arise - this is avoided precisely because the convertible agreement contains an obligation of the company and the shareholders to allow the conversion and often penalties for non-compliance.

As a practical example, Omega a.s. is a start-up biotechnology company that needs to finance the development of a new medical device. It has agreed with an investor to provide it with a convertible loan of EUR 5 million. The company has a convertible loan of CZK 5 million for 3 years, at an interest rate of 8% per annum. The agreement stipulates that if Omega receives an investment of at least CZK 20 million over the three years, it will receive a minimum of EUR 1.5 million. CZK from a large investor, then the loan and the accrued interest will be converted into shares in Omega a.s. for the investor, at a 20% discount to the price at which the shares will be sold. If no further investment can be found within 3 years, the investor can demand repayment of the loan (including interest), or decide to convert anyway, according to the valuation of the company in the amount of e.g. CZK 50 million. CZK (this was agreed as a valuation cap so that the investor would not wait forever).

Advantages. The investor has an incentive to help the company grow (consultancy, contacts) because he believes that he will get an interesting share later. Cons. The investor will either have to pay CZK 6 million (principal + interest) or become a shareholder under the terms of the contract. For the founders, this may mean more dilution than if they had given the investor a smaller stake today - but they take into account that without the 5 million CZK, the company will not be able to invest in the company. CZK 5 million, the company might not have survived at all or not reached a stage where it would be highly valued by large investors. Therefore, they carefully set the terms of the conversion with their lawyers to make it fair for both parties, and made sure that the Omega a.s. general meeting pre-approved the possibility of issuing new shares to the investor when the time came (thus avoiding the risk of someone blocking the conversion).

Silent partnership and off-balance sheet financing

Alternative forms of equity financing include silent partnerships and other off-balance sheet methods. These instruments make it possible to raise capital without increasing the conventional debt on the balance sheet or changing the ownership structure of the company.

Silent partnership (silent partner)

A silent partnership is a special contractual relationship regulated by the Civil Code (Art. 2747 et seq.). It does not create a new company nor is it a participation in the share capital - it is a contract between an entrepreneur (company) and a silent partner (investor) where the silent partner makes an investment in the business in exchange for a share of the profits of the business. The essence is that the silent partner bears the business risk limited to the amount of his contribution and remains hidden from the outside - his name does not appear in the name of the company or in the commercial register.

How it works: The silent partner undertakes to provide the entrepreneur (e.g. Ltd.) with a certain contribution - this can be monetary or even non-monetary (property, right, etc.). The entrepreneur (company) accepts this contribution and uses it in its business. The parties then dividethe profits made from the business in the proportion agreed in the contract. Typically, the silent partner is entitled to a percentage of the net profit. If the business makes a loss for the financial year, the silent partner also shares in it - but only up to the maximum amount of its contribution. Therefore, it cannot be agreed that the silent partner would only share in the profit and not bear any loss; the law considers such an arrangement to be null and void. In practical terms, the way it works is that any losses reduce the value of the silent partner's contribution (if the company loses money, part of the contribution is "consumed").

When the losses reach the full amount of the contribution, the silent partnership is dissolved (the silent partner has de facto lost all the funds he or she has contributed). On the other hand, when there is a profit, the deposit is not changed and the profit is paid to the partner. A silent partnership can be agreed for a fixed or indefinite period. The contract typically also provides for a notice period or termination conditions (in addition to the automatic termination upon loss of the full amount of the deposit). Importantly, the silent partner does not enter the company as a shareholder - he or she does not have voting rights or intervene in the management of the company. However, he or she has the legal right to inspect the books of the business and receive the annual accounts to verify the calculation of profits (this right can be contractually limited). Outwardly, he remains "silent" - if the entrepreneur carelessly reveals to third parties that the silent partner is doing business with him or even mentions his name in the company, the silent partner would thereby become unlimitedly liable for the debts of the business. Thus, anonymity is not only an advantage but also a condition for the protection of a silent partner.

Advantages: for the entrepreneur (company), the silent partner is a source of capital that does not increase debt or dilute ownership. The money from the silent partner is not a loan - the company does not have to repay it, it just shares the profits, if any. When things go wrong and there is no profit, the silent partner simply gets nothing (or suffers a reduction in the value of his or her investment) - this can be an advantage in a crisis situation over a bank loan, where even in times of loss, repayments would have to go out. A silent partnership is discreet - its creation is not publicly recorded anywhere. The company can thus obtain financing discreetly, without sending a signal to others (e.g. competitors or banks) that it needs money. This can be important if you don't want people to know about temporary problems, or if you don't want to disclose who is behind the company.

A silent partner also usually does not interfere with management - the entrepreneur retains full control of the company. From a silent investor's perspective, the attraction is that he or she can share in the profits of the business without having to deal with operational management - essentially acting in a similar way to a shareholder, but without the formalities. In addition, its identity can remain hidden, which can be advantageous for an investor who does not want to be publicly associated with many businesses, for example. The silent partner also shares losses only to a limited extent - at most he loses the stake he has put in, and cannot be called upon to top up the money beyond the agreed stake (unless he voluntarily wants to do so himself to keep the project going). From a tax point of view, the share paid to the silent partner is a tax deductible expense for the company (similarly to a profit share, which reduces the tax base as the profit is distributed). However, the company must pay a 15% withholding tax to the state on the share paid, similar to a traditional dividend.

Cons: The price of obtaining this "silent" capital is permanent profit sharing. If the business is very successful, the aggregate of the shares paid out to the silent partner can far exceed the amount the business would pay in interest on a loan - so for a business, this can be a relatively expensive resource in the case of large profits (but, in fairness, only expensive when the business can afford to pay it). A silent partner also cannot help the firm beyond providing capital - don't expect mentoring advice or contacts, his role is really that of a passive investor. The disadvantage for the silent partner is the high risk - he has no collateral or guarantees, he depends purely on the success of the entrepreneur. If the entrepreneur does not generate a profit, the shareholder gets nothing; if the business goes bankrupt, the shareholder loses his stake and is entitled to nothing (he is in a position subordinate to creditors).

The liquidity of such an investment is low - there is no market where the silent partner can "sell" his participation, everything depends on contractual arrangements with the entrepreneur. From a legal point of view, it is relatively easy to set up a silent partnership (a contract is sufficient, a written form is recommended), but the amount of profit and loss sharing, the deposit, the duration, notice periods, withdrawal options, etc. need to be carefully defined. It is also advisable to address what happens in specific situations (e.g. sale of the company - usually the silent partnership is dissolved, but the parties can agree on the payment of the silent partner). If the agreement is not well set up, disputes may arise - e.g. over the correctness of the calculation of profits, whether or not a certain expense should have been included in expenses (and thus affected the amount of profit to be distributed). Accounting-wise, the silent partnership contribution does not appear as share capital or a classic loan - it is often recorded below the line or as a special item, which can make it slightly more difficult for banks to analyse financial health (but not a major problem if everything is explained).

Practical example: ABC Ltd. is a small family business in the catering industry that found itself in financial difficulties due to an unexpected shortfall in revenue (it had to cut back operations during an emergency). The owners do not want to lose their shares in the company, but the bank has refused to grant them another loan because of the existing debt. They therefore agree with a family friend to enter as a silent partner. This investor will invest CZK 1 million in ABC s.r.o. He will receive 20% of the net profit of the company for 3 years. They have contractually agreed that the investor can terminate the contract after three years and the company will then return his contribution (possibly reduced by any losses or retained in the company if they agree to extend the cooperation).

Result: ABC s.r.o. quickly raised cash to pay its debts and stabilize operations. She did not have to report anything or change the registration in the commercial register - everything was done discreetly. The company pays no fixed interest for the duration of the silent partnership, only if it makes a profit, it pays out a share to the silent partner. This gives it breathing space, because if there is no profit, the shareholder simply won't get paid (unlike the bank, which would have to pay the interest). It's a riskfor the silent partner - if the company doesn't make a profit, his reward is zero and he could lose a whole million if the company loses in the long run (e.g. if the company goes bankrupt, he would have nothing left). However, he trusts the business and its owners, and was therefore willing to bear this risk in exchange for a potentially attractive return if ABC Ltd returned to profitability. ABC s.r.o., thanks to the correct legal set-up of the contract, has ensured that the investor has no say in the management of the business, and the investor in turn receives regular accounting reports to keep him informed of the results. This cooperation has helped the company to bridge a difficult period - after three years either the silent partner will receive a total of 3×20% of the profit for his contribution (which can give him e.g. 600 thousand CZK if the company's profit was 1 million CZK per year) and decides to continue, or he will withdraw and the company will return his 1 million CZK to him. CZK (if he will have enough funds and the partner will prefer to use the money elsewhere).

Other off-balance sheet financing

In addition to silent partnerships, there are other forms of financing that do not manifest themselves in traditional balance sheet debt. These include, for example, factoring, forfaiting or operating leases. In factoring, the company obtains money from the factor (a bank or specialist firm) by assigning its receivables before they are due - it immediately gets paid most of the value of the invoices and the factor then collects payment from the customer itself. In this way, the company quickly finances its operations without a conventional loan (the accounts receivable are reduced, no loan is created, although economically it is an alternative to a loan).

The disadvantages, however, are higher costs (the factor takes a fee or discount on invoices) and possibly the loss of direct contact with the customer in the collection process. Operating leases, on the other hand, allow the use of fixed assets (e.g. cars, machinery) without the need to invest in a purchase - the company pays the rent and returns the equipment to the leasing company at the end of the lease. Thus, unlike a finance lease or loan, the leased asset does not enter the firm's assets (off the balance sheet) and the firm does not recognise a liability corresponding to the full cost of the asset. This visually improves the debt, but the costs tend to be higher and the firm does not take ownership of the asset. These off-balance-sheet forms can be useful in combination with other financing - but the full contractual terms and implications should always be assessed (e.g. in the case of factoring, whether it will damage customer relationships, in the case of leasing, what are the penalties for early termination, etc.).

Importance of the legal setting and possible risks

As can be seen, the financing options for capital companies are varied and allow for tailor-made solutions to meet the needs of the company. However, each option also carries specific risks - whether financial, commercial or legal. The correct legal set-up of each step is therefore crucial. Mistakes or omissions in this area can lead to serious consequences:

• Invalid decisions or contracts: if, for example, the share capital increase is not carried out exactly according to the legal rules (improperly convened general meeting, absence of a notarial record, etc.), the registration court may refuse registration or, in a worse case, the increase may be declared invalid. Similarly, a share transfer agreement without notarized signatures will not be effective against the company. Care must be taken with formalities such as the necessary majority votes, the correct time limits for subscription of contributions, the execution of expert reports for non-cash contributions, etc.

• Tax implications: each method of financing has different tax consequences. For example, interest on a bank loan is a tax-deductible expense, whereas the payment of a profit share to an investor (dividend) is made out of already taxed profits and is still subject to withholding tax. The eventual return of the bonus to the shareholders must be carefully planned so that it is not assessed as a disguised distribution of profits (which would have tax consequences). For a silent partner, a tax of 15% must be paid on his share of the profits. For non-cash contributions, VAT and other considerations need to be taken into account. However, tax optimisation should never lead to circumvention of the law - the tax administration is sensitive to such transactions.

• Corporate relationships and conflicts of interest: when an investor enters, it is crucial to treat the relationships between the shareholders. Without a shareholder agreement, deadlock or disputes can arise that paralyse the company's decision-making. If one shareholder lends money to the firm (in lieu of a premium), it is important to remember the financial assistance rules and that such a shareholder, as a lender, may have a conflict of interest. In the case of a silent partnership, a dispute may arise if the entrepreneur pays out profits to himself in the form of bonuses or other benefits and the silent partner does not receive any - the agreement should anticipate how the basis for calculating the share is determined (after-tax profit, or whether it is adjusted for extraordinary costs, etc.). There is also a risk of abuse on the part of the investor - for example, an investment fund could abuse its informational superiority or force unilaterally favourable terms for the investor if the entrepreneur does not consult and watch the balance of the agreement.

• Insolvency considerations: if a firm is in crisis, the choice of financing may affect whether it goes bankrupt. For example, an additional loan may deepen over-indebtedness, while a premium will improve the balance sheet. Conversely, excessive debt among shareholders (and the absence of real capital) may lead to suspicions of purposeful bankruptcy delays. Management must act with due care and choose a solution that gives a realistic chance of turning the company around. In the extreme case, a bad decision may mean that the managing directors may be liable for the company's debts if the insolvency petition is filed late.

Conclusion: when considering the financing of a company, it is advisable to consider a combination of instruments and to consult the plan with experts (lawyers, taxpayers or financial advisors). Professional legal advice can ensure that the chosen form of financing is contractually sound and carried out in accordance with the law - thus minimising the risk of future disputes, penalties or invalidity of transactions. For the entrepreneur, this means a more peaceful sleep and the ability to focus on business while legal matters are taken care of. Whether you decide to take out a bank loan, issue new shares, bring in a silent partner or some other method, a trusted law firm will help you set everything up so that the injection of funds actually serves the growth of the company and does not lead to unpleasant surprises. This is doubly true with investments and finance: prevention and proper setup will prevent problems that would be difficult to resolve later.