You are establishing a joint venture for a single project.

Partnership Agreement or a Joint LLC: How to Choose the Right Form

If several persons agree under a contract to associate as partners for a common purpose of activity or property, a partnership is formed (Section 2716 of the Civil Code). A joint venture is not a legal term, but a commercial designation for cooperation that can be structured both contractually and corporately, and for a time-limited project, it can be built precisely on a partnership agreement. A partnership under the Civil Code does not have legal personality, and the partners therefore act and are liable themselves.

An alternative is to establish a joint business corporation, most often an LLC (s.r.o.), into which both partners make their contributions. A joint LLC has its own legal personality, separate liability, and registry requirements, but it takes longer to incorporate, and its voluntary termination after the project ends usually means dissolution with liquidation (Section 169 of the Civil Code). For a project that is intended to last a few years and then end, an agreement is usually faster, whereas a corporation is more suitable for a long-term partnership.

Choosing the form is the most important decision of the entire project because it determines who is liable. Under a partnership agreement, the partners are jointly and severally liable to third parties for debts arising from the joint activity (Section 2736 of the Civil Code). A supplier or a bank can thus turn to any of the partners, who must then resolve the settlement with the other. In the case of a joint LLC, the company itself is liable for debts with its assets, and the shareholders are liable for them only up to the amount of their unpaid capital contributions according to the status registered in the Commercial Register (Section 132 of the Act on Business Corporations).

Practice shows three typical situations. In manufacturing, two companies associate to develop and manufacture a new component, each contributing differently—one with technology and the other with manufacturing capacity. In IT, a supplier and a customer join forces to develop a product and share the revenues. In the energy sector, partners join forces to build and operate an energy source where investments are high and the payback period is long. Each situation leads to a different choice of form.

A joint venture in real estate development, which has its own specifics, is discussed in the article on joint ventures in development. This article focuses on joint ventures in manufacturing, IT, and energy, where other issues are at play: contributed technologies, development results, and revenue sharing.

Project Purpose, Contributions, and Inventory

The agreement begins with defining the common purpose. If the purpose is formulated vaguely, disputes arise over what belongs to the project and what does not, who is authorized to act on behalf of the joint venture, and what activities fall outside of it. For a one-off project, it is reasonable to describe the purpose specifically: the result to be achieved, the deadline, and the scope of activities.

An important rule is the inventory of contributions. If an association of assets has been agreed upon, a signed inventory of the partners' contributions is required for the validity of the agreement, and it is presumed that only what is listed in the inventory has been associated (Section 2716(2)). For each item in the inventory, it is therefore necessary to determine whether the asset or right itself is being transferred, or whether only the right of use or another authorization is being granted, which particularly concerns machinery, licenses, and software.

Each contribution is therefore described according to what right the partner contributes to the project. If a partner contributes an asset, the provisions on purchase apply mutatis mutandis; if they contribute the right to use an asset, the provisions on lease apply; and if they commit to an activity, the provisions on a contract for work or mandate apply (Section 2717 of the Civil Code). A partner who only contributes the right of use does not transfer ownership, and the agreement should explicitly state this.

For technologies and know-how, it is necessary to distinguish between what enters the project as existing assets and what will be created within the project. Existing technologies usually remain the property of the original owner, who grants a license for project purposes. Development results created within the project are addressed separately: who owns them, who is allowed to use them after completion, and how the revenues from their use are shared.

Decision-Making, Management, and Deadlock

Decisions on partnership matters are made by a majority of votes, with each partner having one vote, and a decision amending the agreement must be adopted unanimously (Section 2729 of the Civil Code). If two partners have one vote each, in the event of their disagreement on an issue to be decided by the partnership, a majority is not formed and no decision is made. The agreement should specify how such disputes are resolved.

The management of the joint venture belongs in the agreement as a separate chapter. A partner who is not authorized to manage the partnership may not dispose of the joint assets, and if they do so towards a third party acting in good faith, the invalidity of the action cannot be invoked against them (Section 2732). If multiple managers are appointed without further specification of their scope of authority, each of them acts independently (Section 2733). The agreement should therefore determine who signs on behalf of the venture, up to what value, and which actions require the consent of both.

The manager keeps proper accounts and records of the financial situation and, at least once a year, provides the partners with an accounting, including income, expenses, and profit or loss (Section 2734). For a joint venture, it is therefore sufficient to build on this rule and expand it: who keeps the project's accounts, how often and in what form reporting is done, and what rights the partners have to inspect the documents.

In practice, several tools are used to resolve deadlocks: escalation to the management of both companies with a deadline for agreement, mediation, the decision of an independent expert on technical issues, and finally, termination of the project with a settlement. The sequence of steps and deadlines belong in the agreement, because during a dispute, no one wants to negotiate the rules of engagement. Similar mechanisms are discussed in the article on shareholders' agreements beyond the scope of the articles of association.

Profit, Loss, and Liability to Third Parties

If the agreement does not specify the ratio in which the partners share in the assets acquired during the existence of the partnership, in the profit, and in the loss, their shares are equal; if the agreement specifies the ratio for only one of these areas, the same ratio applies to the others (Section 2728 of the Civil Code). A partner who contributes a larger share of the investment must therefore explicitly negotiate the ratio, otherwise they will receive half.

An agreement excluding a partner's right to a share in the profit has no legal effect, and an agreement excluding the obligation to share in losses is effective only between the partners (Section 2728(2)). It follows that while the agreement can distribute losses between the partners, a third party can still turn to any of them. The internal distribution of losses then functions as a recourse between the partners.

Towards third parties, a partner acts as a mandatary of all partners. If a partner acts in a joint matter with a third party, they are considered a mandatary of all partners, and if the partners have agreed otherwise, this cannot be raised against a third party acting in good faith (Section 2737 of the Civil Code). It is different if the partner acts in their own name: the third party is then bound only to them, unless they knew that the partner was acting on behalf of the partnership.

A practical conclusion follows from these rules: limitations of authority in the agreement do not protect against a supplier who did not know about them, and must therefore be accompanied by notifications to third parties and internal controls. A partner who does not want the other to enter into contracts above a certain value should secure a penalty for breach in the agreement and ensure that suppliers are informed about the scope of authority. The agreement between the partners alone will not prevent a commitment to a supplier from arising.

Competition, Know-How, and Development Results

Without the consent of the other partners, a partner may not do anything on their own or someone else's account that is of a competitive nature with regard to the common purpose, and the others may demand that they refrain from such conduct (Section 2727 of the Civil Code). They may also demand that the action on their own account be declared as made on the joint account, or that the remuneration be handed over to them, or instead, damages. These rights expire if not asserted within three months of discovering the conduct, and at the latest within one year of its occurrence. However, statutory protection applies only to the duration of the partnership and only to the common purpose.

The agreement therefore specifies what constitutes competition and extends protection to the period after the project ends, if necessary. A manufacturing partner who has learned about the other's technology should not offer the same solution to a competitor after the project ends. In an IT project, the source code and data are primarily addressed, while in the energy sector, operational know-how and contracts with fuel suppliers are key.

The protection of know-how is also ensured by confidentiality. Knowledge once acquired by a partner cannot be returned like a physical asset, so the agreement must determine what is confidential, to whom and under what conditions information can be disclosed, when licenses expire and the prohibition of further use applies, how media and copies are returned or destroyed after termination, and what the penalties are. Without these rules, a partner might use the insights from the project for their other business, leaving the other party with virtually no tool to prove it.

Special attention should be paid to the ownership of results. If the project result is a technology, product, or software, the agreement must state who owns it and who is allowed to use it. A common combination is that the result is owned jointly or by one partner with a license granted to the other, with revenues shared according to a key specified in the agreement.

End of the Project and Partner Withdrawal

A joint venture for a single project is meant to end. The agreement therefore determines when and how: by achieving the goal, by expiration of time, by decision of the partners, or by the withdrawal of one of them. Each of these methods requires a settlement of assets, debts, and results, which is why the agreement describes it in advance, preferably with a calculation example.

The law addresses a change in circumstances only generally. If circumstances change so that the common purpose cannot be achieved without increasing the contribution, a partner who is unwilling to increase their contribution may withdraw from the partnership or be excluded from it (Section 2722(2) of the Civil Code). For a joint venture where there is a risk of project costs rising, this means that the agreement should regulate who will provide additional funding and under what conditions.

Settlement upon termination includes three things: assets acquired by the partnership, debts to be paid, and results to be distributed. The agreement determines who leads the settlement, how assets are valued, and how valuation disputes are resolved. Uncertainty in this phase is usually the most costly, as the partners no longer have an interest in cooperating and each defends their own position.

The withdrawal of a partner during the project also belongs in the agreement. This may involve the buyout of the share by the other partner, purchase by a third party, or termination of the project. Share buyout options, pre-emptive rights, and change of control clauses are common tools that protect the other party from having their partner change without their knowledge.

Market Standards and Warning Signs

A good joint venture agreement contains several mandatory sections: purpose and scope, contributions and inventory, distribution of shares, management and decision-making, deadlock rules, protection of know-how, ownership of results, liability to third parties, financing, withdrawal, and termination. Each of these is brief but must be precise.

A warning sign is an agreement that speaks of "cooperation" but does not state who is liable for what. The second sign is a 50/50 split without a deadlock mechanism. The third is an agreement that does not define contributions, so a dispute later arises over what belonged to the project. The fourth is the absence of rules for financing additional costs, which manifests when the project becomes more expensive.

Negotiations for a joint venture often begin with a letter of intent signed by the parties before a detailed agreement. The question of when such a document is binding and when it is not is discussed in the article on term sheets. This applies similarly to joint ventures: what is binding in the document must be clearly marked.

It also helps to divide the agreement into a framework section and annexes. The framework section contains permanent rules, while the annexes contain the project plan, budget, list of contributions, and schedule. Operational annexes can be set up to be updated through a simpler procedure within pre-agreed limits. However, if an amendment to an annex would de facto alter the agreement itself or the fundamental rights and obligations of the partners, the requirement of unanimity under Section 2729(2) of the Civil Code applies.

Typical Mistakes and Their Cost

The most common mistake is signing a letter of intent and starting work without an agreement. Partners invest time and money, and when a dispute arises, they only have emails. The cost is a dispute over who promised what and who owns the results created without clear rules.

The second mistake is underestimating liability to third parties. A partner may think they are only liable for their share, but a supplier or bank can demand performance from any of them. Only when an unpaid invoice arises does it become clear that the internal distribution of losses does not protect against third parties. The cost is an unexpected payment and a subsequent dispute between the partners over settlement.

The third mistake is neglecting contributions and development results. The agreement does not state who owns the technology brought into the project by a partner and what is created during the cooperation. After the project ends, disputes over licenses arise, and the partner who invested in development finds out they cannot use the results without the other's consent.

The fourth mistake is failing to plan for the end of the project. The agreement describes the launch and progress, but not how assets will be settled, who will cover the final costs, and how results will be valued. The Prague-based ARROWS legal team assesses the form, risk distribution, protection of know-how, and withdrawal mechanism for each joint venture, as the right choice depends on the industry and how much the company contributes to the project.

Risks of a Joint Venture Without an Agreement

Summary

A joint venture for a single project stands and falls on the agreement, which determines the form, contributions, decision-making, know-how protection, and termination. The article showed that the Civil Code only addresses the basics, that partners are jointly and severally liable to third parties, and that a decision to amend the agreement requires unanimity.

For company management, this leads to a clear task: before starting the project, choose the form, compile an inventory of contributions, and negotiate deadlock and settlement rules. Postponing these steps leads to partners negotiating the rules only during a dispute, when there is no longer a willingness to compromise.

The Prague-based ARROWS legal team prepares and negotiates joint venture agreements in manufacturing, IT, and energy, and represents companies in negotiations with partners. Write to us at consultation@arws.cz or check out our service for contracts and negotiations.