Partnership Agreement: Simple on the surface, risky underneath

SHORT ANSWER TO THE MAIN QUESTION

Under Czech law, a partnership agreement allows two or more persons to agree to pursue a common purpose together, typically by contributing their activities, assets, or other resources.

Unlike establishing a limited liability company or another business corporation, this arrangement does not create a new legal entity.

Each participant remains legally independent while cooperating towards the agreed common purpose.

That is why the agreement should clearly define the parties’ rights, obligations and the rules that will apply if the cooperation stops working.

YOU MAY BE THINKING…

“Isn’t a verbal agreement enough?”

“If we trust each other, why do we need a contract?”

“Do we really need to establish a company just to work on a joint project?”

“What happens if one of us stops contributing?”

“How will profits and costs be divided?”

THE REAL PROBLEM IN PRACTICE: THEORY VS REALITY

The theory sounds simple: several people combine their efforts to achieve a common purpose.

The reality can be considerably more complicated.

In practice, I encounter situations where:

• each participant has a different understanding of what they were supposed to contribute,
• nobody has decided who has authority to make important decisions,
• profits were supposed to be divided “fairly”, but nobody defined what that means,
• one participant stops contributing but still expects a share of the result,
• the cooperation ends and nobody knows how the jointly used assets should be settled.

The law provides a general framework, but it cannot resolve every practical issue in advance.

The fewer rules you establish at the beginning, the more likely you are to have to establish them later during a dispute.

BIGGEST RISKS AND COMMON MISTAKES

The most common mistakes include:

• starting cooperation without a written agreement,
• failing to define each participant’s contribution,
• having no clear decision-making rules,
• unclear allocation of profits and costs,
• failing to address how the cooperation may end,
• overlooking intellectual property and know-how,
• using a generic online template without adapting it to the actual project.

A typical mistake I see in practice?

People carefully plan how they will start working together. They do not plan how they will stop.

HOW TO APPROACH IT: REALITY, NOT THEORY

Before entering into a partnership agreement, I recommend answering several basic questions:

1. What exactly is the common purpose?
2. What will each participant contribute?
3. How will important decisions be made?
4. How will profits and potential losses be allocated?
5. How can the cooperation be terminated?
6. What happens to assets connected with the joint activity afterwards?

Only once these questions are clear does it make sense to draft the agreement itself.

PRACTICAL EXAMPLES

👉 Two friends develop software together. One contributes money, the other contributes their time and expertise. Once the project becomes successful, they discover that they never agreed how the proceeds should be divided.

👉 Several entrepreneurs cooperate on a single project. They never clearly establish who may enter into contracts and create obligations in connection with the project. Once liabilities arise, disagreements about responsibility follow.

👉 Family members jointly use and manage property. While everyone gets along, nobody considers a written agreement necessary. When one person later wants to leave the arrangement, it becomes clear that everyone had a different understanding of their rights.

WHY YOU SHOULD BE CAREFUL WITH “I’LL DO IT MYSELF”

There are plenty of partnership agreement templates available online.

The problem is that most of them contain only basic provisions.

They usually do not address:

• the actual structure of your cooperation,
• decision-making mechanisms,
• responsibility of individual participants,
• withdrawal of one participant,
• what happens if a dispute arises.

Yet these are precisely the issues that often determine whether a joint project ends successfully or turns into a legal dispute.

LAWYER’S RECOMMENDATION + CHECKLIST

From my practical experience, I recommend:

• Do not underestimate the importance of a written agreement, even when you trust each other.
• Clearly define what each participant contributes.
• Establish decision-making rules.
• Think about the end of the cooperation before it begins.
• Do not rely on generic templates without adapting them to your specific arrangement.

Quick checklist

✔ The common purpose is clearly defined.
✔ Each participant’s contribution is specified.
✔ Decision-making rules are established.
✔ Profits, costs and losses are addressed.
✔ Termination and settlement are covered.

FAQ

Is a partnership agreement the same as establishing a limited liability company?

No. Under Czech law, this type of agreement does not itself create a separate legal entity.

Does the agreement have to be in writing?

Not in every situation. From a practical and evidentiary perspective, however, a written agreement is highly advisable.

Can the agreement be used for a single project?

Yes. The parties may cooperate for a specific and limited common purpose.

How are profits divided?

The safest approach is to define the allocation directly in the agreement. If the rules are unclear, disputes may arise later.

What happens if one participant wants to leave?

This is precisely why the agreement should address termination, withdrawal and the subsequent settlement from the beginning.

Can I use an online template?

It may provide basic orientation, but a generic template will rarely address the specific risks of your particular project.