Ready-made limited liability companies (s. r. o.) and the establishment of a LLC (s. r. o.) with a silent partner

You can borrow money for business not just from the bank, but also from someone else. And this may be very advantageous for both the parties.

A ready-made LLC (s. r. o.) or establishment of a LLC with a silent partner (surcharge to the price of a ready-made LLC or establishment of a LLC) CZK 2,000 exclusive of VAT *

* The price is for the preparation of the documentation for a specific client (who need not be present at the meeting) and for comprehensive advice in this matter.


The principle of a silent partner

An entrepreneur with a great business plan can ask the bank for a loan for starting-up his or her own business. However, should s/he not obtain it, there is still the possibility exercise the option, which is close to a classical loan: of silent partnership.

The principle of a silent partnership is that anyone can put some funds into the business of another person, and the entrepreneur evaluates this investment by transferring to it converts a certain proportion of his or her own profits. And should s/he fail in business, s/he does not bear the loss alone, but it is also borne by his or her silent partner.

Then the advantage for the entrepreneur is particularly this sharing of the silent partnership in loss. Should s/he fail in business, does not create a profit, and still has to repay the loan this is often the first step towards bankruptcy.

The advantage for the silent partner is that if the entrepreneur has a really good business plan, in a very short period of time this investment can be evaluated in a very interesting manner. And on the contrary, it can also be lost quickly. However, if their mutual cooperation does not work for them, then it is still very easy to terminate it.

A silent partnership agreement commits the silent partner to provide the entrepreneur with certain funds or assets by means of which the silent partner participates in the entrepreneur’s business and the entrepreneur undertakes to pay him or her a portion of the net profit resulting from the silent partnership stake in the outcome of the business.

This is all permissible in accordance with ct No. 89/2012 Coll., The Civil Code

Agreement

The entrepreneur must first establish a silent partnership agreement with his or her silent partner. It shall indicate who is the entrepreneur and who is the silent partner, while also identifying the subject of the investment and its value and determining to what portion of the annual profit the silent partner is entitled. If, for example, they agree on the silent partner’s share amounting to 30% of the profit, then the silent partner shall also contribute the equivalent amount in the event of a loss.

The subject of the investment does not need to be cash only; it might be any other tangible or intangible assets. As of the effective date of the contract this investment is transferred to the ownership of the entrepreneur and it is therefore necessary that all the activities associated with the transfer of property should be carried out (e.g. a transfer of the ownership of the building in the Land Register).

A silent partnership can be concluded either for a limited or for an unlimited period, while the share of the silent partner may be determined in a uniform amount for the entire duration of the silent partnership or it may be determined at a different level for each year. Its amount must always be agreed upon in advance, however. It is not possible to conclude a silent partnership with the proviso of a certain minimum amount, whereby a high profit represents some kind bonus based on it being a share of the profits. The partner’s share must always actually represent a share.

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Accounting

Since the silent partner may invest a large sum into a business and due to the entrepreneur’s reckless style of business s/he may lose it, the law provides the silent partner with the right to inspect the entrepreneur’s accounts and also to request copies of the annual financial statements.

For a silent partner the annual financial statement represents a very important document. It defines the economic results during the last business year and what consequences they entail for the silent partner. If the entrepreneur has made a profit, then the silent partner has the right to receive payment of the appropriate share within 30 days of the completion of the annual financial statement. If the entrepreneur ends the year with a loss, however, then the loss attributable to the silent partner is offset from its investment. If, in the following years, the company generates a profit, then first that part of the investment that was previously used to cover losses is settled and only after the silent partner’s investment reaches its original amount is a share of the profits paid. Nevertheless if the entrepreneur is so unsuccessful that the share of the silent partner in the loss is equal to the amount of his or her investment, the silent partnership then expires.

Termination of the agreement

If the entrepreneur and/or the silent partner are dissatisfied with their cooperation for whatever reason, they may agree to terminate it at any time. If it is not possible to reach an agreement, it is possible in regard to an agreement that was concluded for an indefinite period, to give notice of withdrawal from the silent partnership, but not later than six months prior to the end of the calendar year. If, however, there is a risk that after the expiration of the notice period, due to the high losses, the initial deposit will either have ceased to exist or will be greatly reduced, then it is possible to file a proposal with the Court to cancel the obligations arising from this silent partnership agreement. Otherwise, if it has been agreed for a finite period, a silent partnership contract expires at the end of the agreed period through the termination of the entrepreneur’s business activities or by a declaration of bankruptcy by one of the parties to the agreement. Following the termination of the silent partnership the entrepreneur is obliged to return the initial deposit to his or her silent partner, adjusted in accordance with its share in the profit of business. If the deposit were an indivisible asset, however, and the entrepreneur were to return a lesser sum than the deposit that was invested by the silent partner, it would then be permissible for the silent partner to pay the entrepreneur his or her share of the loss. For tax purposes the income from a silent partnership constitutes capital income and it must be recorded in tax return declarations.

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