Cooperation Agreement – Is it necessary to establish a legal entity to conduct business?

In Mongolia, it is possible to conduct business activities and earn profit without establishing a formal company. One such form is a cooperation agreement, which is a widely used option in business operations. Although this relationship is primarily regulated by a contract, the agreement must meet the requirements set forth in the Civil Code and other relevant laws. This information introduces a general understanding of cooperation agreements and important considerations related to them.

This type of agreement is aimed at achieving a joint objective to generate profit without establishing a legal entity such as a company or a cooperative. Specifically, two or more parties enter into a cooperation agreement to work together for a specific purpose or to earn profit without forming a new legal entity. [1] Therefore, registration with the state is not required. [2]

A cooperation agreement regulates the following:

• The type and objective of the joint activity;

• Rights and obligations of the parties;

• Management structure, powers, and duties;

• Procedures for profit and loss distribution;

• Procedures for withdrawal from the agreement;

• Duration of the agreement;

• Grounds for termination and procedures for distribution of joint property.
  

During cooperation, the parties may contribute in various forms such as money, equipment, labor, or services. [3] Based on the size of the contribution, the parties agree in advance how to divide the profits from the joint activity, for example, 60/40 or 50/50. Each party reports income under its own name and pays taxes under the law. Similarly, costs incurred during operations are shared according to a pre-agreed ratio; if not specified, they are divided equally. [4] This is intended to ensure a fair distribution of financial risks between the parties and plays a crucial role in preventing potential misunderstandings or disputes in the future.

To ensure a balance of rights and responsibilities, the cooperation agreement must clearly define each party's roles, duties, and liabilities. This provides clarity on who is responsible for which tasks, who has the authority to make decisions, and who will be liable for the consequences of those decisions. This makes the cooperation more organized and transparent. [5]

A cooperation agreement can be a time-saving and simple solution for individuals or entities that wish to start a business without establishing a legal entity. By clearly describing rights, responsibilities, management structure, profit and loss distribution, withdrawal procedures, duration, and termination grounds, the cooperation becomes more structured and understandable. It also has the advantage of mitigating potential future risks and disputes.

Sources:

[1] Article 476.1, Civil Code of Mongolia (2002)

[2] Article 481.1, Civil Code of Mongolia (2002)

[3] Article 477, Civil Code of Mongolia (2002)

[4] Article 478.12, Civil Code of Mongolia (2002)

[5] Article 478, Civil Code of Mongolia (2002)

Disclaimer: This article is intended for general informational purposes only and have been prepared in accordance with the laws in effect at the time of writing. For legal advice, please consult a professional attorney.