Silent Partner Agreement: Everything You Need to Know
A silent partner agreement lets a silent partner share the profits or losses of a business without handling the day-to-day tasks of running it.3 min read
2. Avoiding Misunderstandings
3. Some Common Terms for Silent Partnerships
4. The Silent Partner's Contribution
5. If More Money Is Needed
6. Allocation of Profits and Losses
Updated June 30, 2020:
A silent partner agreement lets a silent partner share the profits or losses of a business without handling the day-to-day tasks of running it. It gives you a way to go into business without moving into a high profile position. Your choices are to be a silent partner or a member of a group of silent partners. In your role as a silent partner, you assist with financing the partnership via your financial investment. Silent partners don't have much responsibility in the partnership beyond funding, while the general partners manage day-to-day operations.
Advantages of Bringing a Silent Partner Onboard
A silent partner can be a great addition to your business. First, the silent partner brings in extra funds you can use to manage the business and improve operations. Having a partner also gives you someone to discuss business ideas with to see if they're viable and likely to be profitable.
There are a few situations where you might ask someone to sign a silent partner agreement, including when:
- You first bring a new silent partner into your company
- You're the silent partner and you're joining a new company
- You're the manager of a company that has one or more silent partners
Bringing a partner into your business is an important decision, and a big one. A silent partner agreement simplifies everything when partners are involved. The agreement details:
- What each partner's responsibilities are
- How much of the company each partner owns
- How liabilities will be handled
These are just a few of the details you need to agree on, there are also some other important details. Whenever you bring a new partner into your business, it's important to be sure everyone is agreeing to the same set of terms.
Some Common Terms for Silent Partnerships
Some things typically included in the silent partner agreement are:
- How much the silent partner shares in gains and losses
- Limits on the silent partner's liability
- The dollar amount the silent partner invested
- How much more the partner may be expected to contribute
- Terms detailing when and how the investor can withdraw funds
- If the silent partner is able to invest more
- A statement explaining the investor won't receive a salary or wages
- A statement that the silent partner must remain silent on daily business operations
- Terms of how the partnership can be ended
The Silent Partner's Contribution
The silent partner gets a certain amount of equity interest in a business in exchange for making a contribution of cash or assets to a business. The partnership agreement needs to specify how much capital the silent partner contributes to the business. The agreement should also list the exact date the partner made the contribution and a detailed description that explains the reason for the partner's contribution.
If More Money Is Needed
One other provision that should be covered in the silent partner agreement is what will happen if more funds are needed from the silent partner or the general partner. As an example, if the company needs to acquire more assets or fund more research and development projects. After the agreement is signed, both parties are invested in the business organization's profits and losses.
Allocation of Profits and Losses
The details about how profits and losses will be distributed to each partner in the business is, or should be, written out in the partnership agreement. Profits and losses are usually divided based on the percentage of the business each partner owns. For example, a partner who owns 20 percent of the company gets to claim 20 percent of the profits or losses.
It is, however, possible to split profits in any way the partners choose. The general partner who is doing the work of running the business might want a bigger percentage or if one partner is paying 100 percent of the costs, that partner might also want a bigger cut of the profits.
If something goes wrong in the business, the silent partner is liable for the company's debts the same way the general partners are liable. So, the business going bankrupt or getting sued, means the silent partner's personal assets are subject to seizure and sale to pay debtors and legal claims.
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