What is a Silent Partnership Agreement?
A silent partnership agreement would allow you to become a silent partner in a business or to bring a silent partner into your business.3 min read
A silent partnership agreement would allow you to become a silent partner in a business or to bring a silent partner into your business. Silent partners contribute financially to a business, but they are not responsible for any management duties.
Facts About Silent Partnership Agreements
If you're interested in making money by owning a business but have no desire to actually run the business, you could become a silent partner. As a silent partner, you will be responsible for providing capital to the business. You won't, however, have to manage your company. This would be the responsibility of the general partners.
The drawback of being a silent partner is that you will have no power in how the general partners run the business. If you don't agree with how the owner is operating the business, you will have little to no recourse. Silent partners do have some influence because of their financial investment, but the general partners don't actually have to listen to your input unless they have granted you voting rights. Even if you do have voting rights, your vote might not count as much as the general partners' votes, and you may only be able to cast a vote for certain decisions.
A partnership agreement dictates several facts about the partnership, including the allocation of profits and losses among partners. Typically, losses and profits get distributed based on each partner's ownership percentage. For instance, if you have a 10 percent stake in the partnership, that entitles you to 10 percent of the profits and 10 percent of the losses. Distributing profits can be tricky when there's a silent partner involved. The general partners may feel entitled to a larger share of the profits since they're running the business.
Another drawback of being a silent partner is that you are still liable for business debts, even though you don't do any work for the business. If a lawsuit is filed against your partnership, your personal assets will be at risk. You may also lose your initial capital contribution and any other investments you have made into the partnership.
Income from the partnership earned by silent partners is not subject to self-employment taxes because silent partners are not considered employees. General partners must pay self-employment taxes because they work for the business.
Forming a limited partnership (LP) can limit the liability of silent partners. In this type of partnership, only general partners are responsible for the debts of the business. Silent partners' personal assets will have protection during lawsuits against the partnership. It is possible for silent partners to lose their liability protections if their involvement with the business reaches the point they could be considered employees.
A partnership agreement must outline several facts related to silent partners:
- The silent partners' rights and responsibilities.
- How much the silent partners will contribute to the partnership.
- Profits and losses to which the silent partners are entitled.
Forming Limited Partnerships
In a limited partnership, the general partners are responsible for the business's day-to-day operations, and the limited partner, or silent partner, provides funding for the business. The biggest benefits of being a limited partner is that you can't be liable for business debts and you don't have to pay self-employment taxes.
With a limited partnership, you must have a written partnership agreement. This is not a requirement for normal general partnerships. Your state will likely have specific rules for how you should write your limited partnership agreement, and your partnership may also need to comply with certain securities laws.
Partnership agreements for general partnerships will typically restrict the authority of the silent partner. Failing to limit the silent partner's authority could cause big problems if the silent partner decides they don't like how the business is run and attempts to use their financial leverage to influence company management.
When forming a partnership with a silent partner, there are several issues that you will need to determine:
- How much of the partnership's revenue the silent partner will receive. Typically, a silent partner's revenue share will be based on how much they have contributed to the partnership.
- The amount that the silent partner will invest.
- If the silent partner can invest additional money at a later time.
- How the silent partner can leave the partnership.
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