A silent partner is a person whose participation in a business is restricted to provision of capital. Further, a silent partner is hardly involved in the daily operations of the partnership. The partner is also not involved in the management and running of the business. Silent partners are also referred to as limited partners because their liability is basically restricted to the total amount that is invested in the business.
Other than provision of capital, effective silent partners may benefit from the business by providing guidance when the same is solicited. They can also provide business contacts that could aid in the development of the business and step in as mediators when disputes arise among the partners.
Operation of Silent Partners
Just like other partnership agreements, silent partnerships require formal agreements that should be in writing hence a silent partnership agreement. Before the drafting of a silent partnership agreement, the partnership should be registered as a general partnership of limited liability partnership according to the state regulations.
According to the silent partnership agreement, all partners are responsible for making sure that the financial obligations of the partnership are met. The silent partnership agreement also serves as an outline of the functions of the specific silent partners. It also briefly outlines the operational functions of the general partner. Further, a silent partnership agreement includes the percentage of earnings owing to every partner regarding the business profits.
A good silent partnership agreement also highlights that silent partners are responsible for any losses incurred by the partnership. The preceding is, however, limited to the amount they invest in the partnership. Participating as a silent partner is also a suitable investment form for people that want a stake in the growing business without being exposed to unlimited liability.
Further, silent partnership agreements should include the terms for buying out the stake of ownership that is held by a silent partner. It should also include the same in relation to dissolving the partnership. A business person that desires to start a business could welcome the capital that is provided by a silent partner. This is especially when starting the business. Nonetheless, if business becomes successful, it is recommended that the silent partner be bought out rather than sharing profits in the long run.
Furthermore, a silent partner may desire to dissolve a silent partnership agreement. This mostly happens after the partner determines the business is not profitable. Nonetheless, the silent partnership agreement contains the minimum return on investment if the business becomes profitable. Also, the risk may be limited to more than the invested capital.
Significance of a silent partnership agreement
A silent partnership agreement allows a silent partner to share the losses or profits of a business without dealing with the daily tasks of running it. It also allows a partner to be part of a business without necessarily acquiring a high-profile position. Silent partnership agreements also allow partners the discretion to either be an individual silent partner or a member of a group of silent partners. In one’s role as a silent partner, one assists with the financing of the partnership through financial investment. Further, silent partnership agreements do not burden with silent partners in the business beyond funding. On the other hand, general partners manage the day-to-day operations.
Advantages of inclusion of a silent partner
Silent partners can be of great significance to a business. They bring additional capital that could be utilized in managing the business and improving operations. Having partners also aids the partners to have an extra person to discuss business ideas with. This aids in the assessment of the viability of the idea and the possibility of making immense profit.
There are several situations that include the signing of a silent partnership agreement which include:
- Bringing a new silent partner into the company.
- An individual interested in joining a partnership as a silent partner.
- Being a manager of a partnership or company that has either one or more partners.
Avoiding Misunderstanding
Bringing a silent partner into a business is a big and important decision. A silent partnership agreement simplifies business operations when the partners are involved. Some of the details of the silent partnership agreement include:
- The responsibilities of each partner.
- The share of ownership of the partnership by each partner.
- Handling of liabilities.
These are just but a few of the details that need to be agreed on. Whenever a silent partner is being brought into the business, it is key to ensure that everyone agrees to similar terms.
Common terms of a silent partnership agreement
Some of the things that are included in the silent partnership agreement are:
- Sharing of gains and losses by the silent partners.
- The limitation on the liability of the silent partners.
- The amount invested by the silent partners.
- Amount that the silent partner could be required to contribute.
- Terms that detail how and when the investors can withdraw funds.
- The possibility of silent partners investing mores.
- A clear statement elaborating why the silent partners will not receive wages or salary.
- A clear statement detailing that the silent partner must remain confidential regarding the daily business operations of the business.
- Terms on when and how the partnership of the silent partners can be terminated.
The silent partner’s contribution
The silent partner gets certain amounts of equity interest in a business. This is done in exchange for making a significant contribution in form of assets or cash. The silent partnership agreement should specify the amount of capital that every partner should contribute to the business. It should also list the precise dates that the partner made the contribution. Further, the agreement should detail the reason for the contribution of the partners.
Another provision that should be included in the agreement is what happens if more funds are required from the silent partners. For instance, if the company desires to acquire more assets or fund more research and development projects. Upon signing of the agreement, parties are invested in the partnership’s losses and profits.
Allocation of profits and losses
Details on how profits and losses are distributed to every partner in the business should be outlined in the partnership agreement. The profits and losses are usually divided based on the percentage of the business that every partner owns. For instance, a partner that owns 20 percent of the company claims a total of 20% of the losses and profits.
However, there is the possibility of splitting the profits in a manner that the partners desire. The general partner that does the work of running the business may want a bigger share. Also, a partner that pays all the costs might need a bigger share of the profits.
Liabilities
In the event something goes wrong in the business. Silent partners are liable for the partnership’s debts in a similar manner to that of the general partner. Therefore, when the business become bankrupt or is sued, the personal assets of the partners could be seized and sold to pay off any debts and legal claims.
Main contents of a silent partnership agreement
There are main elements that a silent partnership agreement should not lack. They include:
- The partnership name, place and business
The name of the partnership should be included. However, the partnership business could be conducted in compliance with the applicable laws. The primary place of business should also be indicated.
- Term
The date of commencement of the agreement should also be indicated. The termination date should also be stated.
- Interest in contributions
The agreement should also indicate that no partner’s contribution of the partnership’s capital will bear the interest in their favor. All the interest that is earned on any contribution is also payable in its entirety to the partnership capital account.
- Ownership interest in the partnership and authority
The agreement should clearly define the authority of the partners. This is in relation to both general partners and silent partners.
- Duties of the general Partners
The agreement should outline that the general partners are responsible for the control, management and formulation of policies of the business.
- Duties of the silent partner
The agreement should highlight that the silent partners should not participate or interfere with the partnership’s operations.
- Profits and Losses
All partners, silent partners included share in the income, credit, deduction, profits and losses of the partnership. The same should be included in the agreement.
- Limited Liability
The agreement should also highlight that silent partners shall not be personally liable for the liabilities, debts, and obligations of the partnership.
- Settling disputes
Further, the term that all partners agree to enter into mediation before filing a suit against the silent partner or silent partners should be included. Hence partners agree to attend mediation sessions before filing of suits.
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