Essentials of Silent Partnership Agreement Samples

Making Sense of the Silent Partnership Agreement

Silent partnerships are a relatively rare type of partnership for business, and one that has very specific agreement terms. If you are considering bringing a silent partner into your company, or if you have already done so, understanding the silent partnership agreement samples will help you understand how silent partnership agreements work.
A silent partnership agreement is much like any other agreement that defines the working relationship between two partners. The difference in a silent partnership is that one partner is not involved in the day-to-day operations of the business. Depending on the agreed terms, the silent partner may not even know what the business does , just that it makes a profit.
In general, the silent partner is an investor, giving a detailed business plan to a partner who believes that he can make it work. It is that partner that implements the business plan and manages the financial aspects, while the silent partner contributes capital and has no knowledge of the operations of the business.
Like all business partnerships, the silent partnership agreement will specify what each partner brings to the relationship, such as capital and/or expertise, and how the profits will be divided. Silent partners do not participate in the management of the business, but are often brought in to make up a missing skill set, such as international marketing.

Key Features of a Silent Partnership Agreement

The agreement should detail the various areas of responsibility for all partners, particularly the silent partner. Some of the key elements that should be included in a silent partnership agreement are as follows: Roles and responsibilities; silent partner (retained right to obtain specified financial information + documents, non-management role, right to attend annual meeting to obtain annual accounts, vote on certain matters) Capital & other financial contributions; contributions of the silent partner, return of distributed capital, loan capital (repayment of loan), guarantee of obligations (owner of asset agrees to mortgage as security for loan), reimbursement of partnership expenses (of a partner via imposition of additional liability on silent) Profits / losses, losses allocated to silent, profits, usual entitlements of partners re profit, distribution of profits to silent Salaries & wages to silent (as partner not employee therefore cannot be paid salary unless under separate employment contract), salaries to other partners (also partners cannot be paid salaries unless under employment contracts, therefore should be clear to whom such amounts are paid), other payments and expenses to silent (reimbursement for costs incurred for partnership purposes, payment of other amounts under terms of agreement, eg loan repayments and distributions of partnership assets to silent) Ownership of intangibles /non-tangible improvements (management rights [not allowed to have ownership of things which fall under this category such as company documents, records, books, quote sheets and electronic data], assignment of agreements [provision in negligent partners agreement where they agree to procure premium insurance where they fail to take action to remedy neglect], cost of copyright [cost of having the copyright assigned to the partnership]) Winding up of the partnership arrangements (process for unwinding of arrangements, procedures to be observed in situations of insolvency) Disputes between partners (negotiation for resolution of disputes, use of an expert to provide a determination on the matter or the appointment of a mediator or even a binding arbitration process).

Silent Partnerships: Pros and Cons

A silent partnership can be advantageous for any business, including a startup, if the partner agrees to invest money in the business and then immediately steps back and relinquishes control.
If you are a one-person show, an important reason to enter into a silent partnership is to gain access to funds that can be immediately reinvested in the business, or to gain a financial cushion. You also may need a partial stockholder in order to apply for certain types of loans or depending on the industry, to apply for insurance. For example, if you’re opening a restaurant, you may be required to have a certain number of stockholders in order to qualify for liquor liability insurance.
Silent partnerships are characterized by a limited partnership where only one partner is active in managing the business and the other does not participate. Many small businesses start off with a silent partnership, particularly a limited liability company. The ‘silent partner’ in a limited liability company is known as a ‘general partner.’ The silent partner is typically responsible for financing while the designated general partner carries out the day-to-day responsibilities of managing the company. However, there are limits to what the silent partner can accomplish; any decision is subject to the approval of the general partner.
While silent partnerships do benefit direct participants in many ways, as well as the overall business, there are also clear risks that they introduce. The main risk to the person who is not active in the business is the chance of limited liability being ‘pierced’ by the IRS, or creditors, to make the investor personally liable for 100 percent of profits of the business.
For example, let’s say you are the silent partner in a new bar. The IRS makes a close examination of the bar and finds that you and the other partner are paying yourself a wage of $50,000 per year. The IRS finds out, through an audit, the other partner is paying themself $100,000 a year, and that you were aware of this and signed IRS forms reflecting this as true. The IRS will most likely come after you for the other $50,000 because you signed a form saying that was your share of the profits. Many times, a shareholder will not want to file for bankruptcy even though they know they should. In those cases, the IRS will assess you for the unreported profit and will withhold your tax refund until the balance is paid. It you owe more than the value of your home, the IRS will file a lien on your real estate and take that property upon foreclosure. This is considered a piercing of the corporate veil.

Sample Structure and Key Provisions of a Silent Partnership Agreement

I. Title Page
Includes the title of the agreement, the names of the partners/business/organization, and the date of drafting/assignment.
II. Statement of Intent
Outlines the purpose of the agreement and the relationship between the partners. Will this be a formal legal relationship, or an informal one based on mutual trust and agreements?
III. Background
Provides information about the business, the partners, and the terms of their silent partnership agreement.
IV. Term
How long will the silent partnership agreement last? Has the partnership been formed for a limited or indefinite term?
V. Payment
How much will the partners contribute to the partnership, and how will the profits be divided?
VI . Non-Compete/Confidentiality
The partners may agree that they will not work together outside of the business, or share any business information or trade secrets with outsiders.
VII. Resignation/Termination
If the terms of the silent partnership are broken by either partner, what will happen? What will the consequences be? What will be the process by which either partner can resign from the silent partnership?
VIII. Governing Law
Provides the jurisdiction and venue of the silent partnership agreement, should the terms of the agreement be contested.
IX. Signature Page
The page where each partner signs and dates the agreement.

Legal Factors in a Silent Partnership Agreement

When contemplating the creation and execution of a silent partnership agreement, there are a number of legal issues that should be taken into consideration. When considering the formation of a silent partnership, the potential partners should be aware of the applicable laws in their jurisdiction. For example, in California, there are specific requirements for the formation of a partnership under the California Corporations Code (§§ 16100, et seq.), including specific language relating to limited partners. In contrast, in Illinois, the formation of partnerships is governed by the Illinois Uniform Partnership Act, 810 ILCS 206/.1-1, et seq. (2005), which does not specifically address so-called "silent partners."
In addition to jurisdictional issues, the partners should also consider the specific legal obligations of each partner. The duties of partners are generally those set forth in the California Corporations Code, Illinois Uniform Partnership Act and the Uniform Partnership Act, §§ 401, 402, 403. Further, a fiduciary duty should be imposed upon partners under the common law as well. These statutory and common law duties are separate and apart from the contractual obligations set forth in the written partnership agreement. Each of these duties must be considered when entering into a silent partnership under California and Illinois law.
It is essential that individuals creating or entering a silent partnership agreement receive independent legal advice from counsel specializing in business formations and partnerships.

How to Use a Silent Partnership Agreement Sample

Customizing a sample silent partnership agreement to meet the specific needs of a specific business is a straightforward process. However, if there are several partners involved, you may want to leave it to a board of directors or other decision-making body to get the input needed to customize your agreement to the business’s needs.
There are two primary methods you can use to customize a silent partnership agreement sample for your business: When viewing a silent partnership agreement sample as a Microsoft Word document, you can click on any area of the document and begin typing. This lets you quickly replace any existing text with the specific information your business needs. In many cases, this is all the customization you need.
On the other hand, instead of simply replacing silent partnership agreement sample text , you may want to change or build upon it. You can easily do so using a Word template, which lets you keep some of the wording in place while adding new wording. Using a Word template is also a way to update an existing Word document by saving it with a new name and making any desired changes and additions.
The bulk of the information outlined in a silent partnership agreement sample is quite specific and unlikely to be useful in developing a unique silent partnership agreement for your business. However, there are some areas of your sample agreement that are particularly important to customize to your specific needs: Although it may not be necessary to get professional help while customizing a sample silent partnership agreement, it’s always a good idea to have the final agreement reviewed by a lawyer so they can make sure that all the information is correct and that there aren’t any major gaps.