An agreement on the formation of a silent partnership is an agreement among partners who either wish to start a partnership with some or one of them as a silent partner or who wish to add a new partner who is willing to operate as a silent partner. A silent partner is someone who shares the financial burden but does not run the daily affairs of the company. Such a partner typically brings in the funds and leaves the management to the active partners.
What Is Agreement on the Formation of a Silent Partnership?
An agreement on the formation of a silent partnership is an arrangement between partners of a firm, wherein any partner who wishes to share the financial liabilities but not wanting to manage the day-to-day operations agrees to become a silent partner. A silent partner also shares in the profits and losses incurred by the company. An example of a silent partner may be an equity investor who invests in a startup. He may want to share the financial burden but would not want to be involved in the daily activities of the company. Similarly, a minority shareholder of a company may also be a silent partner.
Purpose of Agreement on the Formation of a Silent Partnership
Typically, silent partner opportunities are availed of by someone who brings investment in the firm but does not get involved in routine operations of the company. Purpose of such an agreement is to clearly lay down the rights and obligations of a silent partner vis-à-vis the other partners and the firm. It clearly spells out the amount of money brought in by each and share of profits or losses incurred by each. In doing so it avoids any misunderstandings between the partners including the silent partner.
Key Terms of Agreement on the Formation of a Silent Partnership Agreement
The following key terms must be included in a silent partnership agreement:
- Number of silent partners: It is pertinent to mention the total number of partners in a firm and mention who all are silent partners. For instance, if A, B and C open a partnership firm and C wishes to be a silent partner, he should be specifically named in the agreement as such.
- Capital contribution: The amount each partner including the silent partner will be contributing to the firm should be mentioned.
- Profit participation: How and in what proportion the profits would be shared among the partners should be clearly laid down. A schedule of distribution of profits should also be preferably appended to the contract.
- Loss share: The process and proportion of the share in losses should also be contained in the agreement.
- Purpose of adding a silent partner: The purpose behind adding a silent partner to the partnership should also be mentioned. For instance, “for the purposes of enhancing the share capital Mr. A who has voluntarily chosen to be a silent partner, is being added to the partnership”. Here, the term voluntary is important.
- Management of the firm: It should be clearly mentioned that the business of the firm should be carried out in the name of partners A and B only. The silent partner’s name should not be brought into this clause.
- Operations of the company: A clear list setting out the functions of partners should be mentioned and the active partners should be made responsible for the same.
- Holders of cash: It should be stated that only the active partners are authorized to receive cash on behalf of the company and that if the silent partner does receive cash in the name of the company, he/she shall hand it over to the active partners within a stipulated period of time.
- Limited rights of the silent partner: The Silent partner can draw expenses from the joint partnership account for certain purposes.
- Termination: This clause would provide exit options to all the partners including the silent partner. There should be a termination for breach option as well, wherein for breach of the said agreement, the partners may elect to terminate the other partner including the silent partner from the contract.
Drafting an Agreement on the Formation of a Silent Partnership
The following guidelines should be kept in mind while drafting this agreement:
- Mention the name of the silent partner clearly. If there is more than one silent partner, you may define the term silent partner and club all the silent partners under the same.
- The purpose of adding the silent partner should also be mentioned clearly. For instance, “A has been added as a silent partner”, would not suffice. The reason for this addition should be mentioned.
- A statement to the effect that the silent partner does not and will not take part in the daily management affairs of the company should be mentioned.
- All the obligations of the active partners such as taking care of daily operations, entering into contracts on behalf of the firms, etc. should be mentioned.
- The rights and obligations of the silent partner should also be mentioned explicitly.
- The active partners may be granted rights to control the activities of the silent partner vis-à-vis the business of the partnership firm. For instance, “C shall refrain from taking any decision pertaining to the business of the firm, subject to the approval of A and B”.
Silent Partnership Agreement Benefits
A silent partnership agreement has the following benefits:
- Helps in increasing the working capital without compromising on the decision-making power
- Helps in having a clear set of rights and obligations in place
- Provides security to both the silent partner and the active partners.
A silent partnership is a good way to raise some money without giving up on control. It is always advisable to enter into an agreement for the same as it will outline minute details involved in such a partnership and would define the rights and obligations involved.
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