This pamphlet provides an overview of silent partners. Topics covered include what a silent partner is, steps to take before becoming a silent partner, and how buy-sell agreements are used.
This pamphlet provides an overview of silent partners. Topics covered include what a silent partner is, steps to take before becoming a silent partner, and how buy-sell agreements are used.
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In partnership businesses, ownership is allocated to each partner's capital account as a percentage of 100 percent, so silent partners should generally hold no more than 49 percent of the business.
How much does a silent partner receive? According to his or her contribution and equity in the business, silent partners will get paid. An investment of $50,000 from your silent partner turns into a $500,000 value for your business. Thus, they own 10% of the company, and they receive 10% of its profits as well.
But what is a fair percentage for an investor? When it comes to angel investors, the general rule is to offer approximately 20-25% of your business earnings. If you're selling the business in its infancy, this is the amount that investors will expect in returns.
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 partnership businesses, ownership is allocated to each partner's capital account as a percentage of 100 percent, so silent partners should generally hold no more than 49 percent of the business.
Rights of a Silent Partner. A silent partner has the right to earn investment returns (proportionate to his or her initial investment) with limited involvement and liability. Silent partners also have the right to review company financial statements and provide input on changes made to the partnership agreement.
Although state regulations can vary regarding silent partners, their relationship with the business and their potential liability, silent partners are commonly protected from unlimited personal liability for any debts or obligations of the partnership business.
Although silent partners can involve themselves as needed, they usually don't participate in managing the business. Their ownership is motivated by return on investment. Silent partners can prevent other partners from making any drastic changes in business structure.