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.
Michigan USLegal Pamphlet on Silent Partners
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Multi-State
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US-PMPH-17
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How to fill out USLegal Pamphlet On Silent Partners?
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FAQ
While they're responsible for their individual taxes, silent partners rarely involve themselves with the company's taxes. Because of their limited involvement with the company's daily operations, silent partners can't claim as many tax deductions as company owners.
50/50 is normally the profit split between partners in a 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.
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.
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.
A silent partner is an individual whose involvement in a partnership is limited to providing capital to the business. A silent partner is seldom involved in the partnership's daily operations and does not generally participate in management meetings.
Becoming a Silent Partner If you want to form a limited partnership, you need a written partnership agreement, and all partners should agree to the terms of the contract. You will need to formally register your limited partnership with both the county clerk where your business is located and your Secretary of State.
The silent partner steps back and lets you run the business. Once your business turns a profit, the silent partner receives 20% of the net profit. The profit is what's left after you subtract business expenses from your total sales revenue.
The primary benefits of being a silent partner is the ability to earn investment returns with limited involvement and being in a position of limited liability for any financial obligations of the business. When a business partnership is formed, the various partners make varying capital and asset contributions.
There are, however, a number of words of wisdom to take on board and pitfalls for a business to avoid when taking their first big step. A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.