What is a Silent Partner Agreement?

A silent partner agreement is a written legal agreement under which an investor commits to make an investment in a partnership, in exchange for the rights accorded to a limited partner. A silent partner takes no part in the day-to-day management of a business, is only liable for the amount of his or her investment, and is generally not publicly known to be an investor in the business. In this arrangement, the managing (or general) partner is the one known to the public, and who may take on additional financial liabilities. The silent partner agreement delineates the terms of this arrangement.

Advantages of a Silent Partner Agreement

A formalized agreement gives limited partners legal protection, since their liability for the debts of the partnership is then capped at the amount of their investment in the business. It also clarifies all terms of the arrangement, making it less likely that there will be legal disputes among the partners at a later date.

Disadvantages of a Silent Partner Agreement

The main concern with a silent partner agreement is that the limited partners are handing all control over the business to the general partner. They do not have a say in the operation of the business, and so have to trust in the business judgment of the general partner.

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Contents of a Silent Partner Agreement

Typical terms of the agreement are as follows:

The degree to which the investor shares in the profits and losses of the partnership (usually based on the amount of funds invested)
The limitation on partnership liabilities by the investor (usually limited to the amount of funds invested)
The amount of the investment made in the partnership by the investor
The amount of any additional investments to be paid into the business by the investor (may be based on certain future occurrences)
The rights of the investor to withdraw from the partnership (possibly only allowed after the passage of a certain amount of time)
The rights of the investor to invest more funds in the partnership
That the investor will receive no compensation (such as salary or wages) from the partnership
That the investor cannot participate in the operations of the business in any way
The conditions under which the arrangement shall be terminated (such as through bankruptcy or the death of the managing partner)