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.
A silent partner agreement states the conditions under which an investor will be a silent partner. Typical terms of the agreement are:
- 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)
There may be many more silent partners than general partners in a business.