The essence of a silent partnership
A silent partnership is a form through which a silent partner participates anonymously in the company's business by making a certain contribution to the company. The silent partner's anonymity stems from the fact that the silent partner's identity is not disclosed in any public register (such as, for example, the Commercial Register). The silent partner's identity is therefore known only to the company itself, which has concluded a silent partnership agreement with them, that agreement being the legal basis for the creation of the contractual relationship of the silent partnership (or their identity may be known to other silent partners). The essence of a silent partnership and of the silent partnership agreement is the silent partner's obligation to provide the company with a certain contribution and to participate through it in the company's business, and the company's obligation to pay to the silent partner the part of the profit arising from the silent partner's share in the results of the business.
A silent partnership can also be understood as a form of investment and the silent partner as an investor who, on the basis of the silent partnership agreement, is entitled to a predetermined share of the company's profit.
Who can be a silent partner?
Anyone can be a silent partner, that is, both a natural person and a legal entity, regardless of whether or not they are an entrepreneur.
A company may also conclude several silent partnership agreements with several silent partners, whereby no legal relationship arises between the silent partners themselves. An agreement may also be concluded between the company and several silent partners as several contracting parties at the same time.
What can constitute a contribution?
A silent partner may make a monetary or non-monetary contribution to the company. As regards a non-monetary contribution, it may be a contribution that has a tangible form, such as movable or immovable property. An intangible contribution may be, for example, a claim together with its accessories (the accessories of a claim are interest, default interest, default charges and the costs associated with enforcing the claim) or industrial or copyright rights (e.g. trademark rights). The law does not set any minimum or maximum amount for the silent partner's contribution.
During the term of the silent partnership, the silent partner may not request the company to return the contribution they made to the company.
Formation of a silent partnership
A silent partnership is created by concluding a silent partnership agreement, the statutory regulation of which is set out in § 673 et seq. of the Commercial Code. The law requires the agreement to be in written form.
The agreement is always concluded by the company on the one side and the silent partner (or possibly several silent partners) on the other.
Given that the legal regulation of the silent partnership agreement contained in the Commercial Code is of a non-mandatory (dispositive) nature (with the exception of the provisions of § 673, § 675 and § 676 para. 1 and para. 2, from which the contracting parties may not deviate), the contracting parties do not have to adhere strictly to the provisions of the law and may regulate the rights and obligations arising from the silent partnership differently. The statutory provisions listed in the parentheses above represent the basic rights of the silent partner, which cannot be excluded, nor can the agreement be arranged differently in this respect. Even if a silent partnership agreement contained a different arrangement, it would be invalid in that part for being contrary to the law.
In order for an agreement to be regarded as a silent partnership agreement, the contracting parties must agree on its essential elements, which are the type and amount of the silent partner's contribution and the amount of the silent partner's share in the profit.
Rights of the silent partner
The silent partner has the right to inspect all business documents and accounting records relating to the business in which they participate through their contribution (e.g. invoices, contracts, etc.). By exercising this right, the silent partner essentially monitors, for example, the share in the company's profit or loss, since they do not have the right to co-decide as a member at the general meeting.
The silent partner also has the right, upon their request, to be provided by the company with information about the business plan for the future period and about the expected development of the state of the assets and finances relating to the company's business in which the silent partner participates through their contribution.
The company is also obliged, upon request, to provide a copy of the financial statements, but only where the company is required by law to have those financial statements audited by an auditor. The company is also obliged to provide the annual report.
The above-mentioned rights of the silent partner cannot be restricted or excluded by the silent partnership agreement.
However, beyond the scope of the law and the above, the company and the silent partner may also regulate other rights or obligations of the silent partner or the company.
The silent partner's share in the company's profit
The silent partner is entitled to a share in the profit in the amount agreed in the silent partnership agreement.
The annual financial statements are decisive for determining the silent partner's share in the company's profit, and their entitlement to a share in the profit arises within 30 days from the day the statements are drawn up or, if the entrepreneur is a legal entity, within 30 days of their approval in accordance with the articles of association, the memorandum of association or the law.
At this point, a potential risk can be seen arising from § 40 of the Commercial Code, under which a joint-stock company, a simple joint-stock company, a limited liability company, a cooperative and a state enterprise are obliged to submit the ordinary financial statements for approval to the competent body so that it approves them within 12 months from the day they were drawn up. To eliminate the risk on the silent partner's side consisting in the relatively long period within which a legal entity is obliged to approve the drawn-up annual financial statements, we recommend regulating the procedure and the deadline for approving the financial statements in detail in the silent partnership agreement.
The relevant provision of the silent partnership agreement could read, for example, as follows:
„The company undertakes to ensure that the ordinary individual annual financial statements of the company are drawn up no later than 2 months from the beginning of the calendar year following the end of the calendar year for which the financial statements are drawn up, and to approve those financial statements no later than 15 days from the day they are drawn up.“
Unless the contracting parties have agreed otherwise in the silent partnership agreement, the company pays the share in the profit to the silent partner in money. The silent partner receives a share in the profit in the amount due to them according to the profit share determined in the silent partnership agreement, reduced by withholding tax of 7%. The company remits the withholding tax before paying the share in the profit to the silent partner, who is subsequently no longer obliged to pay any further tax on the paid-out share in the profit.
Example calculation:
The silent partner is entitled to be paid a share in the profit of 10.000,- EUR.
The withholding tax in this case amounts to 700,- EUR.
The net profit that will be paid to the silent partner therefore amounts to 9.300,- EUR.
It should also be added that the silent partner has no guarantee that they will receive a certain profit for the contribution they made to the company, since it is not possible to predict in advance whether the company will make a profit.
The silent partner's share in the company's loss
If the company into which the silent partner made their contribution incurs a loss, the silent partner's contribution is reduced by the share in the company's loss. However, the silent partner is not further obliged to increase the contribution already made to the company.
If the company makes a profit in the following years, the silent partner's contribution made to the company is increased by the share in the profit. However, the silent partner's entitlement to be paid the profit arises only once the contribution reaches the original amount they made to the company.
This arrangement is non-mandatory (dispositive), which means that the contracting parties may agree otherwise in the silent partnership agreement. The contracting parties may, for example, completely exclude the silent partner's share in the company's loss.
It is important to point out that the silent partner participates in the company's loss only up to the amount of the contribution they made to the company. Following on from this, it should be noted that if the company's loss reaches the amount of the silent partner's contribution in the company, their participation in the company's business terminates by operation of law. This applies where the contracting parties have not agreed otherwise in the silent partnership agreement.
Liability of the silent partner
The silent partner in principle does not guarantee the company's obligations, with the exception of two cases. This concerns the case where the silent partner's name is part of the business name of the company into which they made their contribution, and the case where the silent partner declares to a third party with whom the company is negotiating the conclusion of a contract that the two of them do business together (if the silent partner made this declaration after the conclusion of that contract, they do not become a guarantor).
Termination of a silent partnership
The Commercial Code regulates the termination of the silent partner's participation in the company's business such that their participation in the business terminates:
- where the silent partnership agreement was concluded for a fixed term, upon expiry of that term (e.g. where the silent partnership agreement was concluded for a term of 1 year);
- by notice of termination given by either party, where the silent partnership agreement was concluded for an indefinite term;
- where the silent partner's share in the contribution has reached the amount of the loss incurred by the company;
- by the termination of the company's business (e.g. by deletion of the company from the Commercial Register); or
- by the declaration of bankruptcy over the company's assets or by the rejection of a petition to declare bankruptcy due to insufficient assets of the company.
When regulating termination of the agreement in the silent partnership agreement, it is advisable to set a notice period. Unless the contracting parties agree otherwise, a silent partnership agreement may be terminated by notice no later than 6 months before the end of the calendar year.
It is not excluded for the contracting parties to also provide, as a ground for termination of the silent partnership agreement, termination of the silent partnership agreement by agreement of the contracting parties or by withdrawal of either contracting party on grounds which they define more closely in the agreement.
After the silent partnership agreement terminates, the company is obliged to return the contribution to the silent partner within 30 days. The contribution is returned to the silent partner increased or decreased depending on the result of the company's business. The above of course does not apply where the silent partner's share in the company's loss has been excluded.
Advantages and risks of a silent partnership
Like any form of investment or participation in the business of a commercial company, a silent partnership brings with it many advantages but also risks. Below we look at what can be considered advantages and what can be considered risks of concluding a silent partnership agreement.
Advantages of a silent partnership
The anonymity of the silent partner can undoubtedly be counted among the advantages of a silent partnership. Therefore, if a natural or legal person has an interest in keeping their identity anonymous, a silent partnership is an ideal solution for them.
Another advantage is that the silent partner's share in the profit will be in the amount that the contracting parties agree in the silent partnership agreement. In other words, the silent partner's share in the profit need not correspond to the value of their contribution.
The possibility of excluding the silent partner's share in the company's loss, as well as the fact that the silent partner in principle does not guarantee the company's business towards third parties, can also be considered an advantage. Where the silent partner's share in the loss has not been excluded by the silent partnership agreement, the silent partner will participate in the company's loss up to a maximum of the amount of the contribution they made to it.
In the event of bankruptcy over the company's assets, the silent partner has the status of a creditor and may assert their claim in the bankruptcy proceedings. The silent partner's contribution becomes part of the bankruptcy estate.
Disadvantages / risks of a silent partnership
Any potential share of the silent partner in the profit is not guaranteed by anything. The silent partner shares in the company's business risk; the company may or may not make a profit, and therefore the silent partner has no guarantee that they will themselves obtain a share in the profit.
Unless the contracting parties have agreed otherwise, the silent partner is obliged to bear a share of any loss of the company. A major negative can be seen in the fact that if the amount of the company's loss reaches the amount of the silent partner's contribution, their participation in the company's business terminates. In this connection, cases of intentional conduct by the company resulting in the company being in a loss cannot be ruled out.
The silent partner also has no voting rights by which they could decide on the company's affairs in the way a member can (e.g. the right to appoint a managing director).
In the event of the company's dissolution with liquidation, the silent partner does not have a right to the liquidation surplus in the way a member of the company does. In this case the silent partner has only the right to have the contribution returned.
In conclusion, when assessing the suitability or, conversely, the unsuitability of an investment in the form of a silent partnership, it is necessary to take into account the circumstances of the particular case, the specific content and wording of the silent partnership agreement, the accounting situation of the company, as well as the business plan of the particular silent partner.