The silent companion: how and why can it pay off?

Inviting a so-called silent partner to start a company can be a very smart and strategic move. But you need to know how your relationship can and will work and what you can expect from each other.

tichy společník ve společnosti
7 minutes of reading

Chapters of the article

Who is the silent companion?

Of course, by silent partner we don’t mean an introverted buddy with whom you discuss your business plans over wine in the evenings. Not that such an option is completely out of the question, but it’s certainly not what a silent companion should be about.

In reality, it is either an individual or even a legal entity that commits to make a certain monetary or non-monetary contribution to another company, which it supports. The motivation of the founders of this “other” company (typically an LLC) is therefore obvious: to obtain funds for the operation of their company, usually for its start-up. But what about the intention of the silent partner? His primary goal is not to participate in the running of the supported company, to influence its every step, development and direction. This is where it differs from an otherwise similarly perceived investor. However, the reason for the silent partner’s support is primarily to share in the outcome of the business.

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Where and how is the silent society regulated?

The “silent” partner designation does not imply any illegal support from a secretive, non-existent Cayman Islands sponsor. On the other hand, the public often may not know much about the shareholder unless the entities involved are interested. After all, he is not officially registered as one of the partners in the commercial register. His intention is often to remain a grey eminence in the background.

However, all this is done within the limits of the law and on the basis of the law. The silent partnership is regulated by the Civil Code in the section on companies.

Tip: Entry in the Commercial Register is mandatory for most legal entities and some natural persons. For them, the amount of income is decisive, but they can also register voluntarily. How is the registration process and where to deliver the application? This is the subject of our article.

What can be a deposit?

We have mentioned above both monetary and non-monetarydeposits. In theory, however, it can be almost anything, i.e. a tangible or intangible thing, or even a right or property value. Typically, however, it will usually be a sum of money.

On what basis is a silent partnership created?

TheCivil Code speaks of a silent partnership agreement, whereby the silent partner undertakes to make a contribution to share in the results of the entrepreneur’s business for the duration of the silent partnership, and the entrepreneur undertakes to pay the silent partner a share of the profits. Perhaps surprisingly , however, no written contract needs to be signed; a verbal agreement is sufficient.

However, we always recommend our clients to conclude a written agreement, as this is the only way to avoid many unnecessary problems that might otherwise arise.
In addition, the Companies Act requires the consent of the general meeting in the case of a limited liability company or a joint stock company to be obtained in order to conclude the agreement. If the promoted company is a cooperative, the members’ meeting must approve the silent partnership agreement.

What must the silent partnership agreement contain?

We always recommend that the agreement has the following information:

  • the usual elements of a contract, such as the identification of the parties, their seats, etc.
  • the type of contribution and its amount,
  • the manner and form of delivery of the contribution, together with the term,
  • the amount of the silent partner’s share in the company’s result (this is a share not only of the profit but also of the loss),
  • any conditions for the use of the contribution, if it is not in cash,
  • the period for which the contract is concluded.

Tip: Please note that no new legal entity is created by entering into a silent partnership agreement. It is therefore not a special type of company, as it may seem.

Rights and obligations of a silent partner

The basic obligation to which a silent partner commits himself is clearly to make a contribution. On the other hand, he has the right to inspect business documents and accounting records and, where appropriate, to obtain a copy of the accounts. Although this is guaranteed to him by law, it is nevertheless possible to limit or exclude the aforementioned in the contract. However, the prohibition can be broken if the silent partner has reasonable grounds to believe that the business documents and accounting records are not kept correctly or honestly.

The fundamental right is then to receive a share of the profits. This is always due to the silent partner within thirty days after the accounts have been drawn up (or approved). If the promoted company gets its business off the ground quickly and is soon successful, it may be that the profit share paid out soon is not proportionate to the amount of the contribution. However, this is usually a tax for allowing a start-up in a situation where it might not otherwise have been possible. An option is to cap the upfront share paid out contractually if all participants agree.

The amount of the share depends purely on the agreement of both parties. As a rule, it depends on the importance of the silent partner’s contribution to the start of the business. But it depends above all on the negotiating skills of the parties. Whether the share is a few percent or tens of percent is entirely up to them.
We have already mentioned above that the possibility of the silent partner controlling the company is very limited (apart from the right to inspect the accounting records). To a large extent, it is about building a confidential relationship between the parties. A prospective silent partner should look for a company whose partners he knows or trusts and has confidence in the product it produces and its future in the market.

But as we mentioned, the silent partner also shares in the loss. The latter will in practice be reflected by a reduction in the partner’s contribution. For example, if he puts 500,000 into the company and the company’s loss is so high that within three years the share of the loss is that half a million, then the silent partnership ends (if the shareholder has not made up his original contribution).

Other possibilities for termination of the silent partnership are the expiry of the agreed contract, the cessation of the business or the bankruptcy of the silent partner.

Upon termination, the silent partnership returns the original deposit to the promoted company. The current financial situation is always taken into account and the deposit may be increased by a share of the profit or decreased by a share of the loss. If a profit share is paid, a withholding tax of 15 % is levied on it.

A silent partnership may also be arranged for the silent partner to participate only in the operation of one of the entrepreneur’s plants.

A limited liability company operates on the principle of two factories. One of them produces fruit products (juices, purees, fruit snacks), the other one operates a chain of ice cream and healthy smoothies shops. While the gastro-operation is working well, the production is stagnant and needs innovation. Therefore, a silent partnership agreement will be entered into for this part of the business to allow investment in a new operating line.

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Establishment of the company s.r.o.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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