Are you a business owner looking for more capital to grow your company? Perhaps you don’t want to take out a bank loan and are wondering if a silent partner would be a good alternative for you?
My personal opinion: Yes, getting a silent partner on board can be a good idea. But only if you know all the pros or cons of what you are getting into.
With this blog post I would like to give you the tools to make the decision. You will learn:
- What a silent partner is
- How a silent partner differs from a “normal” shareholder
- The seven advantages a silent partner brings to your company
- The three disadvantages you need to be aware of
- How to terminate the contract
This article was updated on 29 July 2021.
A silent partner is a shareholder of your company and participates with a contribution of assets (money, goods or services) (Section 230 (1) German Commercial Code (HGB)).
The amount of the contribution can be contractually agreed. In addition to this, the contract must contain an ordinary (with due notice) and extraordinary (without notice) cancellation provision.
Difference 1: The registration of the partnership
Unlike a “normal” partner or shareholder a silent partner is not documented anywhere.
They do not have to be listed in a public register or on the balance sheet.
Difference 2: Participation in the profits, losses and capital gains of the company
An ordinary partner shares in the profit, loss, and appreciation of the company.
A silent partner normally only participates in the profit of the company. They do not run the risk of a loss in value of their equity due to company devaluation, but they also do not benefit from an increase in value either (Section 232 (2) German Commercial Code (HGB)).
Please note: It can also be agreed in the contract that the silent partner participates in the loss or increase in value. But then it is not a normal silent partnership, but a so-called atypical silent partnership.
Which situation this special form is suitable for is summarized in a separate blog post. Just click on the following link to get to the article: https://www.steuerberatung-breit.de/en/atypical-silent-partnership-with-a-limited-liability-company-gmbh-more-liquidity-less-taxes/
Difference 3: Monitoring and participation rights
In contrast to a normal shareholder, a silent partner usually has no say in the running of the company. Therefore, they cannot make any decisions themselves and have no voting rights at the assembly of shareholders.
A silent partner is however entitled to audit the annual financial statements. But, they do not have the right to monitor ongoing activities and transactions (e.g., contracts). Only ordinary shareholders have these rights.
However, like with the second difference, the atypical silent partner is the exception to this rule. This type of silent partner has, in fact, comprehensive participation and monitoring rights.
Difference 4: Treatment in the event of insolvency
In the event of insolvency, a silent partner is a creditor of your company and can demand full repayment of their investment.
However, an ordinary shareholder does not have this right and loses their stake if the company goes bankrupt.
1) More equity: Having a silent partner increases your equity. This is because the silent partner’s contributions must be reported as equity.
2) Financing without a bank loan: You can finance your business entirely without a loan from the bank. In the case of loan financing, interest would accrue regardless of what the profit of the company is. The silent partner, on the other hand, only receives a share of the profits if the operating result is positive.
3) Low repayment risk: The repayment risk for you is low because the silent partner bears the risk of total loss without compensation and without receiving collateral. But beware: Interest rates are higher here than with a straight loan.
4) A weak co-partner: A silent partner is a weak co-partner who has no say in the company, and you can part from them more easily.
5) Choice of participation: You can decide whether or not to give the silent partner a share in the value of the company.
6) Tax benefit for an atypical silent partnership: If the silent partner also participates in the value of the company, then the company will always be taxed like a partnership, regardless of its outward legal form. In other words:
- The income taxis reduced by the trade tax burden.
- Distributed profits are not taxed.
- The taxation is up to 18% lessthan for a GmbH, although on the outside it may be a GmbH. (As the silent partner can be concealed, there is a separate commercial balance sheet and tax balance sheet).
7) Perfectly suited for succession planning: A silent partnership is especially suitable for succession planning. The heirs are initially only weak shareholders in the company, but can become strong shareholders at a predefined time.
In addition, you can save your tax-optimized “private” assets as part of a family solution and distribute them via the silent partnership or give them away or bequeath them via succession planning.
1) Be careful with an AG: The silent partner can be concealed within most companies. But be careful when it comes to stock corporations (Aktiengesellschaften AG). Here the silent partnership must be registered in the commercial register.
2) Put the procedure for determining the company value in writing: The procedure for determining the value of the company should be specified concretely in the partnership agreement with the silent partner.
This prevents disputes arising later about the procedure that was actually used. After all, there are at least 20 different methods, all of which can lead to a different value.
3) Preparation of two balance sheets: You must prepare two balance sheets for a silent partnership. First, the commercial balance sheet for the legal form under commercial law, e.g. GmbH.
Second, the tax balance sheet. In this case, the company is always taxed like a partnership, as mentioned above.
Have you fallen out with your silent partner? Or do you want to sell your business and in order to find a buyer you need to “get rid” of the silent partner?
Unlike with other shareholders, you can get rid of a silent partner very quickly. You just have to terminate the contract.
But beware: If you terminate an atypical silent partner, this is classed as a corporate transformation under tax law!
The GmbH, which, due to the silent partner was classed as a partnership now reverts to a “normal” GmbH again for tax purposes.
My tip for termination: Only dissolve the contract if you no longer need the silent partner’s money. Otherwise, you will probably have to finance their share with a (short-term) bank loan and may have additional costs of thousands of euros.
Conclusion: Silent partnership makes financing possible without a bank
As you can see, silent partnership can bring more advantages than disadvantages: From increased equity to tax benefits. The biggest advantage, however, is probably the access to capital without a bank loan.
You only have to pay interest or profit shares to the silent partner if your company actually makes a profit.
Furthermore, a silent partnership can be an ideal solution for succession planning for the company: First, you involve your children as “weak” shareholders and can transfer more and more rights to them over time.
If you have any further questions about silent partnerships or would like to know how to proceed step-by-step with the implementation, please feel free to contact me.
Photo: © franz massard – fotolia.com