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Thread: How silent can a silent partner be?

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    Bronze Member rfnel's Avatar
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    How silent can a silent partner be?

    Hi Guys

    Let's say that, hypothetically, a partner in a business wanted to bring other partners on-board for reasons which don't quite make sense (e.g. partners who are there solely for the title of "partner"). These partners would put a small amount of money into the business, they would not be involved in the running of the business, and they would draw minimal (if any) dividends. Will SARS and CIPC frown on it? What are the "formal requirements" (if I can put it like that) for silent partners?

    Cheers,
    Riaan
    "Fortune favours the bold" - Virgil
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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by rfnel View Post
    Let's say that, hypothetically, a partner in a business wanted to bring other partners on-board for reasons which don't quite make sense (e.g. partners who are there solely for the title of "partner").
    In practice there is always a reason, even if it's a flawed one.

    I don't see why CIPC or SARS would have a problem, but then I don't know the real reason - which might affect how the business is conducted, which in turn might affect the way SARS and CIPC view the matter.

    (I have a lousy imagination).
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member Vanash Naick's Avatar
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    Partnerships and sole proprieters are the two forms of ownership that are not regulated by the Companies Act 71 of 2008. Both partnerships and sole proprietors are seen as "natural persons," as opposed to juristic persons. They will pay tax as individuals. The partnership agreement itself should be the point of department as it is this document that clarifies roles, duties, say in decision making, dividends etc...
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    Silver Member Petrichor's Avatar
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    What benefit would there be for the silent partner to be a partner, if it was only in title and not much more?

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    Quote Originally Posted by rfnel View Post
    Hi Guys

    Will SARS and CIPC frown on it? What are the "formal requirements" (if I can put it like that) for silent partners?

    Cheers,
    Riaan
    Riaan, as regards SARS, there is no impact as SARS, in the first instance, is only concerned with income derived.

    Regarding CIPC; I assume then that you are talking about a company or a cc else CIPC would have no interest:
    With regards to a company, it depends on the class of shares that these investors would acquire. Unless they acquire a class of share that specifically excludes voting rights, it is not possible that they be 'silent partners'. Be that as it may, other than in extreme circumstances and only in reaction to formal complaints, CIPC would not concern themselves with this.

    On the other hand, it is my experience that 'silent partners' become vocal partners surprisingly quickly!

    In the case of a cc, there is no provision for members with reduced powers, other than as a consequence of their percentage holding.

    In bygone days you could contrive such an arrangement by means of a shareholders agreement, alas no more. Well, not without significant amendments to the Memorandum Of Incorporation.

    If you could be more specific, I could perhaps advise you better.

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    Riaan I forgot to mention that if the entity is a company and these 'silent partners' are shareholders and not directors, an unintended impact might well be that the company is obliged to be audited, because it is in effect no longer owner managed.

    There are many ways to achieve a desired outcome, the best would be to get a professional opinion and advice (hint hint).

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    Bronze Member rfnel's Avatar
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    Quote Originally Posted by Petrichor View Post
    What benefit would there be for the silent partner to be a partner, if it was only in title and not much more?
    My sentiments exactly, but my partner (in a CC) has decided that he wants to give a part of his share to his brother and his mother. Since my share isn't affected, I don't really have an issue with it as such, but I wanted to make sure that it would legally be okay as well.
    "Fortune favours the bold" - Virgil
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    This is one of the reasons why I hate CCs.

    There is no such thing as a silent partner in a cc. A silent partner is one who invests in the equity of an entity, but is not entitled to any say in management of the entity. In other words, he is entitled to a dividend and nothing else.

    CCs are like marriage and dissolution is divorce. Messy.

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by rfnel View Post
    My sentiments exactly, but my partner (in a CC) has decided that he wants to give a part of his share to his brother and his mother. Since my share isn't affected, I don't really have an issue with it as such, but I wanted to make sure that it would legally be okay as well.
    Make sure you pay attention to voting powers then. You don't want a situation that allows equal voting per member under any circumstances.

    I'd also be mindful of the point above that "silent" partners have a habit of not staying silent for long.
    And all those minor interests that have to sign anything important... there's leverage in that and it isn't in your favour.

    I regret my imagination is now starting to fire up again, and it's telling me - be careful here my friend. This could be rocky ground and avoided if possible.
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member Justloadit's Avatar
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    If you have an agreement, there should be a section dealing with the dissolution or sales of shares.
    Make use of this clause, or it may come back to haunt you.
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