How silent can a silent partner be?

[rfnel]

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

[Dave A]

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).

[Citizen X]

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...

[Petrichor]

What benefit would there be for the silent partner to be a partner, if it was only in title and not much more?

[CLIVE-TRIANGLE]

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.

[CLIVE-TRIANGLE]

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).

[rfnel]

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.

[CLIVE-TRIANGLE]

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.

[Dave A]

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.

[Justloadit]

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.

[BusFact]

If I bought a 100 shares in Standard Bank I'd essentially be a silent partner, purely due to the low value of my shares and hence low voting rights. So no issue from SARS or CIPC.

But the others above have raised some real world problems you have to seriously give thought to.

[rfnel]

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.

Thanks Dave. I'm keeping a close eye on the development of our updated association agreement, just to make sure that all my bases are covered.

When (not if) I go into a business again, I think I'll prefer to go at it solo; partnerships cause way too many hassles.

[sterne.law@gmail.com]

Why would your partner want to give a share away? If he wants them to have income he can merely pay them the money in a personal capacity.
I would be concerned that it is in order that they may have a form of equity, which means they may plan to use it as security.
Alternatively why dont tehy form a trust and teh trust can then hold his share holding.. Your situation then remains pretty much the same as i ftehre are 2 partners. The trust can vote and squablle about their share and voting etc,

[rfnel]

Why would your partner want to give a share away? If he wants them to have income he can merely pay them the money in a personal capacity.
I would be concerned that it is in order that they may have a form of equity, which means they may plan to use it as security.
Alternatively why dont tehy form a trust and teh trust can then hold his share holding.. Your situation then remains pretty much the same as i ftehre are 2 partners. The trust can vote and squablle about their share and voting etc,

My partner has family in the USA, and the CC holds an interest in a company over there. According to my partner, by giving a part of his share to his family it will be easier for all of them to get visas to work in the US.

[sterne.law@gmail.com]

Not sure on the USA visa's but probably some similarities to SA.
So they may be looking at a business visa, hence the need for shareholding or other visa requre income such as a pension.
I suppose one has to look at the manner in reaching the end goal for your partner without placing any one at unneccessary risk and maintaining the working relationship. Again, is the trust as shareholder an option for your partner?
Even if I am a silent partner, nothing precludes me from disagreeing and protecting my investment. perhaps an exit strategy is required, whereby if the new partners dont "abide" by the agreement there is a termination and the shares revert back to the partner or a buyout at a "predetermined" formula, possibly at a slightly discounted rate to discourage the silent partner becoming a booming voice.