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juliet
07-05-2010, 03:26 PM
I just started a "sole proprietor" business. although i have the permits, published the business name, etc, etc. it is not open yet because i am still in the process of hiring staff since i just got my worker's comp and liability ins.

i have invested close to $7k already of my own money and am doing all the work. i have a cousin who wants to invest $5k into my business. i am thinking of making her a "slient partner." how much percentage should i give her? i am thinking of drawing up a contract wherein she gets her investment back plus % of profit in 3 years but i can't figure out how much percentage i should give her.

and, as far as paying back her investment, do i give it to her monthly or does she get it back by the end of the 3 years? :confused:

thank you so much in advance for your advise.

vangogh
07-05-2010, 04:00 PM
Hi Juliet. Welcome to the forum. I'm not really sure if there's a specific % you should set. Are you looking for her to be a silent partner or are you looking for a loan for your business. The way you want to draw up the contract it sounds more like you want is a loan. It might be best to just discuss things with her and come up with a % you both think is fair. You'll probably want to give her something more than what she can get investing her money in something safe, but at the same time she'll need to agree if the business doesn't work out she doesn't get her money. Again I'm not sure what the right % is, but you can probably look at typical small business loans and how those are paid back and with what additional %

If you do want her to be a silent partner then she would be entitled to a % of the business itself I would and might be expected to contribute money again in the future as needed. It doesn't sound like that's what you're looking for, but it's something to consider.

Hopefully someone else will chime in with a better idea of how something like could work. It really does sound to me like you're thinking of this more like a loan in which case I'd look into what a bank would charge in interest on a loan and set up something similar with your cousin.

juliet
07-05-2010, 04:34 PM
thank you for your input, vangogh.

i think i'll consider maker her a "silent partner" for a term of 5 years. so this means she doesnt get any money from the business until i start turning profit? i dont know how this "silent partnership" really works, i just want to make sure that i dont cheat her out of her what is rightfully hers and at the same time i dont want to short change myself either.

vangogh
07-05-2010, 05:47 PM
Glad I could help in some way. I think the best thing is you're looking to set things up that are fair to both of you. Have you and your cousin discussed what might be fair? Probably a good starting point. If you can spend some time defining what each of you is contributing to the business it might make it easier to figure out what you each deserve later.

You could set something up where you're paying her back her investment even before the business itself is profitable. You could pay her back from your own finances or set it up so a portion of the business' revenue pays here back profitable or not. Using the business' money would reduce revenue and consequently some taxes you'd owe at the end of the year.

I'm not sure if there's a right or wrong way to set this up. You might want to talk to an accountant or lawyer, not necessarily to set the rate, but to bring up some issues you might not think about on your own. I'm not entirely sure how a "silent partnership" works either. I think you have to decide first if your cousin is mainly investing money now with the idea of getting paid back + interest and then she'll no longer be part of the company. If that's the case I think you might want to set this up more as a loan. If you expect her to stay involved after the initial investment, then you may want to go the partnership route, in which case she might then own a % of the business, but also be expected to make future investments or have some responsibility in the growth of the business.

Evan
07-05-2010, 11:03 PM
FYI, if you have a partner -- you're a partnership, and not a sole proprietorship.

vangogh
07-05-2010, 11:08 PM
Evan I don't think a partnership has been set up, which what was making me think this is more wanting a business loan than it is a silent partner.

Evan
07-05-2010, 11:17 PM
Receiving a percentage of profits and losses sounds like a partnership, no matter how you want to dice it. "Investing" into a business also sounds like an equity stake over a "loan", which generally requires payment of interest that isn't related to profits and losses.

vangogh
07-05-2010, 11:21 PM
I agree. Only Juliet can tells us this, but my initial thought was she was looking more for a loan to help her get started and is thinking that would mean a silent partner. Just a hunch, but it didn't come across to me like this other person would have anything to do with the business other than the one time payment of money. I could be wrong of course. Part of why I suggested setting this up as loan. Just struck me that's really what Juliet is looking for.

Otherwise then I agree that the business will need to be changed to a partnership.