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the goat
12-30-2008, 05:06 PM
I am thinking of entering into a partnership with two other people. Two will be running the business on a day to day basis and drawing a salary, the other is strictly a silent partner and providing the start up capital.

My question is what would be a reasonable percentage of ownership the silent partner would get. Also if he owns a percentage of the business, wouldn't it make sense for the start up loan to carry little to no interest?

The start up costs are $50,000 if that makes any difference. I realize these numbers will vary by situation but I am just trying to get a ballpark.

OldJack
12-30-2008, 07:49 PM
My question is what would be a reasonable percentage of ownership the silent partner would get.

One-third ownership unless you are unlucky and he demands more. Since the other two partners are being compensated for their work, I see no difference in any of the partners ownership interest. A partner loan over $10,000 must bear interest or the IRS will impute interest at their published rate (that changes quarterly).

BTW, a working partner does not get a "salary", it is called "Guaranteed payments" reducing profit before the partner's share of profit is allocated. Guaranteed payments are self-employment income to the partner as well as the profit that is allocated.

You should consult a qualified tax professional as to the type of tax entity that would be best for this business.

vangogh
12-30-2008, 09:17 PM
My first instinct was to say 1/3 too. I think it really depends though on how much the investment will be now and in the future and also what all three of you think is fair. In the end it really has to come down to what each of you thinks is fair and being able to agree with each other on what is and isn't fair to each of you.

Evan
12-30-2008, 09:32 PM
I agree with the one-third ownership. Why should anybody be represented less equally? And sometimes the ownership is based on capital contributions. If he's the "silent partner", presumably he is the one contributing the capital -- at that rate, the other two could be his EMPLOYEES!

Before signing a partnership agreement, make sure everyone has read it and understands what everyone is getting into under such an agreement. Also make sure you're all aware of the advantages/disadvantages of a general partnership.

Business Attorney
12-31-2008, 01:56 AM
I think it is nearly impossible to give an answer in the abstract. If I read your facts right, the "silent" partner is putting up all of the start up capital while the other two partners are getting a salary (actually, guaranteed payments as was pointed out). Under similar circumstances, I have seen the silent partner get significantly more than one third.

On the other hand, if the salaries are basically subsistence level, the two active partners are contributing economic value measured by the difference between their actual pay and the market value of their services.

In many cases, the active partners also came up with the idea and are contributing the intangible value of their ideas. That often tips the scale in their favor.

Finally, what is the projected return on the silent partner's investment? If his $50,000 could double in two years even if he was given a lesser percentage, and he is not making any intangible contributions (such as ideas, contacts, relationships, etc...), then a lower percentage could be justified.

SteveC
12-31-2008, 02:06 AM
Look at it this way... on day one the business has a value of $50,000 made up of the silent partners investment, so on that basis he is entitled to 100% of the business as the value of the business is due to what he has brought of value... Ask the people working for a salary what they have brought of value to the business... and if they have a good answer (and they should or you should not be in business with them) then apportion shares based on that.

In the end it all comes down to what each of you are happy with... the most important thing however is to ensure you have a proper partnership agreement that deals with things when you all fall out... because if you don't deal with this now, you will all have to deal with it later when it will more than likely close you down. (partners fall out, quite often)...

UFOnaut
12-25-2010, 06:56 AM
I think of phrase "Good idea is 50% of business success". So if you two have only idea, but no money for start-up, it will be fair to give 50% to your 3rd companion. But ... only if he takes part in your business, if he wants only to take his profit I think it is fair enough to give him only 25% ... for some time. When you register company think of procedure, which give you rights to change partnership agreement unilaterally ... =)

Evan
12-25-2010, 08:18 PM
Hmm, I'm starting to wish topics automatically locked after 6 months of inactivity...