Individuals sometimes form companies as sole proprietorships, where they are completely responsible for all aspects of the company. Other times, people form businesses or corporations as partnerships. In a partnership, each partner is invested in the company financially and/or in terms of her particular skill sets. Some partners are called "general partners" in that they have specific responsibility for the management of the company. Other partners are called "limited partners," because their roles in running the company are generally limited to providing money.
Silent partners (also called "sleeping partners") are a specific type of limited partner. They are usually called "silent" because their only role is to provide investment funding for the company. Because of this, they have no responsibility for how the company is run or managed. On the other hand, they are only liable for the company up to the amount of their investment. Their investment is usually paid back in installments over time as a company miscellaneous expense, and they also usually receive an agreed-upon percentage of company annual net profits.
Profit and Liability
Profit is thought of in two ways: gross and net. Gross profit is the amount of revenue that comes in to the company for the delivery of sales or services. Net profit (also called "profit margin" or the "bottom line") is gross profit minus any cost of goods, operating expenses (including salaries) and miscellaneous expenses like loan or investor repayments. Net profit is the amount of money partners and shareholders get to distribute amongst themselves.
Company liabilities are debts the company owes. These debts can be invoices the company has not paid yet, loans the company took out, lines of credit the company has accessed but not repaid, and investments in the company that have not yet been repaid.
Each partner's roles, responsibilities, liabilities and net profit earnings percentages should be clearly defined at the time the company is incorporated.
Typical Percentage of Profit of a Silent Partner
There are two common formulas for assigning the profit percentage for a silent partner. The first is based strictly on the silent partner's investment. For instance, if a silent partner invests $100,000 in a company that needs $1,000,000 to operate, then he is considered a 10 percent partner in the company and might receive 10 percent of the company's annual net profits. The second formula is based on the number of partners. For instance, if there are three partners and one of them is silent, then he receives a one-third stake (33.33 percent) of any net profits.
While these are the two common formulas used for determining the percentage of profit for a silent partner, there are no sets rules for determining it. Any arrangement can be made, as long as all partners agree to it.