A DISCRETE BUSINESS
Modern business provides numerous forms for growing wealth, ranging from the popular bank deposits to considerably risky investments in the stock exchange. Also, more and more people decide to participate in various business ventures – as partners in civil law partnerships, commercial partnerships and companies. However, for different reasons, investors may not be satisfied with this form of earning money – and one of the most frequent arguments against it is the inability to remain anonymous, as well as the need to disclose personal information in publicly available company registers. After all, everyone knows that money likes silence.
However, there is a way to participate in profitable business ventures, including lucrative real estate investment projects, without the risk of competition and jealous neighbors preventing us from living a peaceful private live.
This way is the silent company.
WHAT IS A SILENT COMPANY?
Currently, since 1964, the silent company, is not in any way regulated in the provisions of Polish and European law. However, it still remains a popular and recommended form of investing in different types of assets, including, in particular, lucrative investment projects on the real estate market, such as retail parks, warehouse and logistics space, hotels or other construction projects.
Despite lack of legal framework, the operation of the silent partnership is possible due to the so-called principle of freedom of contract, which allows for the conclusion of agreements of various content, as long as they are not in contradiction with the binding law or the rules of social co-existence. The investor can therefore, using both his own ideas and current regulations, create a bit atypical investment vehicle that will ideally suit his needs. However, this requires a precise description of the rights and obligations in the silent partnership agreement.
A silent company does not have its own legal personality, it is not a separate legal entity established to conduct business activity. The silent partnership does not create any separate assets, does not acquire any rights itself, is not liable for debts, and cannot sue and be sued. All the above activities take place through a registered partner. It is the registered partner who bears the risk of doing business.
A silent partnership is actually a type of agreement (covenant) between an investor (the so-called silent partner) and an entrepreneur (the so-called registered partner), who conducts business activity in a different form – e.g. in the form of sole business activity. Thus, only the parties of the silent partnership are bound thereby, while the agreement does not create any obligations towards other persons. The silent partnership dos not require registration as well. The silent partner is not disclosed “outside” the silent partnership, we will not find him in the National Court Register, the central register of business activities or in the files kept by the registry court.
What’s important, the tax authorities state that the conclusion of a silent partnership agreement is not subject to tax on civil law transactions (as in the Director of the National Tax Information in the letter of 1st June 2018, 0111-KDIB4.4014.147.2018.2.ASZ)
Anyone can become a silent partner and set up a silent partnership. This type of agreement may be concluded by individuals who are not entrepreneurs, as well as legal persons or even organizational units that have been granted legal capacity.
RIGTS AND OBLIGATIONS OF THE PARTNERS IN SILENT PARTNERSHIP
The role of the silent partner in the silent partnership is rather passive, as it is generally limited to providing a contribution to the enterprise of the registered partner. However, in exchange for the contribution, the silent partner does not acquire any shares or rights in the silent partnership or in the enterprise of the registered partner but only acquires the claim for the payment of the profits from the business activity of the registered partner, within it’s enterprise.
There are various types of contributions to be provided – the most popular being simply cash (financial contribution, capital) but more experienced investor have a possibility to provide a contribution in the form of the ownership right to the properties and real properties, as well as other property rights (perpetual usufruct, lease of real property or enterprise). Regardless of the type, the contribution should be precisely described in the agreement. Failing to describe the contribution may result in application of certain provisions of the Civil Code to the silent partnership agreement, which may result in the liability of the silent partner.
The silent partner’s contribution becomes a part of the assets of the registered partner – his enterprise. A silent partnership, as it is essentially an agreement, does not create any separate assets, does not constitute any form of joint property. As a consequence, depending on the provisions of the agreement, the silent partner will either not be able to demand the return of the contribution from the registered partner at all or he will be able to recover the contribution on the terms specified in the silent partnership agreement. If the silent partner would like to have influence over the actions taken towards the contribution, e.g. to forbid the sale of the contribution during the term of the silent partnership, such right should also be included in the silent partnership agreement.
As the silent partnership is not a separate legal entity and all business activities are conducted by the enterprise of a registered partner, it is the registered partner who has the exclusive right to undertake all business activities related to the functioning of the company, including incurring liabilities, conducting business and managing company assets.
Also, it is the registered partner, within and under the name of his enterprise, who represents the silent partnership (or rather the enterprise of the registered partner) towards Third Parties. The silent partner has no rights in this respect. However, if the parties to the silent partnership agreement wish so, the silent partner may represent the enterprise of the registered partner, for example as a proxy or a representative.
Although the silent partner does not run the partnership’s affairs and does not represent it towards Third Parties, it does not mean that the silent partner should not have any influence on the activities of the partnership. Traditionally, the silent partner had access to the balance sheet of the registered partner’s enterprise and had the right to review the accounts and documents of the enterprise – and these rights should absolutely be vested onto the silent partner in the silent partnership agreement. Moreover, the control powers of the silent partner may be strengthened – e.g. by the right to grant consent to the enterprise of the registered partner to undertake specific actions, the right to access documents other than those listed above. These rights, however, have to be properly secured – e.g. by imposing on the registered partner liquidated damages in case of violation thereof.
The method for regulating mutual rights and obligations is similar to the relations between a general partner and a limited partner in the limited liability partnership. The difference here is, in principle, the lack of liability of the silent partner – even limited to the value of the contributed properties and other property rights, transferred by the silent partner to the registered partner – unless the parties agree otherwise in the agreement.
However, in regard to the said similarities, any additional rights of a silent partner should be granted carefully. If the rights of the silent partner correspond with the rights of partners in commercial companies, in particular in a general partnership, or a civil partnership, the silent partnership may be considered as such. This will also result in a greater liability of the investor, comparing it to the liability of the silent partner.
PROFITS AND LOSS OF THE SILENT PARTNERSHIP
The equivalent of the contribution made by the silent partner to the silent partnership (or more precisely – transferred to the registered partner) is the right to a part of the profit from the enterprise of the registered partner. This right is fundamental and defines the silent partnership agreement. The silent partner becomes a creditor of the registered partner and may request him to pay a specific amount, on terms as provided in the silent partnership agreement. In a classic silent partnership, the silent partner participated in the profit ‘on the equity basis’ – which is a very imprecise provision. Therefore, it is recommended to regulate in the silent partnership agreement to what profit the silent partner is entitled to. Thanks to this both Parties have a clear understanding on i.e. the rules of mutual settlements, the silent partner’s share in the profits, payment deadlines. As a rule, there is no limit to the amount of profit that may be reserved for the silent partner, but the sums can be paid out only if the enterprise of the registered partner makes a profit at all.
In business activity forms that are regulated in the binding law, each partner participates in the profits and losses of the business. Additionally, in partnerships it is possible to exclude a given partner from bearing the losses of the partnership. When it comes to the silent partnership, it is the parties who decide whether the silent partner is going to be liable for the debts of the partnership – the silent partner may or may not be liable for the losses of the registered partner’s enterprise, pursuant to the provisions of the silent partnership agreement. Notably, unlike in case of partnerships regulated in the Commercial Companies Code, the above-mentioned exclusion of losses of the enterprise is also effective against Third Parties, not only within the partnership, against other partners. Even if the losses are not excluded, the silent partner is not directly liable for the company’s debts towards Third Parties, both public and private, but is only obliged to ‘compensate’ the losses incurred by the registered partner enterprise.
The silent partner, in principle, will not participate in the additional profit resulting from the increase of the registered partner’s enterprise assets value, even if the change is made to the assets transferred as his contribution. The Parties may, of course, regulate this issue differently in the partnership agreement.
In the event of death or termination of registered partner’s activity, the silent partner will also have the right to settle accounts with the silent partnership. Out of prudence, these issues should, however, be regulated in the silent partnership agreement.
A silent partner may also satisfy himself against the assets of the registered partner’s enterprise in the event of its bankruptcy. Unlike partners in partnerships and shareholders in companies, a silent partner will be treated as a creditor of the registered partner – as if the registered partner was simply to fulfill an obligation to the benefit of the silent partner. This is beneficial for the silent partner. In case of liquidation of the partnership’s or company assets, the shareholders/partners are only entitled to the assets remaining after all the creditors of the entity were paid off. When a silent partner is treated as a creditor of the registered partner, he will be repaid faster, at the moment when the current operations of the partnership are being brought to an end and all the debts are being paid.
TAXES PAID ON THE PROFITS
In silent partnership, as a unique form of investment, tax issues de facto concern individual partners, and not the partnership as such.
The registered partner will calculate his profit within his own enterprise, on the terms adequate for his enterprise.
As for the silent partner, his profit will be taxed either as part of the business activity conducted by the silent partner, or, if the silent partner is an individual and does not perform business activity, as capital fund gains, on the terms similar to the ones regarding the taxation of the interest on loans. This tax is, in principle, 19% and cannot be reduced through tax deductible costs. Moreover, this tax will be paid through a registered partner, acting as the tax withholder.
It should be noted, however, that there have also been legal interpretations against the recognition of the profits from the silent partnership as capital gains. Therefore, it will be reasonable to apply for an individual tax interpretation before concluding a silent partnership agreement.
ADVANTAGES OF THE SILENT PARTNERSHIP
There is no doubt that the lack of formalized rules for the operation of a silent partnership leaves a large amount of freedom in its creation, which can easily become beneficial for investors. The parties to the silent partnership agreement may regulate the issues related to the manner of participation in the profits and losses of the enterprise as they see fit. They can decide on the frequency of payment of profits to the silent partner, the manner of conducting the enterprise’s affairs, including whether to grant the silent partner the right to decide on the matters of the enterprise at his sole discretion, as well as on appointing the silent partner as proxy or attorney, with authorization to act on behalf of the entrepreneur. All this makes the silent partnership an ideal investment vehicle.
The legal institution of the silent partnership is available for all – including both individuals and various forms of business activity. It may also become one of the forms for conducting business activity by spouses who have concluded the separate property agreement. Moreover, we cannot forget that silent partnership is a ‘cheap’ activity – as the tax authorities recognize the conclusion of a silent partnership agreement as not being subject to taxation on civil law transactions.
The silent partnership also allows the investor to remain anonymous as a silent partner and not to be disclosed in any register for business entities.
For many investors, however, the greatest advantage will be the partner’s lack of liability for losses in a silent partnership – or more precisely, for losses of the enterprise of a registered partner. Contrary to the situation in partnerships regulated in the Commercial Companies Code, the above exclusion is also effective in relation to third parties, and not only within the partnership, against other partners.
The fact that in a typical silent partnership a silent partner is not subject to any non-competition clause is also an often mentioned advantage. Irrespective of the participation in the profits generated by the registered partner’s enterprise, the silent partner may also conduct its own business activity. This rule, however, may be modify the silent partnership agreement.
All of the advantages described above make the silent partnership an ideal form of participation in profitable investment projects, both on the real estate market as well as on other asset markets. It is particularly appreciated in the project delivery of retail parks, warehouses and logistics space as well as other construction projects.
