The atypical silent partnership is a multifaceted legal construct within German tax and corporate law. It is characterized by the existence of a partnership in which the silent partner not only provides capital but also actively participates as a co-entrepreneur and assumes co-entrepreneurial risks. This article aims to deepen the understanding of atypical silent partnerships and shed light on the central characteristics, rights, and risks associated with them.
1. Fundamentals of Atypical Silent Partnerships
An atypical silent partnership arises when a silent partner enters a company as a co-entrepreneur, as opposed to a typical silent partnership in which the silent partner merely provides capital. This article now delves into the key elements of this form of partnership.
2. Co-Entrepreneurial Initiative
Co-entrepreneurial initiative is a crucial concept in determining the existence of an atypical silent partnership. It pertains to the silent partner's ability to influence the company's business activities actively. In this context, specific partner rights must exist, at the very least resembling the rights of a limited partner under the Commercial Code (HGB) or corporate control rights pursuant to § 716 (1) of the Civil Code (BGB). Rights established in the partnership agreement under § 233 HGB may also be considered sufficient.
A significant aspect that underscores co-entrepreneurial initiative is the involvement in major corporate decisions. These include, for example, voting rights, control over business activities, and the right to object to specific measures. These rights provide the silent partner with the opportunity to actively participate in the company's operations.
Legal Precedent: Federal Fiscal Court (BFH) Decision of January 28, 1982 (IV R 197/79)
In this decision, the Federal Fiscal Court (BFH) confirmed the importance of co-entrepreneurial initiative in determining the existence of an atypical silent partnership. The court emphasized that the possibility to exercise partner rights resembling those of a limited partner is a crucial criterion for atypical silence.
3. Co-Entrepreneurial Risk
Co-entrepreneurial risk is another central characteristic of atypical silent partnerships. It refers to the silent partner's participation in the economic success or failure of the company. This risk manifests in several dimensions:
a. Participation in Profit and Loss
The silent partner is obligated to share in the profits generated and bear losses. This financial involvement is a crucial element of co-entrepreneurial risk. By participating in profits and losses, the silent partner directly contributes to the company's financial performance.
b. Participation in Hidden Reserves
In addition to profit and loss sharing, the silent partner must also participate in the hidden reserves of the company's assets. This includes, in particular, participation in the company's goodwill. This participation in hidden reserves provides the silent partner with a deeper understanding of entrepreneurial risk.
c. Balancing Risk and Initiative
The characteristics of co-entrepreneurial risk can vary and are often in a complex relationship with co-entrepreneurial initiative. In some cases, strong co-entrepreneurial initiative can compensate for lower co-entrepreneurial risk, and vice versa. For instance, if the silent partner holds the position of managing director, this demonstrates particularly strong co-entrepreneurial initiative and can offset lower co-entrepreneurial risk.
Legal Precedent: BFH Decision of May 13, 1998 (VIII R 81/96)
In this decision, the BFH emphasized the interconnectedness of co-entrepreneurial risk and co-entrepreneurial initiative. The court highlighted that pronounced co-entrepreneurial initiative can compensate for lower co-entrepreneurial risk, underscoring the diversity of possibilities within atypical silent partnerships.
4. Significance of Goodwill
Participation in the company's goodwill is a critical factor in assessing co-entrepreneurial risk. If this participation is absent, the co-entrepreneurial risk of the silent partner is generally considered weak. Full co-entrepreneurial risk is typically conveyed to the silent partner only if, in the event of termination of the silent partnership, they have the right to the increase in the hidden reserves of the company's assets, including the increase in the goodwill calculated using market-standard methods.
However, it is essential to note that the amount of the contribution alone is insufficient to recognize a silent partner as a co-entrepreneur. In addition, typical corporate decisions and ongoing management responsibilities must be delegated to them. This underscores the necessity of precise and comprehensive contract drafting.
Legal Precedent: BFH Decision of December 9, 2002 (VIII R 20/01)
In this decision, the BFH established that mere consent clauses or factual, legally unsecured influence over management decisions are insufficient to adequately convey co-entrepreneurial risk. The court stressed that the silent partner must genuinely be involved in management to be recognized as a co-entrepreneur.
5. Conclusion
The atypical silent partnership is a complex legal structure that demands an in-depth understanding of its underlying characteristics, rights, and risks. The presence of co-entrepreneurial initiative and co-entrepreneurial risk are the two pivotal criteria for atypical silent partnerships. Participation in profits and losses, hidden reserves, especially goodwill, and the delicate balance between risk and initiative are central elements that define this form of entrepreneurship.
Tax specialists should be aware of the significance of these distinctions between atypical silent and typical silent partnerships, as they can have substantial implications for tax treatment and legal obligations of the parties involved. Precise and well-thought-out contract drafting is essential to provide legal clarity and leverage tax advantages. The cited BFH rulings offer important guidelines for interpreting and applying this complex legal subject matter.
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Opinions are my own. No investment/tax or other advice. Do your own research.