The silent partnership in the German Commercial Code: contribution, results, exit and insolvency

The Wendt joinery, a registered sole trader, needs 60,000 € for a new CNC machine. The bank wants collateral, and the owner does not want a co-partner entered in the commercial register. His brother-in-law offers to put the money in as a silent partner: he receives a share of the profit, never appears to the outside world and is listed in no register. What he acquires in legal terms is set out in seven short sections of the Commercial Code.

A stake that nobody outside can see

The silent partnership is found in sections 230 to 236 of the German Commercial Code (HGB), and the very first subsection already holds its whole principle. Anyone who takes a stake in another person's commercial business as a silent partner makes a capital contribution, and that contribution passes into the owner's assets.

No jointly owned partnership property comes into being. The silent partner's money becomes the owner's property, and the owner works with it like any other business asset. The silent partner acquires no share in machines or goods, only claims against the owner: to a profit share, to information and, in the end, to a balance.

Subsection 2 draws the consequence for dealings with third parties. Only the owner acquires rights and incurs obligations from the transactions concluded in the business. Suppliers, customers and banks deal with the owner alone; the silent partner becomes neither a contracting party nor a debtor in those transactions.

Hence the name. The partnership does not appear externally: it has no trading name, no presence of its own in legal dealings and no liabilities of its own. It is called an internal partnership, existing only between owner and silent partner, and its content follows from the partnership agreement.

The wording requires a commercial business run by someone else. That may be a registered sole trader, but equally a commercial company such as a GmbH. Silent stakes in a GmbH are common, and they play a tax role of their own in the second module.

What separates a silent partner from a lender is the common purpose. A lender wants interest, however the business performs. A silent partner wants to share in the result, and section 231(2) makes the share in profit the one feature that the agreement cannot remove.

A comparison with a limited partner is tempting, since a limited partner also essentially risks only the contribution. But a limited partner belongs to a partnership that acts externally and is entered in the commercial register. The silent partner stays invisible, and the contribution stops belonging to the silent partner once it has been made.

For the owner, the appeal lies precisely in this invisibility. The owner keeps sole management, need not register a new partner and need not change legal form. Anyone weighing a corporation with several shareholders instead will find that trade-off in the course on choosing between GmbH and UG.

Profit and loss when the agreement is silent

How the result is shared is the core of every silent partnership agreement, and the law leaves the parties wide latitude. It steps in only where nothing has been agreed, and it draws a single line that cannot be negotiated away.

If the silent partner's share of profit and loss is not fixed, section 231(1) deems a share that is reasonable in the circumstances to have been agreed. The law gives no figure. Whoever leaves a percentage out of the agreement hands the question to a court if a dispute arises.

Subsection 2 expressly allows the silent partner to be exempted from losses. The reverse is not possible: the share in profit cannot be excluded. An agreement promising only a fixed sum with no link to the result therefore describes a loan rather than a silent partnership.

Section 232(1) sets the rhythm. At the close of each financial year, profit and loss are calculated and the profit falling to the silent partner is paid out. What counts is the owner's annual result, not the return on individual transactions.

Under subsection 2, first sentence, the silent partner shares in losses only up to the amount of the contribution, whether paid in or still outstanding. So the silent partner cannot lose more than the promised contribution. The statutory rule contains no duty to put in further money beyond it.

The second sentence holds two rules that are often confused in practice. Profit already received need not be repaid because of later losses. But as long as the contribution is reduced by losses, the annual profit is first used to cover that loss and is not paid out.

The contribution thus works like an account that losses reduce and later profits refill. Only once it is back at the agreed level does profit actually reach the silent partner. A single bad year can therefore absorb the payouts of several good ones.

And profit that the silent partner simply leaves in the business? Under subsection 3 it does not increase the contribution unless otherwise agreed. The amount not withdrawn remains a claim against the owner; it becomes additional equity only through a specific arrangement.

Oversight without a say: the right to information

Anyone who puts money into someone else's business wants to know what happens to it. Section 233 HGB answers with a cross-reference: section 166 applies accordingly to the silent partner's right to information, that is, the provision that gives a limited partner rights of oversight.

Under section 166(1), a limited partner may request a copy of the annual financial statements and inspect the related business records to check them. Carried over to the silent partnership, the silent partner may ask for the owner's accounts and examine the documents on which they rest.

The second sentence adds a right to information about the company's affairs, but only as far as needed to exercise membership rights. The law singles out the case where there is reason to suspect dishonest management.

Subsection 2 is decisive when drafting. An agreement that excludes these rights or restricts them contrary to the provision is void. An owner who wants to forbid any inspection gains nothing: the clause falls away, and the statutory right remains in place.

What is missing is equally telling. Sections 230 to 236 grant no right to manage and no vote on the owner's decisions. The owner runs the business alone; the silent partner checks afterwards but does not steer.

The agreement may grant the silent partner more, for example consent requirements for large investments or rights of objection. Such rights change the character of the stake, and not only in civil law. The second module shows that exactly this drafting can help decide, for tax purposes, whether the silent partner counts as a co-entrepreneur.

Termination, death and the final settlement

For termination, section 234(1) refers to sections 132 and 133 HGB, which otherwise govern commercial partnerships. They apply accordingly, both to notice given by either of the two partners and to notice given by a creditor of the silent partner.

If the partnership was entered into for an indefinite period, section 132(1) allows notice of six months to the end of the financial year. Where the financial year matches the calendar year, a partner giving notice only in July has missed the year-end and gets out only at the end of the following year.

If a fixed term was agreed, early termination under subsection 2 requires good cause. The law gives as an example the intentional or grossly negligent breach of an essential contractual duty by the other side. Where such cause exists, subsection 3 allows termination without any notice period.

Subsection 6 protects these rights: a clause excluding the right of termination under subsections 2 and 4, or restricting it contrary to them, is void. That list does not mention ordinary notice under subsection 1; how far the agreement may shape it is not answered by the wording alone.

A creditor of the silent partner can also end the stake. Section 133 requires that enforcement against the debtor's movable property has failed within the last six months and that the creditor, holding a title enforceable on more than a provisional basis, has had the share attached. The creditor then gives six months' notice to the financial year-end.

The silent partner's death, by contrast, does not dissolve the partnership, as section 234(2) makes clear. The stake continues; who steps into the deceased's place is a matter of inheritance law. For the owner's death, the provision makes no corresponding statement.

After dissolution, section 235(1) requires the owner to settle with the silent partner and pay out the balance in money. The silent partner receives no assets in kind, only a sum of money that results from the account of contribution, loss shares and profit shares still outstanding.

Transactions still pending at dissolution are wound up by the owner under subsection 2, and the silent partner continues to share in their profit and loss. Subsection 3 gives the silent partner, at the close of each financial year, a right to an account, to payment of the amount due and to information on the transactions still open.

When the owner becomes insolvent

The real test of any stake is insolvency. Section 236 HGB governs it from the silent partner's point of view, and the result surprises many owners: the silent partner may assert the contribution, as far as losses have not consumed it, as an ordinary claim in the proceedings.

If insolvency proceedings are opened over the owner's assets, subsection 1 lets the silent partner file a claim as an insolvency creditor in respect of the contribution, to the extent it exceeds the share of loss falling on the silent partner. The loss share is deducted first; only the remainder becomes a claim.

With that claim the silent partner stands alongside the other insolvency creditors. What is actually recovered depends on what the estate yields. Section 236 grants no priority over suppliers or banks, nor does it order subordination.

Subsection 2 covers the opposite case. If the silent partner has not yet paid in the whole contribution, it must be paid into the insolvency estate, but only up to the amount needed to cover the silent partner's loss share. Any arrears beyond that are not owed to the estate.

A second mechanism sits in the Insolvency Code. Under section 136 InsO, a legal act can be challenged if it returns all or part of the contribution to the silent partner or waives all or part of the loss share, provided the underlying agreement was made in the last year before the petition to open proceedings or afterwards.

This also applies where the partnership was dissolved in connection with that agreement. A silent partner who quickly withdraws the contribution in a crisis must therefore expect to hand it back to the administrator. Under subsection 2, the challenge is excluded only if a ground for opening proceedings arose after the agreement.

One clear recommendation for the agreement follows. A silent partner putting in money should set the loss share deliberately, because it determines which part of the contribution still counts as a claim if things go wrong. And an owner negotiating repayments in a crisis should know the one-year window of section 136.