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BUSINESS
by EVELYN JUAN, a Toronto-based financial writer
VET A PRIVATE INVESTMENT VENTURE
Mary’s friend Winston has offered her the
opportunity to invest in his specialty candy store. She would be a silent partner in the business, which is structured as a limited partnership. If she invests $5,000 into Winston’s business, she’ll be paid up to 10% of the business’s after-tax profit over the next five years, starting from year two of operations.
Before investing as a silent partner, what should Mary consider? How would she gauge whether she’s getting a fair deal? What risks should she weigh, and how would her invest- ment be accounted for in her taxes?
The experts
ABBY KASSAR
vice-president,
High Net Worth Planning Services, RBC Wealth Management Services, Toronto
JONATHAN KLEIMAN
corporate law and
litigation lawyer, Kleiman Law, Toronto
Who do you call?
Business investment specialists and lawyers.
What they say
ABBY KASSAR
As a limited partner, Mary’s exposure to the business’s debts and obligations are limited to the amount she’s contributed. A limited partnership must have at least one general partner who has unlimited liability: in this case, Winston. Mary should ensure the agreement identifies her as a lim- ited partner, not a general partner. The agreement should also outline the:
› capital contribution of each partner; › salaries;
› distribution of profits;
› winding up of the partnership;
› withdrawal from the partnership; › death of a partner; and
› arbitration of any dispute.
Regarding her payout over the next five years, she’ll need to define what the 10% profit would be after taxes. Will it include a deduction for Win- ston’s salary, and the salary of any other active partners, or not? Her friend’s salary could eat up profits, and Mary could find herself not getting
a payout at all. Mary needs to find out if she’d
get her capital back after five years, or if she’d continue to get a 10% share of the company’s profits. And would she continue to be a partner after five years? If Mary wanted to be part of
the business long term, she and Winston could agree that she would continue as a limited 26
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