How does a silent partenership work?

A silent partnership should legally be setup as a limited partnership. The limited partner (LP), aka the silent partner, provides capital to the business while the general partner (GP) manages the day-to-day operations of the business. The limited partner's liability is completely limited to the amount of capital they invested while the general partner's liability can range from nothing to being personally liable for all business actions.

Generally a good way to setup the business is for the LP to provide 90% of the capital needed to start and run the business. In exchange for the capital the LP receives a small portion of the company stock (15-25%) and a large portion of the capital in company debt (80-95%) which is personally guaranteed by the GP. The GP gets initially the same amount of stock as the LP and earns out the remaining stock over a 5 year period. This setup protects the investment of the LP while providing a significant upside and allows the GP to manage the company as they see fit.

Operationally, the GP controls EVERYTHING. The GP should be meeting with the LP occasionally to update the LP on business direction and seek some advice on major decisions. The LP should offer assistance when requested, but should never be involved with day-to-day operations.

Designing a successful limited partnership involves considerable planning and the right personalities in the General Partner and the Limited Partner. It's not something you should try doing on your own, and you should seek outside advice from a business consultant and a lawyer. The consultant will help build the structure of the agreements while the lawyer will help protect both parties from each other.