What Is a Silent Partner?
A silent partner is an individual whose involvement in a partnership is limited to providing capital to the business. A silent partner is seldom involved in the partnership's daily operations and does not generally participate in management meetings. Silent partners are also known as limited partners, since their liability is typically limited to the amount invested in the partnership.
Apart from providing capital, an effective silent partner can benefit an enterprise by giving guidance when solicited, providing business contacts to develop the business, and stepping in for mediation when a dispute arises between other partners.
Regardless of such requests, it is considered a background role that cedes control to the general partner. This requires the silent partner to have full confidence in the general partner's ability to grow the business. The silent partner also may need to ensure that their management styles or corporate visions are compatible.
How Silent Partners Work
As with other partnership agreements, a silent partnership generally calls for a formal agreement in writing. Prior to the formation of a silent partnership, the business must be registered either as a general partnership or a limited liability partnership per state regulations.
Key Takeaways
- Entrepreneurs with limited capital often seek out a silent partner to help get a business off the ground.
- While not active in daily management, a silent partner still may serve an advisory role.
- A silent partner can earn a passive income from an investment should the business become profitable.
All parties will be responsible for ensuring the business's financial obligations are met, including any general expenses or applicable taxes, except those that are exempt if the partnership is formed as part of a limited liability company (LLC).
A partnership agreement designates which parties are general partners or silent partners. This serves as an outline to which functions, both financial and operational, the general partner will perform as well as the financial obligations that are assumed by the silent partner. Additionally, it includes the earnings percentage due to each partner in regard to business profits.
Silent partners are liable for any losses up to their invested capital amount, as well as any liability they have assumed as part of the creation of the business. Participating as a silent partner is a suitable form of investment for those who want to have a stake in a growing business without exposing themselves to unlimited liability.
Contracts should include terms for buying out the ownership stake held by a silent partner or otherwise dissolving the partnership. An entrepreneur starting a business might welcome the capital provided by a silent partner when getting their business off the ground. However, if the business becomes successful, it may become preferable to buy out the silent partner rather than share profits long-term.
Buyout terms in a contract should address the possibility of an outside investor buying out a silent partner.
As well, a silent partner might wish to dissolve a contract after a certain period if they determine the business is unlikely to become profitable. However the contract is structured, the silent partner will expect a certain minimum return on investment if the business becomes profitable. Their risk will likely also be limited to no more than the capital invested.
FAQs
Silent/limited partners provide capital to a business entity with an expectation of profit, but they are not directly involved in the management of the business. General partners are designated as the managers of a business and can also contribute to the overall capital pool.
What is a fair percentage for a silent partner? ›
Silent partners are typically paid based on the amount of money they invest in a business and their equity in that organization. For example, if they invest a certain amount of money to secure a 10% ownership of the company, they would likely be entitled to 10% of any profits the business generates over time.
What are the differences between a general secret and silent partner? ›
The Main Difference
The main distinction is in whether or not the partner has a say in the business' day-to-day operations; a silent partner never does, and a secret partner may.
What is the definition of a silent partner? ›
Primary tabs. A silent partner is also known as a dormant partner; an investor who becomes a member of a partnership by virtue of capital contribution, but plays an inactive role in the daily operation and management of the business.
Do silent partners make decisions? ›
Silent partners — also known as silent investors — invest in companies without being involved in daily operations. They invest their money in your business, but they don't attend meetings or make decisions. They don't oversee finances or review strategies.
What are the disadvantages of a silent partner? ›
However, in some situations, silent partners may receive a lower percentage of earnings than more active partners, mainly if they spend less on the firm than others. No Control: One of the primary drawbacks of silent partners is that they lack control over the firm. They cannot participate in business activities.
What are the risks of a silent partner? ›
Due to limited liability rules, a silent partner may lose up to their entire investment in a firm but no more than that. As a hands-off partner, silent partners are often immune from legal actions taken against the firm and its management.
What is the benefit of being a silent partner? ›
Entrepreneurs with limited capital often seek out a silent partner to help get a business off the ground. While not active in daily management, a silent partner still may serve an advisory role. A silent partner can earn a passive income from an investment should the business become profitable.
Does a silent partner have a fiduciary duty? ›
If you are merely investing in a business or if you are a so-called “silent partner”, these duties do not apply to you unless you have a governing role in the company.
What are the benefits of a silent partner? ›
Benefits of a Silent Partnership
Silent partners have little to no responsibility when it comes to the operation of the business on a daily level. Silent partners are brought into a company because of their financial resources, not their knowledge of operations of the company.
In other words, a silent partner is an investor. In exchange for pumping some of their own money into a business, silent partners become part owners of companies. The keyword in the phrase “silent partner” is silent. A silent partner is not responsible for helping a small business owner make decisions on a daily basis.
How to deal with a silent partner? ›
If you find your relationship in trouble and your partner won't talk, here are five things you can do to make a difference.
- Try to choose your time to talk. ...
- Express how their silence makes you feel. ...
- Don't mind read. ...
- Do not repeat yourself. ...
- Remember the positives too. ...
- How can therapy help?
If a partnership does not have an agreement in place, or its existing agreement is silent on what happens on the death of a partner, then under the Partnership Act 1890 (“Act”) a partnership is dissolved by the death of any one partner.
Can an LLC have no general partner? ›
But there are some differences in the way the two business types are run. An LLC doesn't require a general partner.
What share of profit would a sleeping partner have? ›
So, in this case ever if the sleeping partner has contributed 75% of the total capital of the firm the provisions of partnership deed implies distribution of profits and losses will be shared by all the partners equally.
What is a good partnership percentage? ›
💸 Agree on a profit-sharing ratio
There is no one-size-fits-all answer for what a good profit-sharing ratio is for all businesses. As a general rule, if there are two people in the partnership, it's 50/50, and if there are three people, it's a ⅓ split.
What percent of the profits should each partner receive according to the law in the absence of a written partnership agreement? ›
In the absence of a written partnership agreement, the partnership's profits will be split evenly. For example, consider that a partnership agreement states that you will receive 70 percent of the profits and losses. It also states that your partner will be allocated the other 30 percent.
What is a fair percentage for an investor? ›
Searching for the magic number
A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.
