What Is a Silent Partner in a Business?
What is a silent partner in a business? A silent partner is an individual who does not participate in day-to-day operations of the partnership business.3 min read
What is a silent partner in a business? A silent partner is an individual who does not participate in day-to-day operations of the partnership business. His partnership is only by means of capital contribution, and he rarely participates in management meetings. A silent partner is often referred to as limited partner, since his liability is usually limited only to the extent of his investment in the partnership business.
Silent partners only provide financial assistance. Customers are often not aware of these partners' ties with the business.
Roles of a Silent Partner
Although silent partners can involve themselves as needed, they usually don't participate in managing the business. Their ownership is motivated by return on investment. Silent partners can prevent other partners from making any drastic changes in business structure. However, they are expected not to interfere in the business operations, while other partners work on earning profits and achieve business goals.
A silent partner can help business by giving advice when sought by other partners, providing leads from business contacts, and mediating a dispute between other partners. A silent partner plays a background role and cedes operational control of the business to general partners. Thus, he must have full confidence in the ability of general partners.
The role of a silent partner is outlined in the partnership agreement. Usually, a silent partner only provides capital in exchange for ownership, a share in profits, or both. The extent of decision making power of a silent partner depends on his ownership percentage or the rights negotiated in the partnership agreement.
As a silent partner, you should minimize your risk by keeping some sort of veto power over expenditure. You may also want to review financial reports on a regular basis. Although a silent partner does not have any additional responsibilities or an active involvement in the business, you may be requested to act as a mentor to guide other partners.
Creating a Silent Partnership
Like any other type of partnership, a silent partnership too should be done through an agreement in writing. Before forming a silent partnership, you must have the business registered either as a general partnership or as a limited liability partnership (LLP). All partners are responsible for ensuring that the business meets its financial obligations.
You must then create a partnership agreement and specify the parties that are going to act as general partners and those that are going to remain silent. You should outline financial and operational functions to be performed by general partners and financial obligations to be assumed by silent partners. The agreement should also include each partner's percentage in the business profits.
General partners in a silent partnership usually have unlimited liability, while the liability of silent partners is limited.
Liabilities of a Silent Partner
- The liability of a silent partner is limited to the extent of his invested capital and the amount of liability assumed in the partnership agreement.
- A silent partner is legally responsible for business losses. Even if he does not participate in business operations, he is still obligated to bear the losses.
- In case of a limited liability partnership, silent partners are responsible for business losses only to the extent of their stake percentage in the investment. For example, if a silent partner has 20 percent stake in a business, he would only be responsible for 20 percent of losses.
- Since the liability of silent partners is limited, their personal assets remain safe even in the event of bankruptcy and financial difficulties.
Benefits of Becoming a Silent Partner
Becoming a silent partner offers the following major benefits:
- Passive Income: As a silent partner, you get to share the profits of the business without having to participate in its operations. The actual amount of income depends upon the performance of the business and your profit-sharing arrangement in the partnership.
- Less Responsibility: New businesses usually require a lot of hard work. Active partners must put in long hours to make the business successful. They often have to handle tough situations like hiring and firing of workers. However, as a silent partner, you need not involve yourself in the day-to-day operations of the business. Your investment is thus free from stress and hassles.
- Easier Investments: Being a silent partner does not require you to have any experience or knowledge of the business you are investing in. Since you have very little involvement in the business operations, you can even invest in an industry you do not fully understand.
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