A Silent Partner: What You Need to Know About This Business Relationship

ByVladana Donevski
June 07,2022

When most people think of business partnerships, they think of two or more people jointly managing daily operations. However, you can opt for another type of partnership where one party isn’t involved in day-to-day management. Enter the silent partner.

So, what exactly does this partner do, and what are the benefits and drawbacks of this type of business relationship? In this article, we will answer these questions and more.

What Is a Silent Partner?

A silent partner is an individual or entity that provides financial backing for a business venture without being actively involved in the day-to-day operations. Silent partners are also sometimes called limited partners, as their liability is usually limited to the amount of money invested even if the business declares bankruptcy.

Occasionally, if asked to, the silent business partners can provide guidance and help with networking and finding new potential business partners. It is not uncommon for silent investors to be called upon in case there is a dispute between other active partners to mediate the situation.

However, most of the time, the silent partner remains silent. By entering into such a partnership, the silent partner has full confidence in other partners to handle daily operations and grow the business, so they typically have no issues with taking the back seat in the daily management of the company.

Who Can Become a Silent Partner?

Becoming a silent partner in a small business isn’t a complicated process. Individuals, trusts, and corporations can all serve as silent partners. For small businesses and startups, silent partners can even be friends and family.

However, most of the time, it is a business or an investor that benefits from partnering with your company in one way or another. In some cases, a business may even have two or more partners that are silent, as long as it works for both parties.

We'll tell you how to find a silent business partner a bit later. But first, we’ll go over the benefits of having one and how the arrangement is supposed to work.

The Benefits of Having a Silent Partner

There are several benefits that come with having a silent partner, but the main one is financial.

Provides the Needed Capital With No Interference

First, it allows you to raise capital without having someone interfere in how your business is run.

A silent partner doesn’t interfere in the day-to-day decision-making process, either because they don't know much about the industry or lack any interest in managing daily operations. Silent partner business opportunities are ideal for those who have confidence in the management team and are interested in investments that deliver passive income.

Those investments can provide much-needed capital for businesses that are just getting started without any revisions to the business plan or the marketing strategy. In addition, this financial support can help cover unexpected costs or help the company expand its operations.

New Networking Opportunities

Silent partners, just like angel investors, are also usually well-connected and can use their networks to help the new business in a variety of ways. For example, a silent partner or investor may be able to introduce the company to potential customers or help it to secure favorable contracts.

Overall, silent partnerships can be a great way for many entrepreneurs and new businesses to get the business off the ground.

How Does Having a Silent Partner Work?

As with any other partnership, the silent partnership should be formalized in writing. However, to do so, your business must be registered first.

Registering the Business

Any business with two or more owners can either be structured as a general partnership or a limited liability company (LLC). Different states have different rules for registering these partnerships, and you should inform yourself about the relevant laws and requirements.

Silent Partnership Agreement

The next step is inking the agreement. It should include the roles and responsibilities of all parties involved, the amount being invested, the stake owned by each party, as well as how the profits are distributed. 

Most importantly, it should outline the legal responsibilities of all parties. Silent partners are typically liable for losses up to their invested amount, which makes this a safe investment without the threat of unlimited liability.

It also outlines the procedure if one partner wants to sell their stake in the business or if the entire business is sold. A silent partner agreement helps to protect both partners by clearly defining their rights and obligations.

By having a silent partnership agreement in place, the partners can avoid potential conflict and ensure that their business runs smoothly. So, if you are considering entering into a silent partnership, it is important to have an attorney review the business agreement to ensure that it meets your needs and provides adequate protection.

How Does a Silent Partner Get Paid?

Typically, silent partners receive a fixed percentage of the profits on a monthly, quarterly, or yearly basis. In some cases, they may also receive a portion of the proceeds from the sale of the business. 

Silent partners don’t get paid like business owners. Their earnings depend on the amount they invest in the business and what percentage of the business they own. If the business partner buys 10% of the shares with their investment, they will typically receive 10% of the profits.

The exact details of the payment terms should be outlined in the partnership agreement.

Silent Partners vs. Investors

Both silent partners and investors provide financial backing for businesses, but there are a few key differences between the two. The most important of these is the level of involvement each type of shareholder has in the business.

Silent partners, as mentioned before, are typically passive investors who do not take an active role in managing the company. On the other hand, investors often have a say in how the business is run and may provide input on major decisions.

Another key difference concerns the silent business partner's low level of risk. Silent partners are typically liable up to the amount they invest and as such don’t risk losing anything more than the actual investment. Unlike most regular investors, they are also immune from any legal action being taken against the business. Finally, silent partners typically invest their own personal funds, while investors may use borrowed money to finance their investment.

How to Find a Silent Partner?

If you're interested in finding a silent partner, there are a few places you can look. Similarly to finding an angel investor, you can start by networking with individuals and businesses in your industry.

You can also search online for directories of potential investors or work with a business broker to connect with a potential silent partner company. The silent investor doesn't have to be an individual. The business operating in your niche can also be a silent investor.

Pros and Cons of a Silent Partnership

When starting a business, there are benefits and potential pitfalls to bringing a silent partner onboard. It’s important to thoroughly examine both the pros and cons before pulling the trigger on this business arrangement. 

The pros of having a silent partner in a small business:

  1. Silent partners can provide much-needed financial support when you’re trying to get your business off the ground.
  2. They can also have a valuable advisory role.
  3. Having a silent partner onboard can also be helpful in building credibility and attracting other investors.
  4. Finally, silent partners can provide an important buffer during difficult times or periods of transition. While they may not be directly involved in running the business, their support can be crucial during tough times.

Cons of Having a Silent Partner in Business

  1. The silent partner may not be as invested in the success of the business as the active partner. 
  2. Silent partners are often not familiar with all aspects of the business, which can limit their ability to provide useful input.
  3. Finally, it is important to remember that a silent partner has a percentage of the business but doesn’t get involved in strategizing or managing operations. As such, if the business fails, silent partners are inclined to blame the management team.

In Conclusion

Silent partnerships are common practice in the business world, and for small businesses that are just starting out, they can be a crucial ingredient for success. Silent partners offer up the cash without demanding changes to daily operations or influencing your decision-making process. However, most silent partners lack the experience and business knowledge to have an effective advisory role. Make sure this is an appropriate arrangement for your company before signing any silent partner business agreements.

FAQ
Is being a silent partner illegal?

Silent partnerships are legitimate business arrangements. Silent partners are typically investment firms or wealthy individuals who provide funding for a business with little to no say in day-to-day operations. In return for their investment, they usually receive a percentage of the profits.

What rights does a silent partner have?

While they may not be involved in day-to-day operations, silent business partner rights still exist. Silent partners are entitled to earn investment returns proportionate to the investment and have the right to review financial statements as well as provide input on any changes to the partnership agreement.

Is there any difference between a silent partner and a secret partner?

There are a few key differences between silent and secret partners. A silent partner is typically someone who invests money in a business but does not take an active role in its operation. A secret partner, on the other hand, is somebody who is involved in the business but whose involvement is not publicly known. Silent partners are usually more hands-off, while secret partners may be more actively involved in day-to-day operations.

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Once you've got everything up and running, it's just a matter of driving traffic to your site and making sales. You'll also be responsible for customer service and ensuring that your shoppers are having the best experience. After all, 91% of customers will simply leave and never return if they have a bad experience with your store, which is something new businesses cannot afford. Bottom Line There are plenty of ideas for an eCommerce business that involve selling products or services. So, if you're looking to get started in eCommerce, be sure to choose the option that best suits your skills and interests. Moreover, take a closer look at the professional network that you’ve built up over the years and then decide which avenue to pursue. With commitment and effort, you can start making money online in no time!
By Vladana Donevski · June 23,2022
The documents for incorporation differ by state, and the nature and type of the business looking to incorporate. In the United States, Corporations and Limited Liability Companies (LLCs) are the two main types of business entities, and require different documents to achieve that. In this article, we will learn the differences between articles of incorporation and organization, their components, the filing process, and why they’re necessary. Let’s get right into it! Articles of Incorporation: Definition The articles of incorporation - also known as a corporate charter, articles of association, or a certificate of incorporation - are legal documents filed to establish a company of a specific type as a business entity. In other words, they give the corporation its legal identity. In practical terms, for a corporation to open a bank account, issue stock or shares, operate within a state, and engage investors, it must first file articles of incorporation. In the United States, this is usually done with the Secretary of State or company registrar, depending on the state of incorporation. Delaware and Nevada are the most popular states for registering your corporation, because of their friendly regulations and minimal tax requirements. Articles of Incorporation vs. Organization Most people tend to confuse articles of incorporation with articles of organization, but they are not the same; now that we’ve defined the former, we’ll do the same for the latter. The articles of organization are filed at the point of creating an LLC. In terms of function and components, they are no different from articles of incorporation. However, the regulatory requirements are different and might be stricter, depending on the state and industry the business is in. These are the primary thing to research for prospective owners learning how to incorporate their business. The next step is filing your articles, so it’s time to learn how it works. Filing Articles of Incorporation The Required Documents The components of documents to be provided upon filing articles of incorporation vary by state, but many of them are the same everywhere. Most of these components will be on the face of the certificate of incorporation, and they include: The corporation’s name and address The name and address of the registered agent responsible for accepting legal documents on behalf of the corporation; some states may require a formal agreement of the agent’s acceptance of this responsibility. The number and type of authorized shares; more details on this can be found in the articles of incorporation and their bylaws. The type of corporate structure (e.g., profit, nonprofit, etc.) The names and addresses of the founding board members The names, signatures, and addresses of the persons handling incorporation; a corporation can have multiple incorporators who do not need to be directors or stockholders. If applicable, the lifespan of the corporation, as some corporations are made to exist for a limited time and carry out a particular function. The number and type of stocks the corporation can issue. Other components which are not required, but can be included, are: The limitation of directors’ liability Stockholder actions The assignment of authority to call stockholder meetings The purpose of incorporation, which may not need to be specific, depending on the state. The Filing Process The end goal of filing is to receive a certificate of incorporation. After preparing the documents, the incorporator should schedule an appointment with the designated filing agency of their state. Procedures differ between states, but generally begin with paying a filing fee after submitting the required paperwork. The process is completed upon acceptance of the paperwork and approval of the corporation’s registration. In most states, corporations must have both articles of incorporation and bylaws, even though bylaws are not to be filed. Bylaws only serve as internal documents setting out the rights and responsibilities of a corporation’s shareholders, directors, and other officials. Benefits of Incorporation Corporate Brand Identity Customers are more inclined to trust and do business with a brand when its corporate identity is established, as are investors. Banks are more likely to finance your venture if it’s an official business, and you’ll certainly look better in the strict due diligence checks on your business. Where no official or formal records are found, chances are that funding will disappear for lack of confidence in the safety of investing in you. Tax Advantages A corporation’s tax liability can be reduced depending on the state of incorporation. This tax reduction is often justified through operational costs like insurance, green energy investments, employee retirement benefits, production costs, employee wages, etc. Separation of Liability Filing your articles of incorporation separates the corporation's liabilities from those of its owners, in events of criminal activity, injury, or loss. The owners’ personal assets cannot be seized, auctioned, or sold if the business goes into debt. On the other hand, owners of unincorporated businesses are at risk of losing personal property in such situations. Protection of the Business Name Before an applicant is accepted, the state of incorporation will conduct a search to ensure that no other existing business or corporation has the same name. Applications for companies with an already taken business name won’t go through, because those names are protected - but only if their owners incorporated in time. Business owners also have the right to seek legal consequences for infringement of this protection. Perpetual Existence For businesses with no preset lifespan, the articles of incorporation guarantee longevity and perpetuated existence. This means that, in the event of withdrawal or death of one or all owners, the business remains in existence. By extension, a transfer of ownership is an option for incorporated entities. Unincorporated entities suffer a different fate and cease to exist in such situations.
By Vladana Donevski · June 30,2022

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