A Silent Partner: What You Need to Know About This Business Relationship
By Vladana Donevski
June 19, 2023
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:
- Silent partners can provide much-needed financial support when you’re trying to get your business off the ground.
- They can also have a valuable advisory role.
- Having a silent partner onboard can also be helpful in building credibility and attracting other investors.
- 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
- The silent partner may not be as invested in the success of the business as the active partner.
- Silent partners are often not familiar with all aspects of the business, which can limit their ability to provide useful input.
- 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.