Silent partners provide capital to businesses but are not involved in the day-to-day operations and management of the company — hence the word “silent.”
While getting an injection of capital without having to cede any control over your business may sound like a win-win, there are some downsides to entering a silent partnership agreement. Here’s a closer look at what a silent business partner is, how these partnership deals are typically structured, and their pros and cons.
Key Points
• Silent partners provide capital without daily operational involvement in a business, earning equity interest.
• Responsibilities may include business advice, client provision, and dispute mediation, depending on the agreement.
• Benefits include passive income and limited liability, so the partner is protected from business debts.
• Silent partners have no management say, but can review financials and suggest partnership changes.
• Legal agreement is needed for roles and profit-sharing details.
What Is a Silent Partner?
By definition, a silent partner is someone who provides money to fund a business but is not involved in the management of that business. In exchange for making a contribution of cash or assets, the silent partner gets a certain amount of equity interest in the company.
In order to bring in a silent partner, a business must be registered as a general partnership, limited liability partnership (LLP), or a limited liability company (LLC).
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Understanding Silent Partners
While a silent partner doesn’t exert control over the business, they still share in the company’s profits and losses. The details about how profits and losses will be distributed to the silent partner is typically outlined in the silent partnership agreement, or contract.
Generally, profits and losses are divided based on the percentage of the business each partner (whether silent or managing) owns. For example, a partner who owns 20% of the company gets to claim 20% of the profits, or losses.
Typically, a silent partner’s liability is limited to the amount invested in the partnership. In the event of bankruptcy or other financial problems, a silent partner could lose their investment but generally nothing more.
What Do Silent Partners Do?
The level of involvement for a silent partner can vary and will depend on the agreement between the partners. Some silent partners may not want any involvement, while others might want to get updates on the progress of the business.
In addition to making a capital investment, responsibilities of a silent partner may include offering relevant business advice when asked, providing clients to grow the business, and mediating disputes among other partners.
How Do Silent Partners Benefit?
Silent partners benefit by generating passive income on their investment. In other words, they are able to earn income from the business’s success without having to contribute time or labor.
Another plus is that they are often immune from legal actions taken against the firm and its management. Although state regulations can vary regarding silent partners, these partners are commonly protected from unlimited personal liability for any debts or obligations of the partnership business. This can be especially important for silent partners investing in startup companies, since it allows them to get the potential benefits without the risks.
Pros and Cons of Silent Partners
There are both benefits and drawbacks to bringing in a silent partner. On the plus side, a silent partner brings in extra funds you can use to manage the business and improve operations. And, this capital comes without having to cede any control over your company.
Though you don’t need to consult a silent partner before making any business decisions, they may have industry knowledge that can be beneficial to your business. The silent partner’s name and business contacts could also help open doors to opportunities that the company founders wouldn’t have on their own.
On the downside, bringing on a partner means diluting equity in your company and parting with a slice of the profits. Though having a partner who stays out of business decisions might sound appealing, you might actually benefit from having an experienced partner participate. In some cases, a silent partner may not have any relevant business experience or contacts to bring to the table, or may not be invested enough in the company to provide helpful advice or feedback when needed.
Finally, if your silent partner agreement isn’t clear and/or the silent partner doesn’t understand their inability to influence decisions, misunderstandings and disputes could arise.
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Silent Partners vs General Partners
Silent partners provide capital to a business with an expectation of profit, but they are not directly involved in the management of the business. General partners, on the other hand, are designated as the managers of a business and can also contribute to the overall capital pool.
Another key difference between silent and general partners is liability. A silent partner’s liability is typically limited to the amount invested in the partnership. They can potentially lose their entire investment, but generally can’t lose more than that. By contrast, general partners have unlimited legal liability of the partnership, and are generally personally liable for the debts and financial obligations of the business. So if a business loan defaulted, it would likely not be the silent partner’s issue.
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Creating a Silent Partnership
To create a silent partnership, you’ll need to register as a general partnership, LLP, or LLC. You’ll also need to create a silent partner agreement. This is a legally binding document that designates which parties are general partners or silent partners and outlines which functions, both financial and operational, each partner will perform. It will also detail the earnings percentage due to each partner in regard to business profits.
Alternatives to Silent Partners for Funding a Business
If you’re looking for funding but not interested in bringing in a silent partner, here are some alternatives to consider.
Small Business Loans
There are many types of small business loans — including term loans, equipment financing, and lines of credit — available from banks, credit unions, and online lenders.
Banks and Small Business Administration (SBA) lenders tend to offer the best rates and terms but have relatively strict qualification requirements. Online lenders are generally more flexible (and faster to fund) but their small business loan rates are generally higher.
Angel Investors
Angel investors are wealthy individuals who invest their own capital into startup companies during early stages of development, receiving an ownership stake in return. Often, these investors are accomplished entrepreneurs themselves, and able to bring expertise, guidance, and valuable business contacts to the startup company in addition to their capital investment.
Angel investors are generally looking for their investment to grow and pay off significantly down the road. So, unlike a silent partner, they may keep close tabs on the startup’s affairs and become involved in decision-making to ensure their invested capital is used appropriately.
Venture Capital
A venture capitalist is an individual or group that invests money into startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and other financial institutions.
Venture capitalists typically get involved in the fundraising process after angel investors. After a certain period, they may fully buy the company or, in the event of an initial public offering (IPO), a large number of its shares.
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The Takeaway
Traditional business partners provide funding and influence day-to-day management decisions. Silent business partners provide funding but typically have no say in business decisions. While not active in daily management, a silent partner shares in the profits or losses of a business, and may serve an advisory role.
If you’re thinking about bringing in a silent partner, It’s important to have a silent partnership contract that spells out all the terms of the deal to avoid any legal disputes and misunderstandings.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How do silent partners make money?
How do silent partners make money?
Silent partners get paid according to their contribution and equity in a business. For example if a silent partner invests $100,000 in a business that is worth $1 million, they have 10% ownership of the business and will receive 10% of any future profits.
Do silent partners have certain rights over how the business is run?
Typically, no. A silent partner generally doesn’t have any say over how a business is run. Their rights usually include the right to earn investment returns (proportionate to their initial investment), review the company’s key financial statements, and provide input on changes made to the partnership agreement.
What are silent partners responsible for?
What silent partners are responsible for will depend on the agreement between the partners. In some cases, they are only responsible for providing capital. In others, their responsibilities might also include offering business advice, providing clients to grow the business, and mediating disputes amongst other partners.
Photo credit: iStock/LaylaBird
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