A silent partner is an individual who provides capital to a business partnership. This person generally doesn’t engage in the day-to-day operations of the business, which is why the term is also called limited partner. However, the silent partner can profit from the company. But finding the right one for your business can be complicated.
You should work with a financial advisor who can guide you through this and other tasks associated with running your business.
The Silent Partner: A Definition
A silent partner (or a limited partner) is merely a business partner who offers entrepreneur financial assistance. 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. Consumers and clients often aren’t even aware that silent partners have ties to the companies they invest in.
While silent partners can step in and give advice as needed, they usually don’t have anything to do with managing the businesses they’re supporting financially. Their top priority is earning a return on their investment. Silent partners can dissuade their fellow partners from making drastic structural or financial changes. But they’re expected to sit back while the other partners focus on running their companies and on finding ways to reach their business goals.
Check out our investment calculator.
Silent Partnerships vs. General Partnerships
When a business is structured as a partnership, two or more partners split the company’s earnings and losses. All of the partners in a general partnership act as active business managers and have control over what happens to the business from day to day.
In a general partnership, there’s also the issue of unlimited liability. That means that each partner is equally responsible if the business falls apart and creditors can take possession of their assets (like their homes and cars) to cover any unpaid debts. Business debts can then affect their credit scores.
In a silent (or limited) partnership, there are active partners who decide how the business operates and silent partners who primarily exist to provide capital. The general partners within a silent partnership have unlimited liability, but silent partners only have limited liability.
Silent Partners and Liability
Both active partners and silent partners in a limited partnership are legally responsible for business losses. Even though a silent partner might have had nothing to do with why a business failed, he or she is still obligated to pay the price for their active partner’s mistakes.
Thanks to their limited liability, however, silent partners are not liable for company losses beyond the percentage that they invested. So if a silent partner has a 10% stake in a business, for example, he or she would only be accountable for 10% of the incurred losses and debts.
Also, because silent partners have limited liability, their personal assets are safe. If the business goes bankrupt or faces other financial difficulties, the creditors cannot seize the silent partner’s private property.
Should You Become a Silent Partner?
Becoming a silent partner could be a great way to earn passive income. After you’ve invested your funds and assets, you can take a back seat while someone else runs the show. Active partners often need to devote an extensive amount of time and energy to making sure that their businesses take off. But since they don’t have the same degree of responsibility or obligation to the companies they fund, silent partners have plenty of time to focus on other projects and ventures.
A silent partner role might not be right for you, however, if you’d rather be more hands on after investing your money in a business. Remaining behind the scenes and letting someone else call the shots might make you feel uncomfortable.
As with any kind of investment, you’ll be taking on some risk as a silent partner. There’s no guarantee that the business you’ve helped fund will succeed. If the business collapses, you could lose everything and since you won’t be involved in the day-to-day operations, you might not have the chance (or the authority) to stop a bad situation from getting worse.
Silent partners are passive business partners who typically don’t do more than act as investors. Because of their limited liability, their personal assets aren’t in jeopardy. But whatever they invest can be used to pay off company debts. If you’re thinking of bringing on a silent partner or you’re playing with the idea of becoming one, it’s best to fully understand what that entails before moving forward.
Tips on Investing in a Business
A financial advisor can give you valuable insight and guidance about running or investing in businesses. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Sometimes it makes sense to borrow money rather than look for a silent partner. Check out our free personal loan calculator.
Photo credit: ©iStock.com/Manczurov, ©iStock.com/PeopleImages, ©iStock.com/andresr