Business partners can be beneficial to small business owners in many ways. Besides sharing the workload, a business partner can connect a business owner with additional clients and bring new ideas to the table. At the same time, having a business partner can keep your business from growing if you and the other owners disagree. If you’d rather have a partner who plays a limited role in your company, it might be time to consider getting a silent partner.
Check out our investment calculator.
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.
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.
Related Article: Top 5 Tips for Picking the Right Business Structure
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.
Related Article: Is Angel Investing a Smart Way to Build Wealth?
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.
Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Photo credit: ©iStock.com/Manczurov, ©iStock.com/PeopleImages, ©iStock.com/andresr