What is a 'Silent Partner'
A silent partner is an individual whose involvement in a partnership is limited to providing capital to the business. A silent partner is seldom involved in the partnership's daily operations and does not generally participate in management meetings. A silent partner is also known as a limited partner, since his liability is typically limited to the amount invested in the partnership.
BREAKING DOWN 'Silent Partner'Apart from providing capital, an effective silent partner can benefit the enterprise by giving guidance when solicited, providing business contacts to develop the business, and stepping in for mediation when a dispute arises between the other partners.
Regardless of such requests, it is considered a background role that cedes control to the general partner. This requires the silent partner to have full confidence in the general partners' ability to grow the business. The silent partner may also need to ensure that their management styles or corporate vision are compatible.
Creation of a Silent Partnership
As with other partnership agreements, a silent partnership generally calls for a formal agreement in writing. Prior to the formation of a silent partnership, the business must be registered as either a general partnership or a limited liability partnership per state regulations. All parties will be responsible for ensuring the business's financial obligations are met, including any general expenses or applicable taxes, except those that are exempt if the partnership is formed as part of a limited liability company (LLC).
A partnership agreement is then created, designating which parties are general partners or silent partners. This serves as an outline to which functions, both financial and operational, the general partner will perform as well as the financial obligations that are assumed by the silent partner. Additionally, it includes the earnings percentage due to each partner in regards to profits made by the business.
Silent Partners and Liability
Silent partners are liable for any losses up to their invested capital amount as well as any liability they have assumed as part of the creation of the business. Participating as a silent partner is a suitable form of investment for individuals who want to have a stake in a growing business without exposing themselves to unlimited liability.
Silent Partners vs. Secret Partners
While silent partners do not participate in certain business activities, their identities can still be known to others within and outside of the business. In contrast, a secret partner does participate in business operations, but his identity is generally kept secret. This allows the secret partner to participate while maintaining a level of anonymity.