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.

RELATED TERMS
  1. Active Partner

    An invested person who is involved in the daily operations of ...
  2. General Partner

    Owners of a partnership who have unlimited liability. A general ...
  3. Limited Partner

    A partner in a partnership whose liability is limited to the ...
  4. Limited Partnership - LP

    Two or more partners united to conduct a business jointly, and ...
  5. Partnership

    A business organization in which two or more individuals manage ...
  6. Schedule K-1

    A tax document used to report the incomes, losses and dividends ...
Related Articles
  1. Taxes

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  2. Small Business

    MLPs and Limited Partnerships: How They Differ

    Limited partnerships and master limited partnerships have one difference that makes all the difference.
  3. Insights

    Limited Liability Partnership (LLP): The Basics

    LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.
  4. Small Business

    What is a Partnership?

    A partnership is an organization where two or more owners operate a business.
  5. Small Business

    How To Create A Business Succession Plan

    Make sure the business you built continues to thrive long after you've left the helm.
  6. Investing

    What is Carried Interest?

    Carried interest is the percentage of a private equity or a hedge fund’s profits that its general partners receive as compensation.
  7. Financial Advisor

    Diversify with These Four Alternative Assets

    In times of market volatility, investors add alternative assets to their portfolios--highly illiquid, but profitable investments like art, land or precious metals.
  8. Small Business

    What are Limited Partnerships?

    A limited partnership involves two or more partners conducting a business, but one is only liable for his capital investment. They are also called silent partnerships or limited liability partnerships.
  9. Financial Advisor

    Partners Group: Investment Manager Highlight (PGHN)

    Get an inside look at some of the key executives and the investment approach of the global private equity investment firm Partners Group.
  10. Personal Finance

    Financial Infidelity: Are YOU A Cheater?

    These sneaky financial moves could erode your finances - and your relationship.
RELATED FAQS
  1. What is the difference between a silent partner and a general partner?

    Understand the difference between a person designated as a silent partner and a general partner under the partnership business ... Read Answer >>
  2. What are the liabilities of a silent partner?

    Understand the position of a silent partner in a business, specifically how the liability of a silent partner is limited ... Read Answer >>
  3. What's the difference between limited liability partnership and general partnership?

    Learn the differences between general partnerships and limited liability partnerships; each type has unique traits, benefits ... Read Answer >>
  4. Which terms should be included in a partnership agreement?

    Understand what specific terms should be included in a business partnership agreement and how each affects the partners in ... Read Answer >>
  5. Can I buy insurance to reduce unlimited liability in a partnership?

    Find out why it is important to safeguard your general partnership in the even that one member becomes disabled, dismembered ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center