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. Silent Bank Run

    A silent bank run is a situation in which a bank's depositors ...
  2. Partnership

    A partnership is a formal arrangement in which two or more parties ...
  3. Schedule K-1

    A Schedule K-1 is a document used to describe incomes, losses ...
  4. Joint Liability

    Joint liability denotes the obligation of two or more partners ...
  5. Trading Partner Agreement

    A trading partner agreement is an agreement drawn up by two parties ...
  6. Uniform Partnership Act (UPA)

    The Uniform Partnership Act (UPA) provides governance for business ...
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

    Find out how limited partnerships and master limited partnerships (MLPs) differ in their types of business ownership and tax treatment.
  3. Insights

    Limited Liability Partnership (LLP): The Basics

    Limited liability partnerships (LLPs) are a flexible, legal and tax entity that allows partners to benefit from economies of scale while also reducing their liability.
  4. Small Business

    How to Create a Business Succession Plan

    By creating a succession plan, you'll help make sure the business you built continues to thrive long after you've left the helm as the owner.
  5. 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.
  6. 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.
  7. Managing Wealth

    Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  8. Investing

    Learn The Lingo Of Private Equity Investing

    Because of the non-public nature of private equity, it can be difficult to the learn the lingo. We break it down here.
  9. Investing

    Energy Transfer Buys 65% PennTex Stake (ETP, ETE)

    Energy Transfer Partners acquired 65% of the limited partnership interests in PennTex Midstream Partners for $640 million in cash and stock.
RELATED FAQS
  1. 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 >>
  2. Limited, General vs Joint Venture Partnership

    Learn the differences between general partnerships, limited liability partnerships, limited partnerships and joint venture ... Read Answer >>
  3. 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 >>
  4. How are business decisions made in a partnership?

    Understand how partners in a business can tackle decision making, and learn the options available for partnerships to develop ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center