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Understanding the role of a silent partner in your business

On Behalf of | May 23, 2022 | Business Formation & Planning

Most everyone has heard the term “silent partner.” However, it’s important to understand what their role is in a business and how that role needs to be detailed in a partnership agreement.

Basically, a silent partner is a person whose role is to invest capital in the business but largely stay out of the management and operations of that business and let the general partners run it.

If you and your partners aren’t able to come up with the capital you need to start your business on your own, you might want to seek out a silent partner. Typically, the people who serve as silent partners believe in entrepreneurs’ vision and goals enough to invest in their company. However, they don’t want to lose too much if the business fails. That’s why they’re sometimes known as “limited partners.” Their liability is limited to their investment.

How silent partners differ from venture capitalists

A silent partner might sound a lot like a venture capitalist. Both provide capital to the business with the goal of making money on their investment. However, venture capitalists are typically more involved in providing advice and direction to the company’s owners based on their experience and knowledge.

Silent partners can take a more active role in a business if they’re asked to do so. Many have experience as well as contacts in the industry that can be beneficial. Sometimes, general partners in a business will ask a silent partner to mediate a dispute between them.

Codifying the silent partner’s role in a partnership agreement

It’s crucial to determine whether you’ll have a silent partner before you register the business. It’s also necessary to codify the silent partner’s role in a partnership agreement. This can address things like how they’ll earn income from the business, their role (if any) in the direction and operations of the business, the terms under which a silent partner can be bought out or otherwise leave the partnership.

If you are considering bringing in a silent partner, it’s crucial to be sure that you’re on the same page regarding their role (or lack of) in the company and other mutual expectations. Drawing up a detailed partnership agreement is essential to making the partnership work for everyone involved – and the business.