Business Partner vs. Investor: Everything You Need to Know
Business partner vs. investor — what's the difference? In most cases, investors and partners play two very different and distinct roles within an organization.
- How Is a Silent Partner Different From an Investor?
2. Three Ways to Bring on a Silent Partner
3. Investor Pros and Cons
4. Partner Pros and Cons
Business partner vs. investor — what's the difference? In most cases, investors and partners play two very different and distinct roles within an organization. A business partner is an individual that plays a significant role in owning, managing, and/or creating a company. An investor is a person or organization that provides capital to a business with the expectation of a future financial return.
How Is a Silent Partner Different From an Investor?
An investor may assist in the daily operations and management of a business. A silent partner will usually invest money into the business but will not want or need to get involved in the daily operations. Small business owners looking for help and advice will prefer the assistance of an investor as opposed to a silent partner.
If you have a plan or strategy and are merely looking for an infusion of capital then a silent partner may be a good choice. A silent partner will be able to contribute capital but will probably not look to contribute feedback as to how the business should be run. Silent partners will typically trust in the active investors and existing management to make the best decisions for the company. Active investors are used to lead funding and provide expertise to contribute in the growth of the business.
Three Ways to Bring on a Silent Partner
There are three main ways to bring a silent partner into your business without involving the Securities and Exchange Commission (SEC):
- Bring them on as a business partner: Bringing a silent partner on as a business partner has both advantages and disadvantages.
- Registering with the SEC may be avoided
- A business partner may share in the business profits
- You'll be able to save money in legal fees
- A business partner can contribute advice and help
- The business partner now has decision-making and voting rights
- All concerns of the silent partner must now be addressed and they must be treated as a business partner
- The silent partner is no longer a lender, instead they have an ownership interest in the business
- The lender receives a fixed rate of return
- Decreased risk for the lender
- No need to acknowledge feedback or complaints from a lender because they have no ownership interest in the business
- May be able to avoid the SEC as long as the lender is willing to accept a fixed interest rate
- The lender isn't able to share in the profits
- A silent partner may accidentally become a business partner if a payment is made to them through a back-door payment
- A silent partner may become a target of your other creditors or lenders if there's a belief that they're transitioned from a silent partner to a business partner
- Many investors are looking for both a fixed payment on the capital that they're lending and equity in the organization. An investor classification will need to be documented with the SEC. The following steps should be taken when transitioning a silent partner to an investor:
- Seek advice from an experienced securities attorney
- File Form D with the SEC
- Make sure to file the appropriate paperwork with each state in which you'll be selling securities
Investor Pros and Cons
The pros to bringing on an investor include:
- The investor loan is considered a deductible business expense
- You won't have to share in managerial control
- Equity capital isn't a loan and therefore doesn't have to be repaid
The cons to bringing on an investor include:
- As opposed to an investment, a loan must be repaid
- Defaulting on a loan may lead to the loss of control over the business
- Investors expect to have some control over the business
Partner Pros and Cons
The pros to bringing on a business partner include:
- It's easier to borrow capital when multiple owners are involved
- Partners share responsibilities, tasks, and duties
- In a limited partnership, the investor's responsibilities are limited by the agreement, therefore capital is raised without losing control in the business
- Partners-contributed capital is only repaid when a profit is generated
The cons to bringing on a business partner include:
- You may become liable for any claims or debts filed against your partner
- A business partner is able to enter into legal agreements without your knowledge
- Business partners have the right to say how a business should be run