How to Become a Silent Partner in a Business
If you want to be a silent partner in a business, you only need to invest money in the business, while staying uninvolved in management activities.3 min read
How to become a silent partner in a business? If you want to be a silent partner in a business, you only need to invest money in the business, while staying uninvolved in management activities. Typically, your name will be in the partnership agreement, but you will have no say in the business's operation.
What is a Silent Business Partner?
A silent business partner is someone who contributes financially to a business but does not participate in running the business. Getting a big return on their investment is the primary motivation of silent business partners. Essentially, they are looking for the potential profits of owning a business, but they don't want to actually have to manage the company.
It's easy to assume that a silent partner's only responsibility is to give you the money you need to launch your business, but silent partners can actually help you with several other business tasks:
- Providing additional capital if your business is low on funds.
- Fronting the collateral needed for a loan.
- Making connections that can help grow your business.
Difference Between Silent Partners and Silent Investors
In some cases, silent partners are different than silent investors. For instance, a silent partner is often the partial owner of the business, whereas a silent investor simply provides capital but does not own any part of the business.
Silent investors usually have much more in common with angel investors than they do silent partners. A silent investor, like an angel investor, provides money to the business but doesn't have any input in the management of the business and is not responsible for the debts of the company. Silent partners, on the other hand, are full business partners, even if they don't actually run any part of the business. A silent partner is just as responsible for company debts as normal partners.
Family and friends are typically the first people to be asked for money when someone decides to open a business. Because the financing you can get from your personal acquaintances will be likely limited, you will need to find other sources of financing, such as bank loans. If you still need capital for your business, then you should consider looking for a silent partner.
A silent partner can help to support your business endeavor but won't interfere with how you run your business. Silent partners can also connect you with useful resources such as vendors and contractors.
If you want to work with a silent partner or investor, there are several steps you need to complete to develop a successful relationship:
- Discuss Expectations: You should spend some time talking with your silent partner or investor about what you each expect out of the relationship. Clarifying expectations at the beginning of the relationship will prevent future disagreements.
- Write a Contract: You should formalize your relationship with your partner or investor with a legal contract. With a contract, both parties will have access to legal remedies if the relationship encounters problems.
- Talk About Risks: Starting a business is inherently risky, so your partner should be aware of the fact that your business can fail, and if it does, they won't see any return for their investment.
Becoming a Silent Partner
You can become a silent partner by entering into a limited partnership agreement with another person. The other person is the general partner, and they will be responsible for managing the business on a day-to-day business. You will be the silent, or limited, partner and your only duty will be contributing to the business financially.
If you want to form a limited partnership, you need a written partnership agreement, and all partners should agree to the terms of the contract.
You will need to formally register your limited partnership with both the county clerk where your business is located and your Secretary of State. All partners, even silent partners, can be held liable for the debts of the business unless you form a limited liability partnership (LLP). With an LLP, only general partners are responsible for business debts.
After registering your partnership, you should apply for an Employer Identification Number (EIN). This number will allow you to pay your business taxes and can also help you open a business bank account for your partnership.