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What does it mean to take on a silent partner?

On Behalf of | Aug 21, 2022 | Business Law |

A silent partner is typically someone who invests in a business and shares in the revenue or profits. If a company goes public, the silent partner may own shares of stock. Silent partners typically don’t play a role in the operational or decision-making aspects of the business. A silent partner is also a limited partner in that their liability is limited to the amount they’ve invested.

Some new entrepreneurs bring on family members as silent partners if they have money to help out in exchange (they hope) for some financial benefit eventually. Those who don’t have relatives with money to invest in their business may look for “angel investors” who believe in their vision and don’t mind investing money without having a say in how it’s run.  

How silent partners differ from other types of investors

Venture capitalists and other investors also provide money to start-ups they believe have a good chance of success. However, they typically do so on the condition that they will provide input on how to manage and grow the business. 

Unlike silent partners, who are typically called in only to mediate disputes or offer advice occasionally, venture capitalists generally expect to be involved in key meetings and have access to financial reports. 

Developing the silent partnership agreement

It’s crucial for the general partners to have an agreed-on understanding with their silent partners of what their role in the business will be. That should be detailed in their partnership agreement. That agreement, of course, will also outline things like how they share in profits and losses, under what circumstances the partnership can be ended and more.

If you are bringing in a silent partner, it’s crucial to ensure that you have a clear and mutual understanding of their role in the business and your obligations to them before drawing up the agreement. It’s also crucial to have your own legal guidance to protect your and your business’s interests.