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Codifying the role of a silent partner in your business

On Behalf of | Sep 13, 2022 | Small Business

Most people have heard the term “silent partner.” Fewer are clear on what role a silent partner actually plays in a business.

The specific role is decided on by the partners themselves and defined in the partnership agreement. However, it’s important to understand the general roles and expectations for a silent partner and the value the right one can bring to your business.

Generally, a silent partner is someone who invests in a business in return for a share of the revenue. Unlike most venture capitalists, however, a silent partner typically doesn’t get involved in the operations of the business or decisions made by the other partners and management team.

A silent partner is usually a limited partner. Their liability extends only to the amount they’ve invested.

Why do people become silent partners?

Often, they’re simply people with some money to invest in what they believe will be a profitable business venture. Sometimes, it’s a family member. It could simply be an investor who thinks the partners’ business idea shows promise and that they have what it takes to make a success of it. However, they have no interest in advising them or finding solutions to problems. They may be retired or have their own business ventures.

Why have a silent partner?

When entrepreneurs have a business idea they don’t have the money to fund and can’t get a large enough loan for their needs, a silent partner can solve their funding issue. While a venture capital firm can be highly valuable in providing funds and lending their experience and knowledge to the business, not all entrepreneurs want the involvement that venture capitalists expect to have. Further, it can me more difficult to get a venture capital firm to invest in your company than a silent partner.

What should their partnership agreement include?

Among the things you’ll need to address in their partnership agreement are:

  • Their role in the business
  • How they’ll be compensated
  • Their liability
  • How they can leave the business or be bought out

Drawing up a partnership agreement for a silent partner is different than one for a traditional partner. You can assume they’ll have legal guidance to negotiate and review the agreement, so it’s crucial that you do as well.