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If you’re in need of capital to help launch or grow your business, you might be thinking about taking on a partner. However, if you don’t want to share the strategic decision-making with another partner, you might want to have a silent partner who provides capital…but not opinions.Here’s a look at what a silent partner is as well as what you need to know to create a silent partner agreement for your business.
What Are Silent Partners?
Silent partners are investors in a general partnership, limited liability partnership (LLP), or a limited liability company (LLC), who do not want to be involved in the management of the company. This is in contrast to general partners, who both invest and manage day-to-day operations.The level of involvement for a silent partner can vary depending on the agreement between the partners. Some silent partners may want to be kept in the loop on the progress of the business, while others may not want to be involved at all.Silent partners are also known as limited partners, since their liability is typically limited to the amount invested in the partnership. They can potentially lose their entire investment — but typically no more. General partners, on the other hand, have unlimited legal liability for the partnership, and are generally personally liable for the debts and financial obligations of the business.Even though a silent partner doesn’t have control over the business, they can often offer valuable insights, expertise, and business connections. However, silent partners aren’t generally under any obligation to offer advice and support. Their role is typically limited to staying in the background, providing capital when necessary, and sharing in the profits when they start flowing in.Recommended: What Are Business Partnership Loans
How Do Silent Partner Agreements Work?
Whether you are setting up a new partnership or bringing in a silent partner into an existing business, you’ll want to draw up a silent partnership agreement that outlines everyone's interests. A silent partner agreement, or contact, is a legally binding document that designates which parties are general partners or silent partners. In addition, the agreement will outline which functions, both financial and operational, the general partner will perform, along with the financial obligations that are assumed by the silent partner. It will also include the earnings percentage due to each partner in regard to business profits.
Pros and Cons of Silent Partners
Before taking on a silent partner, it can be a good idea to carefully weigh the benefits and drawbacks.
Pros
Cons
Provides an infusion of cash
Silent partner will have partial equity
No loss of control over your business
Silent partner may not bring any helpful experience or insights to the table
Silent partner may offer valuable insights and business connections
Without a clear agreement, a silent partner may expect to have more participation
Pros of Silent Partners
Silent partners can provide much-needed financial support to help a business venture get off the ground or finance expansion. And, while a silent partner doesn’t need to be consulted on day-to-day decisions, they may have industry knowledge that can be helpful to your business. A silent partner’s name and business contacts may also help open doors to opportunities that the company founders wouldn’t have on their own.
Cons of Silent Partners
Bringing on a partner means diluting equity in your company and having to share the profits. And, while having a partner who stays out of business decisions might sound good, you might actually benefit from having an experienced partner participate. In some cases, a silent partner may not have any relevant business experience or contacts to bring to the table, or may not be invested enough in the company to provide helpful advice or feedback when needed.If your silent partner agreement isn’t clear and/or the silent partner doesn’t understand their inability to influence decisions, misunderstandings could arise.
Common Silent Partner Agreement Terms
Generally, the more details your silent partner agreement includes, the better. These agreements typically include:
The dollar amount the silent partner invested
How much the silent partner shares in gains and losses
Limits on the silent partner's liability
If the silent partner is able to invest more (and, if so, how much more)
Details on when and how the silent partner can withdraw funds
A statement explaining that the silent partner won't receive a salary or wages
A statement that the silent partner must remain silent on daily business operations
Details of how the partnership can be ended
What Are the Rights of a Silent Partner?
Generally, a silent partner’s business rights include the right to earn investment returns (proportionate to their initial investment) with limited involvement and liability. Silent partners also typically have the right to review the company’s key financial statements and provide input on changes made to the partnership agreement.
3 Things to Include in a Silent Partner Contract
You may be able to create your silent partner agreement from scratch using a document. Or, you might want to use an online silent partner agreement template. Either way, here is some key information you’ll want to include when drawing up your contract.
1. Basic Partnership Information
Your agreement should include details about the partnership, including the names of all partners, the business name, where the business is located, and the purpose of the business.
2. Percentage of Ownership
The silent partner agreement should clearly outline the percentage of equity that each partner owns and the earnings percentage due to each partner in regard to business profits.
3. Terms of the Partnership
You’ll also want to include the exact terms of the partnership, including which functions each partner will perform. It’s also a good idea to include terms for buying out the silent partner. You might welcome the capital provided by a silent partner when launching your business. However, once your business is successful, you may want to buy out the silent partner rather than share profits long-term.
Alternatives to Silent Partners to Finance Your Business
Not everyone wants to bring on a partner, silent or otherwise. Here are some other ways to raise capital for your business.
Business Loans
There are many types of business loans available from banks, credit unions, and online lenders. With a traditional term business loan, you receive a lump sum of capital upfront, then pay it back, plus interest, with regular payments over the term of the loan. Rates for small business loans vary depending on the lender, type of loan, and your company’s qualifications. Banks and lenders affiliated with the Small Business Administration (SBA) tend to offer the best rates and terms but have fairly strict qualification requirements. Online lenders tend to be more flexible (and are faster to fund loans) but rates are generally higher and loan terms are typically shorter.Recommended: Applying for and Getting a Small Business Loan
Business Grants
There are a variety of government, nonprofit, and private entities that offer grants for small businesses. You may be able to qualify for a grant if your startup supports a specific government initiative, your ownership meets certain qualifications (such as women, veterans, or minorities), or you will be doing business in an underserved community. Unlike loans, grants do not need to be paid back. However, competition for this type of funding tends to be stiff.
Angel Investors
Angel investors are wealthy individuals who offer promising startup companies funding in exchange for a piece of the business, usually in the form of equity. Typically, angel investors get involved in the early (or “seed”) funding rounds. However, some will come in after a company has already received an initial round of funding from the founders/partners, friends and family of the founders, or the bank.
Discover Business Loan Rates
Wherever you are on your business journey, there may be a loan available to help you take it to the next level. If you’re interested in exploring your options (without making any commitment), Lantern by SoFi can help. With our online loan comparison tool, you can access offers from small business lenders matched to your needs and qualifications with one short application.
Frequently Asked Questions
What are silent partnership agreements?
What percentage of a business does a silent partner typically get?
Are silent partners liable in case of bankruptcy or other problems?
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
