Enlisting the assistance of a silent business partner could appear to be a win-win situation for small business startups. A partner who will contribute money without seeking power can seem too good to be true.
Moreover, given that 82 percent of startups fail due to cash flow issues, seeking a silent partner could be a critical step in your company’s survival. Let’s see how one can get a silent business partner, draft an agreement and the rights of the partner in this article.
What is a Silent Partner?
Silent partners invest in businesses without getting active in the day-to-day activities. They put money into your business, but they don’t attend meetings or make decisions. They are not in charge of finances or strategy. Hence, they delegate the day-to-day operations of your company to the active partners, and they have faith in your ability to handle it well.
In short, silent partners contribute financial resources in return for a stake in your business. Silent partners, also known as limited partners, have limited financial interest and rights in the business. They can only lose the amount of funding they contributed.
And, while it can seem to be a no-lose scenario, it is critical to fully comprehend this form of relationship before jumping in headfirst.
How does a Silent Partner Function?
Generally, people recruit silent partners to contribute funds to the company without being active in day-to-day activities or big decisions. Since this form of collaboration is so beneficial to both sides, it’s critical to choose an investor who your team trusts — and who trusts you.
Finding your silent business partner is the first move, and we’ll go over this in more detail below). Next, draft a silent business partner agreement that both parties are happy with. This agreement is a must-have guide that clearly outlines the duties, obligations, and goals for your company and silent partner.
Once you’ve resolved the legalities of your partnership, it’s up to you and your silent partner if you work together (or don’t work together). Silent partners typically make an investment and then step back, allowing you and your team to handle all operations and decisions.
General Partners vs. Silent Partners
Silent partners provide financial support and collaboration to help the company finance and expand, while general partners are individuals or groups of people who have influence over a company’s management, work, and spending.
Unlike general partners, silent partners are not interested in day-to-day business activities. Since general partners may make decisions on the company’s behalf, they are less financially secure. Also, they may be directly liable for the company’s debts and liabilities.
Secret Partners vs. Silent Partners
Secret partners, as opposed to silent partners, may have a say in the day-to-day operations of the company without the public being aware of the partnership. Secret partners, for example, may be concerned that past company failures could tarnish the new venture’s image. As a consequence, they will prefer to keep their participation private.
People often use the words interchangeably, and a silent partner can also be a hidden partner. To ensure the safety of all parties involved, make it a point to spell out precisely how your relationship will be established.
Let’s talk about how to navigate a silent business partner agreement while we’re on the topic.
Silent Business Partner Agreement
You must clearly establish the terms of your silent relationship to keep your entire operation running smoothly.
Most states require relationships to be formalized by legal agreements that clearly define each partner’s position in the organization. These arrangements should clearly describe each partner’s obligations, rights, and liabilities.
Consider enlisting the assistance of an attorney to assist you in developing the collaboration option that is best for your company and all of its stakeholders. While verbal agreements can be legally binding, it is preferable to record anything in writing. This is to ensure that there’s no space for disagreement or misunderstanding over what each party agreed to do.
Enlist the assistance of a lawyer to protect the rights of all parties concerned. Securities experts will assist you in properly structuring your company and protecting yourself from breaches and fines imposed by the Securities and Exchange Commission.
The internet is littered with cautionary tales of failed silent partnerships. Many of the issues are stemming from individuals who failed to legally defend their own interests. And if you’re confident you’ll never be involved in a court battle, remember the experiences of those who came before you who felt the same way.
Silent Business Partner’s Rights
A silent business partner has the right to gain investment gains (proportionate to his or her initial investment) when participating in and assuming limited liability. In addition, silent business partners have the right to review company financial statements. They can also provide feedback on improvements to the relationship agreement.
Silent business partners have many advantages and rights, but it also has financial stakes and risks. Let’s go over them now.
Silent Business Partners’ Financial Interests
Silent partners also receive shares in the business as well as a share of sales or benefit in exchange for their initial investment. The amount of passive income they earn will be determined by the success of your company and the agreement you establish. In most cases, your silent partner will receive a lower percentage of the gains than your active partner.
In terms of debts and losses, all partners in a business venture are jointly and severally liable for the company’s finances. However, due to limited liability, silent business partners are generally only liable for the percentage of their initial investment in the business. A partner with a 15% stake in the company, for example, is only liable for 15% of the company’s losses.
To avoid legal disputes and misunderstandings, the specifics of the partnership must be decided at the outset of the relationship and in the partnership agreement.
For tax purposes, both the owner and the partner must acknowledge the investment, with the silent partner liable for any profits made on the investment.
Dangers of Silent Partners
Since silent partners aren’t interested in the company’s day-to-day activities, confidence is critical to its success.
Silent partners have no official say in the company’s sustainability or strategic decisions. They have no say about matters such as legal enforcement, environmental concerns, or accounting standards. Hence, they have no say about how assets are handled. This means that if your company engages in incorrect or unethical activities, the investment will suffer.
Silent partners not only have less responsibility for your business, but they also have less liability in it. With the proper legal paperwork in place, a silent partner will only be minimally liable for any damages incurred by the company. Thus, it makes it a more secure investment than a direct, or general, partnership.
However, since silent partners are shielded from unlimited liability, they typically have no claim on company assets in the event of dissolution until all other obligations are met.
How to Locate Silent Business Partners
Since silent partners are concerned with the return on their investment. So, you must create a business plan that includes sales estimates to enlist their participation. You must efficiently illustrate how your business can generate positive cash flow in a realistic time frame.
Begin with friends and family who know you well and believe in your abilities. Consider your initial efforts to be a friends-and-family round in which you solicit varying quantities of investment from those closest to you.
Friends and family are more likely to withhold payments if your earnings do not initially meet expectations. They are less likely to sue you if your business fails catastrophically. This initial effort may also assist you in gaining experience and faith in engaging with others outside of your inner circle.
Next, search for angel investors, who usually finance ventures in their early stages of growth. There are frequently affluent individuals who are open to silent collaborations. Similarly, venture capitalists aim to invest in companies that have the potential to have a high return on investment.
There are also whole online directories dedicated to assisting you in identifying potential investors.
Finally, think of other companies whose operations could profit from your efforts. Consider if local wedding planners or caterers may be interested in investing in your event space, for example. Their investment would allow them to diversify their finances and invest in a company that will support their own business.
How to Make Investors Want to Come to You
Investors continue to find companies with bright prospects and plenty of space for expansion. You will increase your chances of finding those investors by establishing realistic, quantifiable figures that outline your business strategy and address any questions your potential investors might have.
Create a pitch that includes your idea, examples of your product or service, and details about your current competition. Include survey reports, marketing plans, main staff bios, and budget details as well.
Outline how much money you’re looking for and how you want to spend it. Describe what you’re giving your investors in return for their assistance. Also, where necessary, highlight any media attention your company has received as well as any significant investments you’ve secured.
How can a silent partner protect their investment?
An investment from a silent partner can be protected from various risks by conducting a thorough analysis of the company’s financials and insurance coverage.
Can a silent partner convert to an active partner?
Yes, a silent partner can convert to an active partner if both they and the business agree to do so.
How is a silent partnership dissolved?
A silent partnership can be dissolved if either the silent partner or the business decides to end the partnership, or if the business is sold or otherwise dissolved.
Can a silent partnership agreement be changed?
Yes, a silent partnership agreement can be changed if both the silent partner and the business agree to the changes.
What is the process for becoming a silent partner?
The process for becoming a silent partner typically involves conducting due diligence on the business, negotiating the terms of the partnership agreement, and providing the agreed-upon capital to the business.
What is the typical return on investment for a silent partner?
The return on investment for a silent partner depends on the performance of the business. Silent partners typically receive a share of the profits, but there is no guaranteed return.
Summary
Effective collaborations will put people with complementary skills and diverse expertise together for the good of a growing enterprise. Partnerships, on the other hand, will increase the risk of conflict due to the additional personalities involved.
You can confidently enter an arrangement that benefits everyone involved in the deal if you understand the risks and rewards of a silent business relationship.
To learn more, check out our list of 2021 small business opportunities.
Silent Partner FAQs
Does a silent partner have ownership?
Silent partners are brought on to contribute funds to your business without getting involved in day-to-day operations or major decisions. … The silent partner provides their contribution. In return, they secure equity or partial ownership of your business (reflected in a percentage, e.g. 20% of your business).
How does a silent partner file taxes?
Income from the partnership earned by silent partners is not subject to self-employment taxes because silent partners are not considered employees. General partners must pay self-employment taxes because they work for the business. Forming a limited partnership (LP) can limit the liability of silent partners.
What percentage should a silent partner get?
Typical Percentage of Profit of a Silent Partner
For instance, if a silent partner invests $100,000 in a company that needs $1,000,000 to operate, then he is considered a 10 percent partner in the company and might receive 10 percent of the company’s annual net profits.
What are silent partners liable for?
Silent partners are liable for any losses up to their invested capital amount, as well as any liability they have assumed as part of the creation of the business.
