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What does it mean to have a silent partner?

On Behalf of | Jan 17, 2023 | Business & Commercial Law |

Most people have heard the term “silent partner,” but fewer know what on actually is. It may even seem a bit nefarious – like someone having an influence on a business or helping keep it going financially without any public awareness of their involvement.

In actuality, a silent partner can be whatever everyone involved agrees to and what is detailed in their partnership agreement. Generally, a silent partner invests in a business in exchange for a share of the profits. However, they typically don’t participate in deciding the direction of the business or in the day-to-day operations, as opposed to the general partners. Depending on what kind of involvement is negotiated and codified, they may be asked for input and help beyond providing capital if they understand the industry the business is in.

Silent partners are also known as limited partners

That’s a common title you see for someone who is essentially a silent partner. A silent, or limited, partner can be someone who believes in the general partners and their vision for the business enough to invest in it and let them run it as they choose while they spend their days relaxing at their home in Sedona or hitting the links in Tucson – or running their own business.

Because their partnership is limited, so is their financial risk. If things go bad, typically, the most they can lose is their investment.

Silent partners play a different role than venture capitalists

Often, new or expanding businesses look for a venture capital firm to give them the capital they need as well as professional guidance. A venture capitalist, unlike a silent or limited partner, typically requires input into the business. Further, they most often invest in industries where they have experience and contacts, so their participation can be a benefit to everyone.

Drawing up the partnership agreement

Whether your business is considering bringing on a silent, or limited, partner or you’re weighing the option of such a partnership for yourself, it’s crucial that all parties agree on how the relationship will work. It’s also essential to detail how profits will be divided and how losses will be handled. Having experienced legal guidance as you negotiate the partnership agreement is necessary to help ensure a smooth and successful relationship.