Table of Contents
- What Are Silent Partners?
- How Do Silent Partner Agreements Work?
- Pros and Cons of Silent Partners
- Common Silent Partner Agreement Terms
- What Are the Rights of a Silent Partner?
- 3 Things to Include in a Silent Partner Contract
- Alternatives to Silent Partners to Finance Your Business
- Discover Business Loan Rates
- FAQ
If you need 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, a silent partner who provides capital but not opinions might be a good option.
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.
Key Points
• A silent partner is an investor in a business who does not want to be involved in the day-to-day operations of that business.
• To bring a silent partner into a business, you must write a silent partner agreement that outlines the interests of all parties.
• There are pros and cons to bringing a silent partner into a business, and it’s important to weigh the advantages and drawbacks of doing so.
• Because it’s important to have the rights and responsibilities of all partners in a business laid out clearly, generally, the more details in an agreement, the better.
• There are many alternatives to adding a silent partner that can infuse funding into your business, including getting a small business loan.
What Are Silent Partners?
Silent partners are investors in a general partnership, limited liability partnership, or a limited liability company who do not want involvement in the management of the company. This is in contrast to general partners, who both invest in a company 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 may be able to offer valuable insights, expertise, and business connections. However, silent partners aren’t 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: 10 Steps for Starting a Small Business
How Do Silent Partner Agreements Work?
Whether you are setting up a new partnership or bringing a silent partner into an existing business, you’ll want to draw up a partnership agreement that outlines everyone’s interests.
A silent partner agreement, or contract, is a legally binding document that designates which parties are general partners and which are 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 the silent partner assumes. It will also include the earnings percentage due to each partner regarding 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.
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Pros:
• Provides an infusion of cash
• Silent partner may offer valuable insights and business connections
• No loss of control over your business
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Cons:
• Silent partner will have partial equity
• Silent partner may not bring any helpful experience or insights to the table
• 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 expand. 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 contacts may 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 sharing the profits. Having a partner who stays out of business decisions sounds good, but you might benefit from an experienced partner’s participation. In some cases, they may not have any relevant experience or contacts or be invested enough in the company to provide helpful advice or feedback.
A partnership agreement that isn’t clear, or a silent partner who doesn’t understand their inability to influence decisions, can lead to misunderstandings.
Recommended: Buying Out a Business Partner
Common Silent Partner Agreement Terms
Generally, the more details your silent partner agreement includes, the better. These agreements typically cover:
• The dollar amount the silent partner invested.
• How much the silent partner shares in gains and losses.
• What are the limits on the silent partner’s liability.
• If the silent partner can invest more money (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 explaining that the silent partner must remain silent on daily business operations.
• Details that state how to end the partnership.
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 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 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 regarding 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 they provide 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 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.
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-, veteran-, or minority-owned), 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 and partners, friends and family of the founders, or a 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), SoFi can help.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What are silent partnership agreements?
A silent partnership agreement is a contract signed by a business owner and a silent investor. A silent investor is someone whose involvement in a partnership is limited to providing capital to the business. The agreement outlines the roles, responsibilities, liabilities, and expectations of both parties.
What percentage of a business does a silent partner typically get?
Silent partners typically own a minority stake (less than half), but exactly what percentage they get will depend on the dollar investment they make and the company’s total worth.
Are silent partners liable in case of bankruptcy or other problems?
Typically, a silent partner’s liability is limited to the amount invested in the partnership. In the event of bankruptcy or other financial problems, a silent partner could lose their investment, but generally nothing more.
Photo credit: iStock/WorSangJun
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