A silent partnership can be a great way for the company to gain capital and the silent partner to receive passive income. There are some benefits and disadvantages to this partnership, though, and you should consider them before you agree to anything.
Being a silent partner is a great way to make some extra money through passive investments. Bringing one on is a good idea for businesses that need capital without further input.
There are positives and negatives to silent partnerships, though, and you should consider them before you make an agreement.
What is a Silent Partner
In business, a silent partner is someone who contributes financial support for a business. The silent partner will provide capital to the company, but that’s about it.
Silent partners invest but don’t concern themselves with the day-to-day operation of the business. They won’t attend meetings or speak with employees. Their role is to provide money and some advice where needed. After that, the business dealings is up to the rest of the partners.
Influencer of a Silent Partner
A silent partner still wants to keep their investment secure, so they don’t have to sit on the sidelines through everything. The other partners can come to them for advice and guidance when they feel they’d be an asset.
You probably should give unsolicited advice as a silent partner, but helping the general partners when they need guidance is part of a silent partner role.
Other than that, most of the trust will be placed in the hands of the general partners. For this reason, it’s essential that the silent partner is confident in the general partners abilities. It helps if a silent partner has a similar management style and business outlook as their general partners to avoid any disagreements along the way.
The Benefits of a Secret Partner
Being or having a silent partner can be beneficial to a business. There’s a reason so many companies choose to have silent partners. Ahead are some of the benefits you can expect from being or having a silent partner.
- Limited Liability
One of the major benefits of becoming a silent partner is limiting your liability. A general partner will invest time and resources into a project that may fail. They have a mark on their record and remain liable to their employees, and any stockholders there may be.
As a silent partner, you limit your liability. You might lose your investment and a few other resources you put into the business, but that’s about it. A silent partnership is a way to invest in a business without taking on too much liability or responsibility.
You can continue to spend your time with other businesses or investments without risking too much on your silent partnership.
- Access to Networks
One of the benefits of bringing a silent partner to your business is the experience and contacts they bring with them. They might be able to give you access to people you had no other way of contacting. The partner can also draw from their own experiences to provide you with advice when you need it.
Networking is the backbone of successful business practices, and someone who is in a position to become a silent partner likely has the names and numbers of some relatively powerful people. These contacts might be able to get endorsements and advertisements for your product or service that wouldn’t be possible otherwise.
- “Too Many Cooks” is Not a Problem
Businesses can run into the “too many cooks” problem quite easily. Disagreements and internal arguments will arise if there are too many general partners who want to make decisions about business operations.
A silent partner, on the other hand, has no definitive say in how the general partners run the company. They can provide insight and advice from their experience, but it’s ultimately up to the general partners to choose whether or not they want to follow it.
A company is in a better position if they have secure leaders who are all on the same page. Introducing a silent partner into the company is often an injection of capital without the baggage that comes along with another partner. Their money will help the company grow, and they won’t get involved to the point that they create a division in leadership.
- Passive Income
Passive income is one of the primary reasons you would want to become a silent partner in a business. This partnership means a passive source of income – like any investment – that has a chance of becoming substantial if the company does well.
A lot of silent partners have other irons in the fire and don’t have time to involve themselves in the day-to-day operations of another company. A silent partnership is an ideal situation if they trust the general partners. They can make some money with a company they believe in without much effort on their part.
- The Disadvantages of a Silent Partner
Silent partners aren’t all sunshine and rainbows. There are a few disadvantages that come along with silent partnerships as well. Some of these disadvantages fall at the feet of the general partners, while others mostly deal with being a silent partner.
Most of the time, a silent partner only has their money invested in a company. If you’re the silent partner, then this isn’t a downside at all. You don’t need the motivation to keep growing the company since you can trust the other partners to handle the daily operations.
If you have a silent partner, though, seeking further finances can be a problem. The silent partner hasn’t spent time growing the company from the ground-up. They provided financial input but didn’t invest their blood, sweat, and tears like the general partners typically would.
When it comes time to seek further funding, though, a silent partner might be apprehensive. The business might fall on hard times and need more money. A general partner probably wouldn’t have too many reservations about continuing financing. They know that their company has promise and have invested time and energy into their system.
The silent partner, on the other hand, is only thinking about money. They might believe that further investment is too risky, and will be more inclined to cut their losses and move on. A silent partner likely has a financial stake in multiple companies. If one comes asking for more to stay afloat, he or she might not want to proceed.
No Say in Operations
The biggest disadvantage of being a silent partner is a lack of control in your investment. If you’re used to controlling how the operations of your business run, then you might not like the hands-off approach required to be a silent partner.
A silent partner might offer advice and insight, but they don’t have any say when it comes to implementation. You have to trust that your general partners are making the right decision with how they spend your money.
Some silent partners enjoy this approach – especially when they have finances but not much practical business experience. If they’ve successfully run other companies, though, they could feel a bit uncomfortable when they watch another person running their business.
This can be especially problematic if the silent partner disagrees with the decisions the general partners are making. As a silent partner, it will probably be in writing that your opinion is nothing more than advice, and has no standing on how the general partners handle business operations.
Your restrictions will start to cause friction if you disagree with major moves the company makes. You might even lose your investment due to poor management at the top, and feel as though it was something you could have avoided.
Weighing the Pros and Cons
There are several pros and cons to having or being a silent partner in a company. You should consider them all before you decide to become or make a deal with a silent partner.
Most of all, you have to ensure that the general partners and silent partner agree to the way the business will be run. This place is where problems can arise down the line, so make sure you square it away before deciding on anything.
Whether or not a silent partner is the right move is up to you. If you want passive income and don’t want to involve yourself in the day-to-day operations of a company, being a silent partner is fantastic. If you need some income and don’t need more general partners, then you might want to look into bringing over a silent partner.