What is a silent partner?
A silent partner is an investor who provides capital without expecting to have a hand in growing the business. They will reap the business's profits and suffer its losses without any involvement in management and operations.
Also known as limited partners, these investors cannot impact the company’s operations or withdraw funds without approval from a general partner. Unlike an angel investor, a general partner has a hand in operations and is liable for the total liabilities of the partnership.
One company can have multiple silent partners to raise capital. Private equity terms prefer these partnerships because limited partners are not liable for the full assets and liabilities of the partnership like general partners.
Companies can use investor relationship management software to manage multiple silent partnerships. This is especially helpful for nonprofit organizations seeking funding from many stakeholders.
Basic elements of a silent partnership
A silent partnership is a unique financing arrangement for both the investor and the organization. The basics of this arrangement are as follows:
- Operations: Operations are handled by a general partner. This type of company is usually easier to set up and has lower administrative costs than public companies. As general partners are in complete control, they must keep silent partners informed.
- Accounting: This type of partnership does not require public reporting on financial statements. The limited partnership agreement fully outlines the timing and level of assurance of its financial disclosure.
- Legal: When it comes to debt and obligations, they are only liable for the total amount they invested in the company.
- Taxation: While silent partners pay their personal tax rate on taxable income just like other stakeholders, their expense deductions are more limited.
Benefits of a silent partnership
Both the investor and the organization stand to benefit from this arrangement. The degree to which both parties benefit is contingent on their unique preference. Benefits include:
- Limited liability. Some investors choose this route to limit their legal liability if the company does not thrive. As a general partner, they would be liable for the company’s debts and could lose more than the amount they invested. Silent partners can only lose as much as they contribute.
- Little experience required. Management experience is not required, as general partners handle operations and management.
- Less time commitment. These investors do not need to devote a lot of time to their investment due to their lack of involvement in business management.
- Ownership and control. Some business owners prefer this type of partnership because they maintain control of the business while benefiting from the additional financing.
Silent partnership best practices
While some business owners are tempted to bring on investors as true business partners and treat them as silent partners, this can lead to legal trouble. It’s best to play by the books and document your deal with the Securities and Exchange Commission (SEC) using these steps:
- Consult with a securities attorney. Business owners should work with a securities attorney to discuss whether a Regulation D offering is the right way to go. This is the format used for the average small business.
- File Form D. An attorney must file the form with the SEC within a set time frame.
- File in all states. The above step must be repeated wherever the business operates.
Silent partner vs. investor vs. secret partner
A silent partner contributes money without impacting the company’s operations.
An investor contributes money and expects influence in business operations. To make the business more profitable, the investor sits in on meetings, requires regular reports, and contributes suggestions to improve the company’s profitability.
Secret partners contribute to day-to-day awareness – just not in the public eye. They prefer not to disclose their involvement.
Martha Kendall Custard
Martha Kendall Custard is a former freelance writer for G2. She creates specialized, industry specific content for SaaS and software companies. When she isn't freelance writing for various organizations, she is working on her middle grade WIP or playing with her two kitties, Verbena and Baby Cat.
