Silent Partner

Partners who are generally not involved in the daily operations of the business nor management meetings

What is a Silent Partner?

A silent partner provides capital and places full confidence in the general partner’s ability to grow the business. Ultimately, a silent partner is one who still shares in the profits and losses of a business but is not part of management.

 

Silent Partner

 

A silent partner, also known as a limited partner, is generally not involved in a business’ daily operations or management meetings. Only when solicited will a silent partner involve themselves in the operations and management decisions.

 

Summary

  • Silent partners, also known as limited partners, are generally not involved in a business’ daily operations nor management meetings.
  • A general partnership is the most common method of business partnership. In a general partnership, all partners must contribute to the day-to-day management of the business.
  • An investor may choose to be a silent partner due to a lack of industry knowledge, time to contribute to the management of the business, or management experience, or a desire to limit legal liability.

 

What is a General Partnership?

A general partnership is the most common method of business partnership. In such a structure, all partners must contribute to the day-to-day management of the business. A partner can make business decisions and can sign legally-binding contracts on behalf of the business.

A general partner possesses more authority than a limited partner. General partners are liable for the full assets and liabilities of the partnership.

 

What is a Limited Partnership?

A limited partnership is a relationship where there can be one or more partners that are not involved in the business’ daily operations or management meetings. The partners are also referred to as silent partners.

Limited partners cannot dictate the company’s operations and cannot withdraw funds without a general partner’s approval. Limited partnerships are common in real estate, and there can be multiple limited partners for the purpose of raising financing.

Moreover, private equity firms generally favor limited partnerships. Limited partnerships are popular because only general partners are liable for the full assets and liabilities of the partnership.

 

Features of Limited Partnerships

 

1. Operations

In a limited partnership, the company is generally run by a general partner who holds majority ownership. It comes with a few operational formalities and low administration costs. Important decisions are made by general partners, and they are responsible for keeping limited partners informed.

 

2. Accounting

Limited partnerships do not require public financial reporting. All financial information is tracked internally with additional support for other accounting functions, such as assurance services.

 

3. Legal

Limited partners are not as exposed to legal liability. In a legal dispute, only general partners can have their personal assets seized to settle legal claims.

 

4. Taxation

Limited partners receive income from their investment, which flows to their taxable income. Each partner is subject to the personal tax rate that applies to them individually. However, there are some limits on available expense deductions for limited partners.

 

Why Would One Become a Silent Partner?

An investor may choose to be a silent partner for a multitude of reasons. Some of the reasons include:

  • Lack of industry knowledge
  • Lack the necessary time to contribute meaningfully to the business management
  • Lack of management experience
  • Desire to limit legal liability

 

Why Would a Business Want a Silent Partner?

Partnerships usually present businesses the opportunity to leverage the knowledge and expertise of partners to improve the efficiency and effectiveness of the operations and lead to more robust profitability.

However, many business owners prefer to take on silent partners because they prefer not to relinquish their influence on the business. Therefore, silent partnerships are primarily sought out for financing purposes.

 

Additional Resources

CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Partnership
  • Distribution Waterfall
  • Limited Liability Partnerships (LLPs)
  • General Partnership

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!