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Silent Partner

An investor that provides capital and places full confidence in the general partner’s ability to grow the business

What is a Silent Partner?

A silent partner is an investor that 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 involved in management or operations.

 

Silent Partner

 

A silent partner is an investor that 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 involved in management or operations.

 

Summary

  • Silent partners, also known as limited partners, are not involved in a businesses daily operations or management meetings.
  • A general partnership is the most common structure for a business partnership. In a general partnership, all partners must contribute to the day-to-day management of the business. 
  • A limited partnership, has a general partner and one or more limited partners who are not typically involved in the business operations.

 

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 are the managers and operators of the business. They are simpler to set up and have  lower administrative costs than public companies. General partners have complete control of the partnership, and they are responsible for keeping limited partners informed.

 

2. Accounting

Limited partnerships do not require public financial reporting. The timing and level of assurance of its financial disclosure is established in the limited partnership agreement.

 

3. Legal

The general partner bears the unlimited liability for the company’s debt and obligations. A limited partners liability is limited to the total amount invested in the company.

 

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 many reasons, including:

  • 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!