Silent partners and business finances -Advantages & Disadvantages

in Money by Nigel Bowen
(274 Ratings)
Business partner, silent partner, advantage of silent partner

Having or being a silent partner has advantages and disadvantages. When it comes to business finances, the crucial distinction with silent partners is that they aren't liable for any losses incurred (beyond the capital they have invested).

The difference between silent and general partners

For a variety of reasons, partnership arrangements involving a silent partner are uncommon. In most cases partners in an enterprise, by legal definition:

  • Have joint ownership.

  • Participate in gross returns.

  • Share in profits.

  • Share in losses.

  • Exercise partner's rights (that is, participate in its management).

In contrast, a silent partner does not participate in the management of the business and has a limited partnership, which means their liability is limited to the capital they have invested.

For example, if Bill - a general partner - and Bob - a silent partner - go halves in buying a $200,000 business, which then goes bust owing $2,000,000, Bob loses his initial investment of $100,000 but nothing more, while Bill is liable for paying back the $2,000,000.

The upsides of silent partners

While silent partners still have skin in the game and are motivated to get a return on their investment, the stakes aren't as high for them as for general partners. This can create problems, but before examining them it is worth pointing out the benefits (in terms of business finances and otherwise) that silent partners can bring.

Most obviously, silent partners provide capital, which might not be available elsewhere. What's more, they leave the general partner (or partners) with the freedom to manage the business as they see fit. This means the general partner(s) has more autonomy than might otherwise be the case, enabling them to make major financial decisions around investing in things such as technology, marketing and staff.

A silent partner may also be able to provide business contacts and a degree of guidance, especially if they are older and more experienced than the general partner(s). When there are three or more partners involved in an enterprise, the silent partner - precisely because they are removed from the day-to-day management - can often act as mediator when disagreements arise between general partners over business finances.

When silence isn't golden

Problems impacting a business's finances are most likely to arise between silent and general partners when their different situations mean their interests diverge. For example, it's not uncommon for technology startups to run out of cash and need to source more capital in order to finish the product development process. In such a scenario, the general partner will likely be highly motivated for the business to continue through an injection of funds, but the silent partner - particularly if they are the one expected to provide the additional funds - may be more inclined to cut their (limited) losses and wind the business up.

All the same precautions that would be taken before entering into any partnership arrangement should be taken before entering into one involving a silent partner. Also, given that the general partner(s) will be doing all the work and shouldering unlimited liability, it will need to be determined whether they should receive a share of any profits disproportionate to the amount of capital they have invested.

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This article represents the views of the author only and not those of American Express.

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Nigel Bowen

Nigel is a freelance journalist and web content provider. Over the past 15 years he has worked for many of Australia's major print media companies and written for a wide range of newspapers, magazines, trade publications and websites. Nigel most enjoys writing about entrepreneurship, popular culture, politics, social trends and small business.

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