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In Finance, What Is a Silent Partner?

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  • Written By: Alexis W.
  • Edited By: Heather Bailey
  • Last Modified Date: 23 September 2014
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A silent partner is a business partner who does not have public involvement with the company with which he is involved. Typically, a silent partner also does not have anything to do with the day-to-day control of the business. He may also be referred to as simply an investor or as a shareholder.

These types of partners generally own a part of the business. This means they are entitled to a share of the profits the business makes. The percentage of profits a silent partner is entitled to depends on the terms of the partnership agreement.

There are several reasons why a person may want to be a silent partner. He may want to invest capital in a new business to earn the benefits of the growth of that business, but he may not want to actually run a company. There are numerous other benefits to being a silent investor that may also make this form of business ownership attractive to some.

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Some individuals may wish to become silent partners because they want to keep their wealth a secret or because they don't want to be seen as a source of money for perspective entrepreneurs. In other words, such people may want to invest in companies but may not want others to know that they have the money to do so. By remaining silent, they are able to invest without becoming known as wealthy and so they are not susceptible to others asking them to back ventures.

In other cases, silent partners may want to invest in a new or growing company but may not want others to know they are doing so because public knowledge of their involvement with the start-up could interfere with their long-range business model. For example, a software company may wish to purchase a stake in an emerging technology company in the hopes that it can ultimately incorporate the new technology into its existing line of software. If competitors knew that the software company was a partner in the emerging tech company, this could tip off competitors as to future business plans.

Having a silent partner can be beneficial to the other partners within a company as well. The named or known partners of the company get an influx of capital from the silent investor but get to maintain day-to-day control over the company. The named partners, in effect, get to make all the public decisions but have an additional person to share the risk with.

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MrMoody
Post 5

@allenJo - I think it would depend on the nature of the legal arrangement. I believe that this would be spelled out in any contracts between the silent partner and the business enterprise.

Typically, however, a true partner, silent or otherwise, would experience shared liability for the operation.

allenJo
Post 4

@SkyWhisperer - I wonder if a silent partner would be subject to legal entanglements, in the case of litigation of any kind? What if you are an investor for a company that gets sued?

SkyWhisperer
Post 3

Sometimes your silent partner will be a venture capitalist, as was the case with many software firms. Clearly, these “VCs” as they are called have plenty of money to put up, and they want a piece of the action if and when the company makes money.

I think we saw this during the dot-com bubble era where so many Internet start-ups received massive infusions of cash in order to get their business going, and received additional cash outlays even when the business wasn’t making a profit.

Of course we all know how things turned out; only a small percentage of these companies became successful. However, as a venture capitalist you know the risk. You spread your money across a wide variety of industries to mitigate that risk and improve your chances of success.

Sinbad
Post 2

@bluespirit - I think you are probably right. It sounds as though because he started as a silent partner he knew that his friend was ultimately making the decisions because he had been the silent partner.

I thought your post was interesting just because my boyfriend just became a silent partner in a bar! He is a great businessman, but because he is such a good businessman he usually likes to be hands on with any business he is a part of, so his decision to be silent partner surprised me.

But now I see a lot of his decision in what you were describing - he likely thinks his friend has a solid business plan but wants to run his company solo.

bluespirit
Post 1

I have heard stories of great business partnerships from silent partnerships to silent partnerships that changed to involved partnerships to partnerships that were always involved and truly seemed to keep the partnership a 50/50 deal.

I have also heard of business partners that have not done well together. From the stories I have heard from my business friends, I have since decided that no matter what the circumstance of the partnership, a business partnership is like a marriage.

My husband was a silent partner who turned into a active partner, but I think the reason for this was because of his friendship with the

guy that started the business. But I personally think it helped that he started out as a silent partner so they always knew business wise where each other stood.

I wonder if this is common - to go from silent partner to active partner...

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