A silent partner, or sleeping partner, is a passive financial investor normally found in a limited partnership with little to no say in the day-to-day running of the business.
Typically the silent partner’s liability is limited though not necessarily. When it is not limited, the silent partner is equally as responsible for the business’s finances as a general partner, despite having seldom input into the management of the business. However, if the partnership is limited, the silent partner is only liable for their own investment of capital.
The distinction of the partnership as limited must be decided upon and approved by all involved parties in the partnership agreement for it to be valid. If it is not then the partnership is susceptible to the law as stated in the Partnership Act 1890.
Limited silent partner
The limited silent partner is only responsible for capital up to their investment amount, and it is an effective way for an individual to be involved in a growing business while remaining undisclosed.
The most successful silent partnerships are those where the general partner and silent partner have compatible managing styles; the sleeping partner must have full confidence in the general partner’s ability to grow the business.
Advantages of a silent partnership
There are numerous benefits to becoming a silent partner in a firm including:
- When the business profits, you profit: as a silent partner you will receive a passive income from the money you have invested in the growing business. Dependent factors are how much you invested to begin with, and the agreement you have with the general partners. For instance your investment in the business may be equal to that of more active partners but you might see less of a return from the profits.
- No management responsibilities: Businesses require a lot of time, particularly at the very beginning which is when silent partners are most likely to make their investments. As a sleeping partner you are not responsible for the running and growth of the business, making any crucial decisions, nor the hiring and firing of employees.”
- You do not have to make investments based on your own expertise: Unlike a general partner who must have an in-depth knowledge of the field they are setting up business in, you are able to make investments though you may know little about the actual industry. A silent partner is not actively involved in the running of the business but a general partner is.
Becoming a silent partner
There may arise many instances where you could invest capital and become a silent partner, in which case you must ensure you protect your investment. Though you do not need to know a lot about the industry, it is recommended that you thoroughly research the business you are investing in, which is likely to be a large sum of money.
If you have concerns about doing so and would like to know more about how general and limited partnerships work, contact Ralli’s team of highly experienced solicitors today.
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