The presence of a silent partner in the business has multi-fold contributions but he does not directly participate in the managerial functions of the partnership business. A business partner of this nature does not have the authority to perform acts on behalf of the organisation and enter into contracts with third parties.
While there are several key benefits for having a silent partner on board, there are certain drawbacks as well that you should be familiar with before you enter a partnership. Without much ado, et’s check out what those are below!
BENEFITS AND DRAWBACKS OF HAVING A SILENT PARTNER
|Strategic and Operational Risks||Passive income for silent partner|
|Legal Risks||Less responsibility for a silent partner|
|Valuation Risks||Easier investments|
|Income Stream||Silent Partner Liability|
|Access to networks||No say in operations|
ADVANTAGES OF HAVING A SLEEPING PARTNER
• Strategic and Operational Risks:
The owners of private businesses are responsible for all the operations and the implementation of the company’s business model over time. On the other hand, silent business partners have no official input into the profit models employed by their managing partners and this often causes them to leave the profitability of their investment in the hands of others.
• Legal Risks
Without thorough checking of accounts and bank statements, there is no alternate way for silent partners to know whether standards in every department of the business are being upheld. This situation can provide a unique leverage if a silent partner is found himself in legal trouble for unscrupulous practices.
• Valuation Risks
Silent partners may invest in businesses with the intention of selling their stake in the future. This presents a risk for investors looking for a short- or medium-term turnaround on their investment, because they cannot actively position the company’s finances to maximize its valuation when they are ready to cash in.
• Income Stream
A silent partner also receives a percentage of the profits and losses of the business. He receives an income stream as the business expands and the profits increase over time. In such a case, when the silent partner invests in a profitable business, then the profits generated from his investment may be considered as long-term income.
• Financial Risk
A silent partner’s financial risk is mostly limited to the amount of invested capital and in most cases he is not exposed to liabilities to the same extent as managing partners in a private partnership are. However, with the nature of silent partners’ contributions, it makes the risk worth noting.
• Access to Networks
Networking is the pillar for successful business practices and someone who is in a position to become a silent partner likely known relatively influential and powerful people. One of the benefits of bringing a silent partner is the experience and contacts they bring with them.
These contacts might be able to get endorsements and advertisements for your product or service that wouldn’t be possible otherwise.
DISADVANTAGES OF HAVING A SLEEPING PARTNER
• Passive Income for the Silent Partner
A silent partner’s main goal is to invest money in a business. Partners, even those who are silent ones also share in the income brought in by the business.
The amount of income a silent partner makes will depend on how well the business is performing and what arrangements and terms has been finalised with the other partners. But in some cases, silent partners may make a smaller share of the profits than more active partners, especially if you invest less in the business than others.
• Less Responsibility for a Silent Investor
Active partners have to devote and dedicate a good portion of their time to getting the business running smoothly. On the contrary, as a silent partner, one will have less responsibilities in the daily logistics and operations of the business. A silent partner does not involve himself in the daily operations of the business, so his investment in the company may come with less stress and hassle.
• Easier Investments
An active partner in a small business needs to work hard to find success and usually have a deep knowledge of the industry and understand the mechanisms to market their type of business successfully.
On the contrary, a silent partner can invest in businesses despite not fully understanding the industry since they will have little involvement in the business itself. This gives more freedom to choose the investments accordingly and not having to limit oneself to industries where you have experience.
While silent partners are allowed to come onboard without having adequate business experience it is of utmost importance to take care to measure the risks thoroughly before making any investment. They will also share in case of any losses. Silent partners need to protect themselves by researching the company and the other partners involved, before investing large sums of money.
• Silent Partner Liability
Silent partners are most often involved with limited liability companies (LLC) and hence their participation can be a suitable form of investment. As opposed to general partnerships, it is for individuals who want to have a stake without getting exposed to unlimited liability. Since most silent partners do not engage in the management, any wrong-doing that happens would not fall on to a silent partner.
• No say in operations
The biggest disadvantage of being a silent partner is not having a proper control in your own investment. If you’re used to controlling how the operations of the business, then it becomes to sought to get accustomed to the the hands-off approach required to be a silent partner.
Opting to become a silent partner could be a great way to earn a passive income. As with any kind of investment, there will be certain risks associated as a silent partner too. Since they don’t have the same degree of responsibility to companies they fund, silent partners have plenty of time to focus on other projects and ventures as well.