What is a silent business partner?

Business partners shaking hands.

If your company needs the extra funding that can come from entering a business partnership, but you don’t want to have to share the decision making, a silent partnership might be a good solution. But what exactly is this type of business arrangement?

Keep reading to find out how these relationships work and how they may benefit you. We also offer suggestions on how to find a silent business partner if you decide to go down this route.

How do silent partners work?

A silent partner, also sometimes called a sleeping partner, is someone who invests money into your company without involving themselves in your daily business operations or decisions. In this way, they act as a passive investor.

In some cases, silent partners are simply shareholders in limited liability companies who invest money without taking an active role in the business. However, a silent partner can also be a business partner in a legal sense in a limited liability company or standard partnership.

Silent partnerships usually start off with both parties signing an agreement setting out the level of investment the silent partner will make and what they will receive in return. This could be equity or partial ownership of your business. For example, you may agree that they will receive a certain percentage of your net profits.  

Typically, silent partners make their investment and then step back, letting you run your business without interference.

What are the liabilities of a silent partner?

The liabilities of a silent partner depend on the specific details of the agreement. If the arrangement is designated as a limited partnership, the silent partner has limited liability. This means they are financially liable only for the amount of capital they invested. In other words, they may lose up to their investment sum if something happens to the company.

However, in cases where these agreements are not limited, the silent partner is equally responsible for the company’s finances as a general partner. This is the case even if they have had little or no involvement in the management of the business.

What are the advantages of having a silent partner?

The main advantage of having a silent partner is that it gives you a way to generate potentially much needed capital without you having to cede any control of your business. This can be particularly important for start-ups where the founder has a clear vision for their business and doesn’t want to have to compromise this.  

These entrepreneurs may not have the track record to persuade traditional lenders and banks to invest in their companies. In such cases, silent partners can help to plug investment gaps without interfering in management decisions.

How to find a silent partner

If you think this type of business partnership might work for you, the next step is to find someone who is willing to invest in your company in this way. Here are some of the options you may want to consider.

Look within your circle of family and friends

Close family and friends can be a good place to start when you’re looking for investment. These people know you and can see how committed you are to your business. They might also want to do their bit to help you succeed. You may find you’re able to raise varying amounts of investment from different people in your social circle.

Of course, if your business doesn’t succeed, there is a risk that these people will lose money. This is something to consider when you’re deciding whether or not to involve those close to you. On the flipside however, as long as your company performs well, your loved ones will get to share in your profits.

Reach out to your business network

You can also turn to your extended business network to seek investment in the form of a silent partner. As well as approaching people you already know professionally, you might want to attend local business networking events to find new contacts. Joining trade associations can help you to expand your network too.

You can also use online resources to connect with potential investors. For example, you can submit a pitch on the Angel Investment Network website.

Partner with other businesses

Companies that offer products or services that complement your own might agree to invest money in you as a silent partner. For instance, if you launch an event space, local caterers or event planners might be interested in this type of partnership. There is a double incentive for such investors. They get to receive a proportion of your profits, and your success can benefit them in other ways too. In the example mentioned above, the investors would have another event space available to them.

So, if you see the potential for symbiotic relationships with other businesses, you may wish to offer them the opportunity to come on board as a silent partner.

The importance of business insurance

Regardless of how you go about securing investment for your business, you will need to take appropriate steps to protect your finances as an entrepreneur. Insurance plays a major role here. As a business owner, you might benefit from taking out various types of financial protection. For example, you may wish to consider getting directors and officers insurance, which protects you if you are accused of wrongful acts in your capacity as a company director or officer.

If you have any employees, you are obliged by law to take out employers’ liability cover, and if you work with members of the public, it may be important to have public liability insurance in place.

Take a look at our business insurance policies to find out more about the various types of financial protection available. 

Cover starting from £8 a month