Pros and Cons of Being a Silent Partner
In today’s world, starting or maintaining a business requires a lot of resources including time, money, and labour. You have to be smart to start and manage a business successfully. The cost of setting up a business is increasing by the day. Hence, you might need to find a partner for your business. So, who is a business partner? Who is a silent partner? This post will provide a comprehensive answer to these questions.
What is a business partnership?
A business partnership is the coming together of two or more firms or individuals to set up a business. Both individuals or firms sign a written document, which includes the percentage of capital to contribute, how to operate the business, the profit-sharing formula, and other important information. There are different types of partnership. We have active partners and silent partners. Active partners are those who take part in the day to day running of the business while silent partners only contribute part of the capital. Today, we will focus on silent partners.
Who is a silent partner?
A silent partner is a person or group of individuals whose participation in a partnership business is limited to the capital contributed to the business. This type of people only contribute capital to the business and do not take part in the day to day activities and management functions. Silent partners are otherwise known as limited partners because their liability in the business is limited to the amount contributed.
Now that we know who a silent partner is, let’s understand the pros and cons of being a silent partner.
Pros of Silent Partner / Advantages
The following are some of the obvious advantages of a silent partnership.
- Passive income for the silent partner.
The world is changing and it’s risky to live on just one source of income nowadays. It is important to have multiple sources of income in the modern world. Having a passive income is necessary if you can afford to have one. Being a silent partner is one of the ways to have a reliable passive income.
Since silent partners don’t involve themselves in day to day running of the business, you can invest your capital and expect monthly or yearly returns. Your money is working for you while you’re doing other businesses at the same time.
- The liability of the silent partner is somewhat limited.
Another pros of being a silent partnership is that the liability of the partner is limited to the capital invested in the partnership business. The liability of an active partner is unlimited, he or she will lose more than just the capital invested in the business. An active partner will lose his or her money, time, and other resources when the business fails. On the other hand, a silent partner will lose just the capital invested when the business fails.
- The silent partnership gives you access to valuable networks.
Another benefit of being a silent partner is the quality of networks that comes with them. You can easily connect with valuable individuals who interact with your business. Ordinarily, it will be extremely difficult for you to connect with these personalities but your business will ease the process. Your fellow partners can also assist you with valuable information or advice when the need arises.
Networking is important for every individual who wants to be successful in the modern world. However, as a silent partner that will be easy because of your influence in the company. The contacts you meet while networking can make your life journey an easy one.
- A silent partner has less responsibility.
The responsibility of a silent partner is extremely less when compared to that of an active partner. Silent partners don’t involve in the daily running of the business and maintenance of the business properties like the active partner. Your responsibility is limited to your investment.
As a silent partner, most people will not know you’re involved in the business and that will reduce your responsibility to the business.
Cons of Silent Partnership / Disadvantages
- The silent partner doesn’t have a say in the business operations.
Lack of say or control in the business is one of the main disadvantages of a silent partner. You can only offer advice but cannot partake the business operations. Sometimes you might be uncomfortable with the decisions of the general or active partners but you don’t have the right to counter their actions.
- Silent partners are less motivated about the business.
Most silent partners are only interested in the income they’ll derive from the business. They do not understand the intricacies of the business like the general partners who invest their time and resources in developing the business. Hence, they’re always less motivated when they’re asked to contribute to further develop the business. Many silent partners forget a lot of information about the company after a few years because of the lack of interest in the business.
Conclusion: Pros and Cons Of a Silent Partner
Being a silent partner has several advantages and disadvantages but it’s left to the individual investor to know what he or she wants from the partnership business. Read the pros and cons once again and decide what you want, and why you want to invest in a business as a silent partner.