Last updated: December 30, 2022

There are a number of business partnerships when creating a business entity like an LLC, however, a silent partner is allowed in an LLC, but they may have certain limitations on what they can do inside the firm.

Venture Smarter is a team of legal experts in the field of LLC formation, so we decided to provide you with a comprehensive explanation and first-hand information from our experience about what it means to have a silent partner and whether you should become one.

What is a Silent Partner?

A LLC owner shaking hands with a silent partner

A silent partner is a person who lacks certain legal rights and duties that the general partners enjoy in an LLC. A silent partner may not participate in typical firm affairs such as making day-to-day decisions, attending board meetings, or exercising voting power for decision-making.

Silent Partners vs Secret Partners

When thinking about being a silent partner, it is important to distinguish between this type of business relationship and the term "secret" or "hidden" partners.

Secret partners are people who have an interest in limited liability companies but want their identity kept secret for some reason. This type of arrangement is illegal in most states, including California.

Silent Partner vs General Partner

Silent partners and general partners are very different.

General partners contribute to the management of limited liability companies, while silent partners do not. General partners can make day-to-day decisions for the company, attend board meetings, and exercise voting power in all major financial decisions.

In other situations, silent investors provide capital while the general partners take care of the management tasks. This is a common arrangement in smaller businesses where one or two people own and run the firm without any outside help as a general partner.

Silent Partner vs Limited Partners

Limited partners are passive investors with limited liability in a business entity.

Unlike general partners, limited partners cannot participate in the day-to-day decisions of the company, and these limited partners do not have voting power on major financial issues.

A Limited Liability Company must consider regulations set out by the state where it is located to determine what type of limited partner it can allow into its ranks.

In California, an LLC can have a general partner or it can have a silent partner, but the two types of partners must be treated differently under the state's regulations.

States such as California and New York require all partners to contribute to management tasks, while other states allow either silent or limited partnership in a Limited Liability Company.

What Does a Silent Partner Do?

LLC owners discussing with their silent partners

A silent partner owns a business without being involved in its daily operations. As a silent partner, you will have no right to attend board meetings or vote on decisions unless you negotiate otherwise.

This is a good option if you want to provide cash for an opportunity but don't wish to be a permanent part of the company.

In an LLC, you can have limited liability and still be involved in firm affairs when you want to.

Because all owners are considered equal in this type of business structure, no one person has more power or authority than any other owner does.

In many scenarios, the role of a silent partner is used when one person has all the capital, but a team of people manages a firm.

The silent partner, who can also be an individual or a group, will contribute the necessary cash while the other limited partners contribute their expertise.

The Silent Partners Liability

As a silent partner, you will be liable for all debts and obligations of the LLC. This means that if your business fails and someone sues the company, they can legally claim all assets owned by you personally to recover their losses.

Therefore, it is imperative for you to purchase adequate insurance coverage in case your LLC is sued or becomes insolvent.

Other Things To Know:

Pointing down on a document list

Other than duties, there are a few other things you need to know.

Federal Taxes

The Internal Revenue Service (IRS) treats silent partners like any other business partner. This means that you will have to pay taxes on your share of the profits earned by the limited liability company.

Although you won't be involved in day-to-day operations, you will need a detailed breakdown of how much money is being made and what percentage of the company you own to determine how much of that income needs to be reported.

Secrecy

If you are a silent partner, it is important that your identity be kept secret at all times. If you're discovered, the LLC may have to pay punitive damages to anyone who has an issue with your involvement.

Limited Partnership Agreement

A limited partnership agreement will help you decide how profits and losses are divided up, what is expected of each partner, etc.

This agreement must be signed by all members before the LLC opens for business to ensure that there are no issues among limited partners in the future.

FAQs

Is It Legal to Be Silent Partners?

Yes, it is legal to become silent partners as long as your involvement is detailed in the contract.

Do Silent Partners Have Ownership?

Yes, silent partners have ownership. Their ownership is equal to the other partners, and they will receive a share of the profits or losses at the end of each year.

What Type of Business Has Silent Partners?

Silent partners are most commonly found in smaller business entities where the owner does not need any help running the business enity.

How Much Money Do You Need to Be a Silent Partner?

You will need to have enough money to cover your initial investment plus a cushion for any unexpected costs in order to be a silent partner.

Where Can You Find Silent Partners?

You can find silent partners through organizations that specialize in finding the right person for each business. It is common for businesses to use an investor, especially if they do not have cash on hand.

Silent Partners in an LLC: Conclusion

Silent partners do not want to be involved in the daily running of the company.

A silent partnership is one of the important ways to raise funds for your business start-up without giving away any control.  Although it is legal to be one, this type of limited partnership is not for everyone.

Before deciding to go into a silent partnership, you should weigh the pros and cons and talk to other business owners who have gone through this type of business partnership or seek legal advice from a law firm.

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