Can You Have a Silent Partner in an LLC? (+ Legal Insights)
There are several company structures you can adapt when creating a business entity like an LLC. Your limited liability company has the option to include regular members, as well as a silent partner.
As a Mergers and Acquisitions specialist, several of my clients seek advice on how to obtain a silent partner and whether it would benefit their businesses.
Together with our team of LLC experts, we’ll share our insights about what it means to have a silent partner and whether you should consider getting one.
- An LLC can have a silent partner by entering into a contract with a person who is willing to provide capital for a percentage share of the company's profits.
- A silent partner is a business associate who provides capital to fund an enterprise, without being involved in the management and operations of the company.
- The standard percentage a silent partner is allowed to invest in terms of ownership is 20%.
- Inasmuch as silent partners are not directly involved in management, l encourage business owners to consult with their investors on how to promote, diversity and grow the business.
Can You Have A Silent Partner In An LLC?
An LLC can have a silent partner, also referred to as a limited partner, who contributes capital to the company and shares in the profits without direct involvement in management and operations.
An LLC can retain its management authority and acquire capitalization through a limited partner.
Since a limited partner does not participate in business decisions, their liabilities are restricted only to the invested capital. The identities of silent partners as well as their involvement with the company can remain undisclosed to the public.
Silent partners are liable for any losses up to their invested capital amount, as well as any liability they have assumed as part of the creation of the business. - Will Kenton, Economist, Doctor of Philosophy
In my experience, silent partners may participate in the company, but only in the capacity of a consultant or business advisor.
In a traditional partnership arrangement, a general partner assumes control over management and operations, and as such, have full liability for debts and losses of the business.
By law, the personal assets of a general partner may be liquidated to pay creditors.
In an LLC, the liability of the silent partner is indicated in the provisions of the partnership agreement, while the LLC members benefit from limited liability protection.
Read our article and learn the difference between an LLC and partnership.
Benefits of a Silent Partner
Whenever business owners inquire about the advantages of having a silent partner, I inform them of the following benefits:
Obtaining capital from banks and other financial institutions entail interest, documentation, paperwork, processing and, in some cases, collateral. A silent partner willingly contributes funding to a business venture for an agreed upon percentage of the profits.
Conventional financiers or venture capitalists demand a certain degree of control in management and operations. Silent partners are passive investors, and are not involved in the company's strategy or decision-making.
Creation of a Silent Partnership
A silent partnership can be formed through a registered business such as a limited liability company or a general partnership.
Essentially, a silent partner may offer to fund a business entity, or a company may seek passive investors for capitalization.
Once the preliminary arrangements have been agreed upon by both parties, a formal contract is required to legally acknowledge the partnership.
The contract provisions must include the amount and terms of the investment, percentage of profits, frequency of payments, and business liabilities.
Since liability companies are not regulated by the federal government, you can find out how silent partnership agreements are treated by consulting the state laws where your LLC is based.
Additional Information That You Should Know
Other than duties, here are other things you need to know.
1. Federal Taxes
The Internal Revenue Service (IRS) treats silent partners like any other business partner. Colleagues of mine had to pay taxes on their share of the profits earned by the limited liability company.
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.
3. Limited Partnership Agreement
A limited partnership agreement will help you decide how profits and losses are divided up and what is expected of each partner .
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.
- How to Set Up A Partnership LLC
- How to Get Out of LLC Partnership
- How to File Taxes for a Partnership LLC
Is It Legal to Be Silent Partners?
It is legal to become silent partners as long as your involvement is detailed in the contract.
How Much Money Do You Need to Be a Silent Partner?
You need an initial investment adequate to fund the business based on the minimum capitalization requirement of the partnership agreement to be a silent partner.
You can Have Silent Partners In An LLC
A silent partnership is one of the important ways to raise funds for your LLC 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.
You can seek legal advice regarding limited partners from a law firm. Here are the best online legal services to help you decide if a silent partner is advantageous to your company.