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It's one of those terms you hear in business circles, but have a hard time defining: silent partner. It sounds pretty cool, but what does it actually mean?
And if you know it means someone who backs a business financially while backing away from the day-to-day operations, you may know just enough to get yourself into trouble. Here's what you really need to know about bringing on silent partners to your small business.
Choose the Right Structure and Documents
There are three main kinds of small business partnerships: general partnerships, joint ventures, and limited partnerships. Because joint ventures only exist for a specified period of time or for a specific project, you're probably choosing between a general and limited partnership, and if you're thinking about a silent partner, you're probably choosing a limited partnership.
A general partnership can be formed without formalizing it in writing, and partners forgo a salary and share profits and losses, as well as management responsibilities, equally. Whereas a limited partnership does have a writing requirement, and allows some partners to invest money into the partnership while retaining little or no control over the partnership's operations.
Choose the Right Partner
Even without a say-so in the business's operations, a silent partner can be a powerful one if he or she is pulling the purse strings. You'll want to choose your partners carefully and create a partnership agreement that guides the behavior of all parties. But agreements are only as good as the parties abiding by them, so be careful who you make a partner, even a silent one.
Choose an Exit Strategy
Even great partnerships come to an end, and there may come a time when you'll need to fire a bad business partner. Make sure all of the partners are on the same page about how the partnership will be dissolved and who will get what once that happens. Again, here is where a good partnership agreement up front can save you from headaches later.
Choose a Lawyer
While you could try and take on a silent partner without consulting an attorney, is it really worth the risk? Partnerships can be complicated business arrangements, and can extend legal liability beyond where the partners might expect it. Consult with a good lawyer before taking on a silent partner.