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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.
Yes, an LLC can have a silent partner or 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.
Whenever business owners inquire about the advantages of having a silent partner, I inform them of the following benefits:
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.
Other than duties, here are other things you need to know.
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.
A limited partnership agreement will help you decide how profits and losses are divided up and what is expected of each partner [2].
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.
Related Articles:
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.
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.
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About The Author
Certifications: J.D/Tax LL.M, Tax M Education: California State University, Northridge Lives in: Los Angeles, CaliforniaDelina Yasmeh, J.D./Tax LL.M, is a distinguished expert in Mergers and Acquisitions with a notable tenure at 'Big Four' firms Deloitte and PwC. Specializing in high-stakes transactions, she has managed multi-billion-dollar deals with precision.
A graduate of California State University with a B.S. in Accountancy, she furthered her expertise at Loyola Law School, earning her Juris Doctorate and Tax LL.M. Delina's profound knowledge in tax law is backed by her robust educational and professional background.
Delina Chantel Yasmeh, J.D./Tax LL.M, specializes in Mergers and Acquisitions at Deloitte and PwC, managing billion-dollar transactions. Educated in Accountancy at California State University and holding advanced degrees from Loyola Law School, she is highly skilled in tax law. Delina also dedicates time to pro bono work for women and children.
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LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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