How Does a Silent Partnership Work?

One Partner Has an Idea

Silent partnerships can occur in virtually any industry and at virtually any level of business development. To get the business started, though, one of the partners must have an idea for a business to start, or a way to improve an existing business. This partner may put up his own funds, and usually invests significant amounts of time and labor in the venture. At the business outset, the partner with the idea may intend to start a sole proprietorship, as the need for a silent partner is not always readily evident until the business is well into development.

One Partner Has Money

Regardless of the quality or validity of the idea, every business venture must have some measure of funding in order to be successful. Various business expenses like rent or lease payments, capital expenditures on equipment and supplies, and advertising require a considerable financial investment, and the partner with the idea may be unwilling or unable to cover these expenses himself. To help fund the venture, the partner with the idea may seek a partner with additional financial resources, and may do so in any number of ways (some entrepreneurs tap the resources of friends and relatives while others openly advertise for partners). In most cases, the sole requirement of the new addition to the business is the ability to finance the venture.

The Partners Share the Business

A silent partnership is a somewhat unique arrangement, as the silent partner generally stays out of the day-to-day operations and allows the original entrepreneur to run the business as he sees fit. In this regard, the partner remains "silent" to the business operations, creating the basis for the "Silent Partner" terminology. As with any partnership, though, the silent partner reaps the rewards of the business by sharing in the profits it generates.

Partners Also Share Liability

While a silent partnership may sound like the ideal business arrangement to financiers with deep pockets, it is not without its risks. If the business fails, both partners stand to lose most--if not all--of their investment. If the business is sued, both partners are party to the lawsuit. Just as both the active and silent partner share in the success and profitability of the business venture, they also share in the organization's losses, setbacks and liabilities.