Business owners can pursue a number of funding options, ranging from investment of personal capital to business loans from a bank or venture capital. Each approach offers benefits and pitfalls. For example, bootstrapping with personal capital leaves you indebted to no one, but can prove stressful for you and your family. A silent investor, also called a silent partner or limited partner, offers another potential avenue for funding, but also brings pitfalls of its own.

Financial Stake

Silent investors provide capital to a business for a return on the investment. The investor may receive stock in the company and may also enter into an agreement that gives the investor a percentage of revenue or profit. The business owner and the investor must come to an agreement on how the investor will receive compensation for the investment.

Limited Partnership

Silent investors brought on as limited partners may lose their investment, but typically lack responsibility for clearing the business’s debts or paying for legal judgments against the business. Silent investors not brought in as limited partners may find themselves considered general partners in the business and face liability for business debts or legal judgments. As protection and liability can vary from state to state, seek professional legal advice to understand your responsibilities.

Silent Is Not Secret

Silent investors do not invest in a vacuum, and many states require the filing of paperwork to legally establish the partnership. The owner must acknowledge the investment for tax purposes, and the investor remains liable for any taxes due on the profits they make from the investment. You should remain very wary of any proposal to invest in your business that requires you not to acknowledge the investment.

Operational Control

The silent component of a silent investor refers to the role the investor plays in operation of the business. Silent investors, typically due to lack of time or expertise, play no role in the management of the daily operations of the business. For example, well-off parents may invest in their daughter’s new bakery, but avoid interfering out of their own career obligations or minimal understanding of the bakery business. This differentiates the silent investor from venture capital agreements, in which the investor typically offers business guidance and often sits on the board of the new company.

Considerations

Prior to entering into a silent-investor agreement, you should hammer out the terms of the agreement in detail and get them in writing. Oral agreements in business often carry the force of law behind them, making you responsible for carrying out your side of the agreement. Getting the details straight and in writing protects you and your investor from any lapses in memory or confusion about the terms of the agreement.