When an investor puts money into a company but remains in the background while the firm is managed by others within the organization, this investor is known as a silent partner.
The trick for the other participants is to keep this investor silent and not allow him/her to dominate board meetings and corporate decision making. If this silent investor owns controlling shares of the corporation, he/she cannot be bullied into submission all the time, but some control can be maintained if the other partners stand together in opposition to decisions they oppose.
The silent partner stands to gain or lose in expenditures and profits. They are also included in any liability suits. They have access to all company files, including daily cash sheets, profit and loss statements, etc.
A silent partner is a full partner except in the day to day operations of a company, although he or she may monitor these operations at a distance.
Usually, this arrangement occurs when someone with capital is not interested in being involved in daily operations. Often this individual will set a friend or family member up in business and pursue other interests. But if this investment proves burdensome or is mismanaged, a silent partner can become very “unsilent” quickly.
This arrangement is very attractive and is one of the best options for someone with business management skills but with little capital who wants to get started.
The old adage about not going into business with friends or family is applicable in seeking out a silent partner. So be cautious in picking your investors, silent or not.