August 19, 2016 / Published Work

What can a “silent partner” do to limit their liability in a small-business venture?

Entrepreneurs often lack the capital needed to pursue business ideas. Such upstarts often solicit capital from relatives and acquaintances who may be sophisticated in certain professions but relatively unsophisticated as small business investors. These investors often become “silent partners” who invest significant capital but will have no role in the business’ operations.

If a silent partner is not careful, their investment may lead to unfettered personal liability. To avoid putting assets like one’s home or bank account at risk, it is critical that the silent partner execute an agreement that limits their liability to no more than the amount of their investment (at worst). Such agreements are common and relatively inexpensive to prepare. They are often, however, overlooked. Further, even if a “limited partnership” agreement exists, investors may put personal assets at risk by signing guarantees or similar documents.

The adage “trust but verify” is key. Confidence in your partner is not enough. Silent partners must make certain that their legal and personal best interests are independently represented.