Ever wondered about the real difference between a silent partner vs investor? Although there is some overlap, a silent partner and an investor are two distinct entities. Keep on reading further to gain insight into what sets them apart.
Who Is A Silent Partner?
A silent partner is someone whose only role in a partnership is to provide funds to the company. They are rarely active in the everyday operations of the partnership and seldom attend any management meetings. As their responsibility is usually restricted to the monetary amount invested in the partnership, silent partners are sometimes referred to as limited partners.
Aside from finance, a competent silent partner may help a firm by
- Providing counsel when asked
- Making business contacts to help the business grow
- And stepping in to mediate when a disagreement emerges among other partners
Regardless of such requests, it is regarded as a background role that cedes responsibility to the general partner. This needs the silent partner to have complete faith in the general partner's capacity to expand the business. The silent partner may also need to guarantee that their management styles or business visions are complementary.
How Does A Silent Partner Get Paid?
Silent partners are accountable for earnings and losses up to their ownership share. A partnership agreement properly documents each partner's profit and loss split. These shares are generally allocated based on the partner's ownership stake. For example, if a partner owns 12% of the firm, they will earn 12% of the profits and losses.
Who Is An Investor?
An investor is someone who puts money into something, such as a business, in exchange for a financial return. Any investor's primary goal is to lower risk while maximizing profit. In contrast, a speculator is ready to invest in a high-risk asset in the hopes of making a more significant profit.
There are several categories of investors. Some people invest in startups in the hopes they will develop and succeed, known as venture capitalists or angel investors, while others invest money in a firm in return for a stake in the company. Some people invest in stocks in exchange for dividend payments.
Silent Partner Vs Investor- Pros and Cons
While there are different pros and cons of being a silent partner, you should be aware of these before entering into a business relationship.
Pros of Being A Silent Partner Let's start with the pros of being a silent partner.
Risks in Strategic and Operational Areas
Private business owners are in charge of all operations and the long-term implementation of the company's business plan. Silent business partners, on the other hand, have no formal influence on the profit models used by their management partners, and thus the profitability of their investment is left in the hands of others.
The world is changing, and it is no longer prudent to rely just on one source of income. In today's society, having numerous sources of income is essential. Therefore, having a passive income is always a big plus if you can afford to spend the time and effort. Being a silent partner is one approach to getting a consistent passive income.
As silent partners are not involved in the firm's day-to-day operations, they can invest their money and anticipate a monthly or yearly return.
When compared to an active partner, a silent partner bears far less responsibility. Unlike active partners, they are not involved in the day-to-day procedures of the firm or the management of its assets, and their liability is limited to the amount they invest.
Another advantage of being a silent partner is the high caliber of networks that come with it. You can simply connect with important people who deal with your company. Typically, connecting with these people will be exceedingly tough, but your business will make the process easier. When the need arises, your fellow partners can also provide you with vital information or guidance.
Cons of being a Silent Partner
Let's continue with the cons of being a silent partner.
The main objective of a silent partner is to make financial investments in the business,and in return, they get to share some portion of the company's profits.
The amount of money a silent partner earns is determined by how well the firm is doing and the agreements and terms reached with the other partners. However, in some situations, silent partners may receive a lesser percentage of earnings than more active partners,particularly if they spend less on the firm than others.
One of the primary drawbacks of a silent partner is a lack of voice or power in the firm. They may just provide counsel and cannot participate in business activities. Moreover, even if they disagree with the other partners' decisions at times, they still do not have the authority to intervene.
Pros of being an Investor or Owner
Let's talk about the pros of being an investor or owner.
You are in Charge
One of the benefits of starting your own business is the opportunity to be your own boss. Because you manage your own investment, you are in charge of every aspect, and if you have employees, they will follow all of your instructions. Furthermore, you are the source of all proposals and the general concept. You are also responsible to implement your startup idea.
Growth of Your Company
Being the CEO or owner of your firm provides fulfilling growth not just from a commercial standpoint but most likely as a person because it teaches you how to manage money, people, and time. It also broadens your viewpoint in terms of how you perceive things and how you contemplate the unexpected. Purchasing a share of stock in a firm is also a good option since it may assist business owners like you achieve tremendous financial success,and you will benefit as the stock price rises.
Since you own the company, any consequence, including profit or revenue, will be returned to you. Every investment aspires you to be successful and prosperous, and when that goal is met, it provides emotional fulfillment. As a result, by achieving your goals, you continue to obtain more by working harder.
Cons of being an Investor or Owner
Let's finish up with the cons of being an investor or owner.
Financial risk is fundamental in business, and it is something that each businessman or owner should address from the start. So, whether you are running a business or investing in one, remember that your other foot is always on the edge of a grave.
It's recommend to use professional market research services to evaluate your situation and be better prepared for the future.
Stress is quite frequent for all business owners and investors; without it, they would never develop or achieve what they have now.On the plus side, stress indicates that a person works hard and is determined to achieve and that whatever obstacles may arise along the road will not prevent them from reaching their objective.
Silent partner vs investor both come with their own perks and drawbacks. Now, it is up to you to decide which situation works the best for you before you take the big leap.
If you are one step before and want to start reaching out to investors, you should learn how to present the pitch deck.