Pros and Cons of a Sleeping Partner in Business

Pros and Cons of a Sleeping Partner in Business

Most start-ups need a considerable amount of funds to operate. So, most small business owners seek partners to invest their money to run the business. A partner willing to invest in business can be either an active partner, or a Sleeping Partner.

Sleeping Partner in business invests their money but doesn’t participate in the daily operations of the business. An active partner is just the opposite, who are responsible and participate in operating the business proactively.

Sleeping Partners are also known as the silent investors who invest their money in one or many companies without getting involved in any nature of operations across businesses. They do invest their capital in the business but don’t make any decisions or attend meetings. They do not review strategies to oversee finances. 

Sometimes they are also referred to as the limited business partner because the sleeping partners have a restricted financial stake in the company. They might also suffer the loss of the amount of their investment they have contributed.

Being a Sleeping Partner in Business, there are lots of advantages and disadvantages. There are multiple vital benefits of having a sleeping partner in a firm. However, there are some drawbacks, which you get familiar with before entering into a partnership. So let’s check out the pros and cons of Sleeping Partners in detail.

Rights of a Sleeping Partner

According to the Partnership Act, it is specified that each partner has the right to participate in the business operations. 

  • The most common benefit of the Sleeping Partner is the chance of earning through investment returns. 
  • The Sleeping Partners also don’t involve themselves in business decisions. Therefore, they are also less exposed to liability for any financial problems of industry.
  • When any partnership or business is formed, then the multiple partners make several asset and capital contributions. For example, the agreement of business partnership included each partner’s valuable capital investments made initially.
  • The position of the Sleeping Partner gives the right to review the company’s financial statements. They can when they want to raise their voice in decision making. It can affect the changes to the existence or nature of the business partnership.

Liabilities of a Sleeping Partner

  • The liability of the Sleeping Business Partner does not go beyond the initial capital investment amount. 
  • Such partners are liable to the third parties that give credit to the company without any knowledge of them being a partner but subsequently discover the fact.Thus, the liabilities of a Sleeping Partner rest upon his unrevealed position. 
  • They’re liable towards mediators for the loan accepted by the company during the partnership, same as an ostensible partner. 
  • Yet their liabilities are relieved instantly on retirement. Dormant partners don’t have to leave any notice on their retirement as apparent partners.

Without immediate managerial assistance, dormant partners don’t have any official involvement in profit models by the active partners. It causes them to leave their profitability on their investment amount completely in other hands.

How Does the Sleeping Partner Work?

The involvement of sleeping partners in business includes contributing fund-wise to the company without involving in daily operations or making decisions. This type of business partnership is valuable for both parties, and it is crucial to find an investor you can trust. Let’s now see how a Sleeping Business Partner works.

  • The Sleeping Partner approaches you to start the partnership.
  • Both of you sign the written agreement, which clearly states the level of business investment.
  • The Sleeping Partner contributes, and in return, they receive partial ownership or secure business equity.
  • The Sleeping Partner stays behind and trusts you to operate the business properly.
  • If the business makes a profit, the sleeping will receive 20 percent of net profit.

Agreement with a Sleeping Partner:

Finding a Sleeping Partner in business is your first crucial step. After that, make a partnership agreement on which you both will sign. The partnership agreement must be non-negotiable because the document should clearly define the expectations, responsibilities and roles for your Sleeping Business partner.

After the agreement, the nature of your work will depend upon you and your partner. Generally, Sleeping Partners make the investment and move back and allow you to manage all the business-related decisions and operations.

Advantages of a Sleeping Partner in Business

  • Operational and Strategic Risks

Private business owners are responsible for every implementation and operation of the company’s business over time. On the other hand, the Sleeping Partners don’t carry any official input to the profit models employed by the managing partners. It often causes them to give their profitability.

  • Legal Risks

Without rigorous checking of bank statements and accounts, there is no other way for the Sleeping Partners to know how to support the standards of every department. The situation can offer unique leverage if the Sleeping Partner in business finds him in legal trouble for any unethical practices. If a Sleeping Partner is proven guilty of unethical practices, then the business activities will not be at risk.

  • Valuation Risks

Sleeping Partners might invest their money in the business to sell the stake shortly. This also presents a risk to the investors looking for medium and short term profit on the investment. They cannot actively position the company’s finances to maximize the valuation.

  • Income Stream

The Sleeping Partner in business will receive the percentage of every loss and profit of the company. He will receive an income stream as the business expands and the expanded earnings over time. In that case, when a Sleeping Business Partner invests their money in a profitable business, profits are generated from the partner’s investment. This investment is considered as the long-term income.

  • Financial Risks

The financial risks of the Sleeping Partner are limited to an invested amount. In most cases, he doesn’t get exposed to the liabilities of the private business partners’ managing partners. Therefore, the nature of the Sleeping Partner contribution is safe. It doesn’t include any risks.

  • Entry to the networks:

Networking is a crucial pillar to success in every business practice. The powerful and influential person tends to become a sleeping partner in business. The most significant benefit of including silent business partners is the contacts and experience they bring along. In addition, the connections might help your business to get some advertisements and endorsements for the service or products.

Disadvantages of a Sleeping Partner in business

  • Passive income

The main goal of a Sleeping Partner is to invest their money in business. They also share the revenue brought by the company. The amount of profit a sleeping partner will make depends on the business performance. It will depend on the arrangements and terms which are decided with other partners.

In some cases, the sleeping partner might make a small share of profits than the active partners, mainly if the investment is less in business than other partners.

  • Less Responsibility

The active partners devote their time and money to running business operations smoothly. On the other hand, silent partners will have limited responsibilities in day to day operations and logistics of the business. The Sleeping Partner in businesses doesn’t involve themselves in the daily business work. So his part of the investment might come into the company with less hassle and stress.

  • More Specific Investments

 The active partners in small businesses need to work very hard to succeed. Most have deep knowledge about the industry and understand mechanisms to market the business type successfully.

On the other hand, a Sleeping Partner might invest in the companies without any knowledge of the business or industry because they will rarely be involved in the business activities themselves. This will give more freedom to select the investments accordingly and not limit himself to a single industry with experience.

  • Warnings

The Sleeping Partner cannot be on board without any experience in the business. It is crucial to measure the risk and take care of them before making any investment. They will also intend to share the losses if there is any. The Sleeping Partners have to protect themselves by researching thoroughly before investing any lump sum amount in business.

  • Liability as a Sleeping Partner

The primary involvement of Sleeping Partners in the LLC or limited liability companies and the participation might be a suitable investment. On the other hand, general partnerships are for individuals who want to own a stake in a company without unlimited liability. In addition, most sleeping partners don’t engage with the management. Therefore, if they make any wrong decisions or bad things happen, it will not fall on the silent partner.

  • Doesn’t take Decisions

The disadvantage of a Sleeping Partner is not participating in any decision making meetings or anything else. They do not control the business in any way. If you have a habit of managing the industry’s operations, you might become accustomed to a hands-off approach required to become a Sleeping Partner.

Conclusion

Being a sleeping partner in the business has its multiple pros and cons. It is entirely upon the investor to know the needs and wants of the business partnerships. So first, you can read the advantages and disadvantages and then decide what you need and why to invest your lump sum money in a company as a sleeping partner.

You can also check this out How To Write A Business Plan – Step By Step Guide

A good partnership might bring people together with varied experience and complementary skills for the growth of the business. Once you learn the rewards and risks of a sleeping business partnership, you can enter into an agreement safely which benefits everyone. 

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