Definition
A dormant partner, also known as a silent partner, is an individual who contributes capital to a business partnership but does not participate in the day-to-day management or operations of the business. Dormant partners typically have no involvement in business decision-making and usually do not have their names included in the firm’s name. Their primary role is to invest funds and share in the profits (or losses) as agreed in the partnership agreement.
Examples
- Investor in a Restaurant Partnership: In a restaurant business, a dormant partner might provide financial support for startup costs, kitchen equipment, and initial inventory but leave the daily operations to other active partners.
- Real Estate Partnership: In a real estate partnership, a dormant partner might invest in purchasing property but not participate in decisions relating to property management, leasing, or development.
- Tech Start-Up: A tech-enthusiast may invest in a start-up company as a dormant partner without any involvement in technology development, marketing, or staff management processes.
Frequently Asked Questions (FAQ)
What is the difference between a silent partner and a general partner?
A general partner is actively involved in the day-to-day management of the business and has unlimited liability for the debts of the firms, whereas a silent partner invests capital but does not engage in management and typically has limited liability.
Can a dormant partner lose their investment?
Yes, a dormant partner can lose their investment if the business fails or incurs losses, depending on the partnership agreement.
How are profits and losses shared with a dormant partner?
Profits and losses are typically shared according to the terms outlined in the partnership agreement, which may be based on the proportion of capital invested by each partner.
Does a dormant partner have liability for the business debts?
This depends on the structure of the partnership and the partnership agreement. In a limited partnership, a dormant partner usually has limited liability, meaning they can only lose the amount they invested.
Can a dormant partner become active?
Yes, the partnership agreement can be amended to change the role of a dormant partner to an active one if all partners agree.
Related Terms
Silent Partner
A silent partner is effectively synonymous with a dormant partner, with both terms referring to someone who provides capital to a business without engaging in its day-to-day managerial tasks.
General Partner
A general partner is actively involved in managing the partnership and is personally liable for the business’s debts.
Limited Partnership
A limited partnership is a partnership where at least one partner has limited liability and does not participate in management, while one or more other partners have unlimited liability and are responsible for management.
Limited Liability Partnership (LLP)
An LLP is a partnership where all partners have limited liability, protecting their personal assets from the business’s debts, and all partners can participate in management.
Online References
- Investopedia - Dormant Partner
- Wikipedia - Silent Partner
- Small Business Administration (SBA) - Types of Partnerships
Suggested Books for Further Studies
- “Partnership Law” by Mark Blackett-Ord
- “Business Law: Text and Cases” by Kenneth W. Clarkson
- “The Law of Partnerships and Corporations” by J. William Callison and Maureen A. Sullivan
- “The Entrepreneur’s Guide to Law and Strategy” by Constance E. Bagley and Craig E. Dauchy
- “Partnership Taxation” by Michael Schler
Fundamentals of Dormant Partners: Business Law Basics Quiz
Thank you for exploring the concept of dormant partners and testing your knowledge with our quiz. Keep expanding your understanding of business partnerships!
