Tag Archive: partnership

The Silent Partner: Boon or Bane?

The Silent Partner: Boon or Bane?
by Erin McDermott.

Psst. Is that silent partner you’re seeking really the best move for your small business?

When it comes to finding additional funding these days, it’s sometimes a tough road. As a result, people are looking at other avenues of capital, taking on all types of new partnerships, and even tapping into money through crowd-funding sites such as Kickstarter, Indiegogo, and AngelList.

Traditionally, silent partners have been the go-to investors, often family and sometimes friends, who pump in funding but also agree to stay out of day-to-day operations. They get a share of the profits and—unless there is a limited partnership agreement that rules out liabilities—risk taking a hit if an enterprise runs into trouble. Their presence is no secret to people familiar with a company, and often they are prized for their industry contacts or standing in a community.

So why choose to remain silent? There can be several reasons. For some investors, it’s a way to avoid the unwanted entreaties of others who also are seeking capital. Others might use a silent partnership to keep quiet about the extent of their business portfolios or to stay one step removed from a venture that they don’t want to be publicly identified as backing.

So, is this silence really golden for a small-business owner?

PQ_SilentPartners.jpgWhat you don’t get for your money

Mitchell D. Weiss doesn’t see much value in the proposition. He’s a longtime financial-services executive and entrepreneur who now teaches finance at the University of Hartford and is the author of Life Happens: A Practical Guide to Personal Finance from College to Career. To him, owners who recruit the strong, silent type of partners are missing a critical opportunity to gain knowledge from others who know the stakes and have years of experience and connections that are priceless for an entrepreneur.

“I wouldn’t want money from people who aren’t going to help me. I want someone who isn’t just a checkbook, but someone who’s in a position to mentor me and offer advice,” Weiss explains. “What’s more important for entrepreneurs is to seek out people who can give you good feedback. Not someone who hasn’t made a payroll, or can’t relate because they’ve never faced the pressure of running a business.”

Weiss himself has been there with business relationships both silent and not so silent. He recalls dealing with a principal at one of his early ventures who declared that he “likes his partners limited” and made clear that he wanted little advice from others, even while seeking investors. “That’s also known as ‘Give me the money and shut up,’” Weiss says now, laughing. “In the end, I learned a lot of good things and a lot of lessons about what not to do.”

Jaine Lucas also sees many entrepreneurs missing the boat.

“One of the issues with crowd-funding is you get the money, but not the advice, coaching, and mentoring you’d receive from angels, VCs, or others who might financially back your company,” says Lucas, an entrepreneur, former Fortune 50 marketing executive and now executive director of the Innovation & Entrepreneurship Institute at Temple University’s Fox School of Business in Philadelphia. “Most entrepreneurs will tell you that access to coaching and other people’s networks are just as important, if not more so, than the money.”

There’s always an exception

But Lucas does see the value of silence with one often-tapped group of investors: friends and family.

“They are often too involved emotionally and cannot see things objectively,” she says. “I see these things all of the time with our younger entrepreneurs who have very little access to capital other than credit cards and friends and family, so they take money from Mom and Dad. The problem is, to Mom and Dad, this promising entrepreneur is still their baby—and they don’t know anything! I see so many family relationships really impaired by money—and money has a way of blowing things up.”

One way to avoid that conflict Lucas says, is to make sure terms are clearly outlined well before any funds are invested, including whether the friend or family member will have any right to input in the venture. “Sadly, it isn’t treated as seriously as it should, and agreements need to be put in place before any money exchanges hands,” she says.

Today, most investments come with an extra two cents

“I see [silent partners] as something that’s becoming a thing of the past,” says David Luk, the 33-year-old chief executive of Quewey, a startup online network of experts that facilitates business expertise via free question-and-answer platforms and paid phone-consulting sessions. As people become more sophisticated about investing, Luk says they should feel the urge to provide advice so they can contribute added value to their investment.

“If you asked me to go out and search, in this early funding round, for investors who want to be silent, I think it would be hard to find that. And frankly, I don’t want that,” Luk says. “If I have a choice between an investor who has a willingness and ability to help versus someone who prefers to stay silent and on the sidelines, I’d rather have the person who can add value and not just the capital. We’re a startup and it seems like a waste of a potential resource.”

Often, it’s elusive resources like experience that are most important for growing small companies—and sorely needed at crucial turning points—such as getting down to the business of suing that new capital wisely and making money for all of your investors, silent or not.

Weiss says he’s seen entrepreneurs get an overzealous sense of “We’ve got it!” when funding does arrive. “Investors want that money back, and want their investment to grow—you’re just renting it,” Weiss points out. “It doesn’t just come with a lipstick kiss on the bottom of a Hallmark card.”

3 Factors to Consider When Determining the Best Corporate Structure for Your Small Business

One of the first and most important decisions you make when starting a business is selecting the right organizational structure. The first question you have to ask yourself is “to incorporate or not to incorporate?” Deciding how to classify your business is a complex issue that can have long-standing implications. Because the needs of every business are different, and the law varies from state-to-state, it’s worth an hour or two with a knowledgeable attorney and accountant to investigate all of the issues that will affect your decision. Broadly however, there are a number of arguments that can be made on either side of incorporation.

In terms of pros, formalizing a corporate identity can help boost your business’ credibility. Additionally, incorporated businesses can sell stock or securities thereby expanding your capital-raising options. Finally, barring some exceptions, incorporation may safeguard your personal assets from liability if your company gets sued. On the flipside, time-intensive paperwork and related costs tend to deter some small business business owners in pursuing incorporation.

If you determine that incorporation is the right direction for your business, there are several alternatives to choose from:

Sole proprietorship is the simplest and most common form of business structure especially for small business owners who are in business by themselves or operating on a shoestring budget. There are no complex rules or paperwork. The main requirement is filing a certificate in the countries where the business operates. Generally, sole proprietors are personally responsible for business debts.

General partnership is similar to a sole proprietorship but is used when two or more people go into a business together. A general partnership has the same certificate filing requirements as a sole proprietorship and does not require a formal agreement between the partners. As with a sole proprietorship, you and your partners are personally liable for business obligations.

Corporations usually cross our minds when we think of large companies – and for good reason. A corporation is a more complex undertaking than a partnership or a sole proprietorship. Those with an ownership interest are shareholders and the company is normally managed by directors, though that could be circumvented through a shareholder agreement. Corporations are subject to regulations, such as keeping minutes for shareholder meetings and could be somewhat costly in fees to set up. There are two types of corporations; an “S” and “C” corporations, respectively. The main difference between the two is taxes. “S” corporations can help you get around the double taxation issue, but you have to meet specific criteria. Shareholders for “C” corporations are taxed on the company’s dividends, even though the business already paid taxes on these earnings.

The upside is that unlike in partnerships and sole proprietorships, corporations can make full deductions on health insurance premiums and shareholders have no personal liability for the company.

Limited Liability Company (LLC) is essentially a hybrid with the properties of both a corporation and a partnership. The owners of an LLC are called “members” and can manage the LLC themselves or with managers. Owners have flexibility to determine the structure, from either a general partnership with limited liability, a limited partnership where everyone is part of management with limited liability as well, or even an “S” corporation without the ownership and tax restrictions. Each entity’s liability is limited to their investment in the LLC, but the tax and other benefits are shared by all.

Pull Quote.pngThere is no right answer when it comes to incorporation. Each structure has its merits depending on the size and type of your business. For example, if you plan to engage in activities that involve a higher level of risk, like driving customers or offering financial advice, you may be more likely to consider a corporation or an LLC because of the liability protection they offer. Likewise, if you never intend to go public, or anticipate needing to issue stock for any reason, a corporation may be an unnecessary investment of time and resources. What’s most important to remember is that your initial choice of a business structure isn’t set in stone. You can start out in a sole proprietorship or partnership and later, if your business grows or the risk of personal liability increases, you can convert your business to an LLC or a corporation.

You can find a user-friendly summary of the various corporate structures here or by visiting the Small Business Administration website for more information.