Sleeping Partner: Also known as a dormant partner or a silent partner, this is an investor in an organization (partnership) who has no active role in the administration of the business. However, they do have liability in the company and own a share of the partnership’s equity.
Sleeping Partner Details
A partnership forms when two or more people come together to run a profit-making business. However, there are different types of partners, and their roles and liabilities in the partnership differ. The partners in a firm have different duties, rights, and responsibilities in the firm. Some partners may act as investors, contributing to the company’s capital, whereas others do not invest in it or take up active roles in its administration and operations.
Unlike an active or working partner, a sleeping partner ‘sleeps.’ This means that they are not active in the management of the partnership and only contribute to a share of the capital of the business. The other partner’s activities bind them, and they share the profits and losses of the business. Active partners are required to give a public notice upon their retirement from the farm; we do not expect the same from sleeping partners, who are also not liable for acts done after retirement.
Sleeping Partner Examples
Silent partners are mainly investors in the company, and they have limited liability. They have a chance to let the working partners take ownership of the business activities and have the chance to get engaged in other business activities while earning a passive income from the partnership. Should the silent partner be declared bankrupt, of unsound mind, or in the event of their death, the company will not be affected, which will not lead to its dissolution. A sleeping partner has no authority to act on behalf of the company; however, they have the right to question or challenge the decisions made and to view the financial statements.
A sleeping partner ought to research the company and industry that they will be investing in. This is because they will share the profits or losses made. They earn a return on the investment they make in the company and are not involved in the company’s daily operations. However, since they have limited liability in the company, they will be liable for a loss only up to their invested amount.
Sleeping vs. Nominal Partner
There is a need to distinguish the differences between a sleeping partner and a nominal partner. A sleeping partner is not the same as a nominal partner. Both sleeping partners and nominal partners are liable to third parties for the acts of the firm. A sleeping partner has a capital shares contribution that factor in the profits and losses of the partnership; however, they are not known to outsiders.
On the other hand, nominal partners are purposefully brought on board to take advantage of their name or reputation. Nominal partners are known to the public, but they do not share the firm’s profits, nor do they participate in its management.