Sleeping partners’ liability

Whilst a sleeping partner would technically relate to a partnership, sleeping partners are often referred to as shareholders who don’t take an active role in the management of a limited liability company but simply provide investment. However, a sleeping partner may literally be a partner in a limited liability partnership or standard partnership, or could be a shareholder of a limited liability company.

• the main point of being a sleeping partner is to obtain a return on investment;
• with a limited liability company or partnership, a shareholder’s liability is only up to the value of their investment, which they may lose if anything happens to the company.

For the purposes of this note we assume that sleeping partners are in fact shareholders of a limited liability company or limited liability partnership rather than an unlimited partnership.

Advantages of being a sleeping partner

The benefits however of being a sleeping partner and taking no role in the management of the company, is that there is little or no chance of being considered to be a shadow or a de facto director, with all of the penalties a breach of duty of directorship brings.

The advantages of silent partnership or sleeping partnership are that when the business increases profit then so do you, and you may receive an income from the money you have invested or capital growth.

At the same time, you have no managerial responsibilities and crucially no managerial or directorship duties which, if you fall foul of, may lead to significant personal liability both in terms of financial liability or the potential to be disqualified as a company director.

What are the risks of being a sleeping or silent partner as a shareholder?

If a silent or sleeping partner takes no role in the management of the company and lets the directors and managers control the company entirely, then arguably their risk is higher than those shareholders who participate in the running of the company as far as shareholders are able to.

Voting rights

The control that shareholders have over the day to day running of the company if they are not directors is limited, but there are ways in which they can have some control over the direction of the company. Shareholders’ interests are defined by the shareholding that they hold as a percentage of the company’s overall shareholding. A shareholder that holds more than 50% of the overall shares has a majority shareholding, and therefore has a far better chance of being able to dictate the direction of the company when voting is required at a shareholders meeting.

Shareholders voting can be used to affect issues such as deferring dividends, alterations to the company’s constitution, or change in the directors. Another power that shareholders have is the ability to remove directors.

Shareholder agreement

Shareholders may have other entitlements to control certain aspects of the company if there is a shareholders agreement in place. Sometimes this gives additional powers to shareholders, such as a power to veto certain decisions. For more details, read our pages on shareholders agreements.

Any shareholder who simply lets the directors get on with a company and doesn’t take part in general meetings or voting risks the company going in a direction or taking action that they do not agree with. This might affect the share value of the company and therefore directly affect the sleeping partner.

Unwanted changes and additions

The shareholder that ignores a company’s position may find that a company is moving towards insolvency, in which case their investment will inevitably turn out to be worthless. They may also find that the company brings in new shareholders which may have the effect of diluting the value of their shares.

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At Francis Wilks & Jones we frequently act for companies to provide advice on liabilities of investors. If you would like to find out more detail, contact our friendly team of experts today and we can chat through the issues with you.