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Silent Partner vs. General Partner: An Overview
Many small businesses and investment vehicles are structured with partners. Technically, a business partnership is created when two or more individuals come together for a specific business purpose.
Business entities can be structured as: sole proprietorships, partnerships, qualified joint ventures, corporations, limited liability companies (LLCs), trusts, or estates.
Each business designation has its own requirements, liabilities, and tax code which can vary according to local, state, and federal law. Generally, silent vs. general partners (GPs) will most commonly come into play when dealing with partnership and/or LLC structures. Both partnerships and LLCs can differ in terms of how profits, losses, and responsibilities are distributed to each participating partner. Partnerships and LLCs can also be combined and structured in a variety of ways. Typically, silent partners are known to only contribute to the business by way of capital infusion—that is, investing money in the business entity—while a general partner is an active manager in business operations.
Key Takeaways
- Silent partners can also be referred to as limited partners.
- Silent/limited partners provide capital to a business entity with an expectation of profit, but they are not directly involved in the management of the business.
- General partners are designated as the managers of a business and can also contribute to the overall capital pool.
- General partners and limited partners are commonly found in partnerships, limited partnerships, and limited liability corporations.
Silent Partners
Silent partners are investors. A silent partner is any individual who provides funding to a business as his only contribution. Partnerships and LLCs can have silent partners. Silent partners can also be referred to as limited partners (LPs).
In a partnership designated as a limited partnership, the liabilities of the silent partner are limited to the amount of money or property that they invest. In an LLC, the partnership agreement will provide details on the liabilities of silent partners. In some cases, silent partners may act as consultants through an advisory board or some other situational setting as designated by the business.
General Partners
A general partner is most commonly found in a limited partnership structure. Limited partnership structures include both limited partners and general partners. General partners are typically designated with control over the management, operations, and use of capital within the business entity.
As mentioned, the limited partner makes investments into the business or investment vehicle and their liabilities are limited to their investment. General partners in a limited partnership, however, have full liability for partnership debts. If the business goes under, a general partner may have their personal assets seized or liquidated to pay creditors and satisfy corporate debts. If the general partner is itself a business, then the business could be liable for debts beyond just their investment.
General partners can also be found in an LLC. LLCs have broader flexibility to structure the partnership details through a partnership agreement. Under an LLC structure, owners/investors are typically designated as members. LLC members are not personally liable for the business’s debts.
Key Considerations: Investing Capital and Partnership Agreements
Business entities need capital to manage a business. Business partnership capital can come from both silent partners and general partners. General partners are responsible for managing the business or investment portfolio. General partners usually provide some capital to the business but they also rely on capital investments from limited partners. Collectively, the investments from GPs and LPs come together to create the business’s total capital.
Partnerships with both general partners and silent/limited partners will detail all of the business’s provisions in a partnership agreement. Limited partnership business structures must adhere to specific legal requirements but other types of partnerships can create their own provisions.
Real estate investment portfolios are one common type of limited partnership that includes both limited partners and general partners. These vehicles are typically set up with backing from an investment company as the general partner. They also include limited partners which are usually required to be accredited investors. The partnership agreement will detail how much the general partner is investing and the terms of investment for the limited partners. Limited partners will usually be required to make scheduled investments over a specified time period.