Silent Partner vs. General Partner: What's the Difference?

Silent Partner vs. General Partner: An Overview

Many small businesses and investment vehicles are structured with partners. Technically, a business partnership is formed 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 laws, which may vary depending on local, state and federal law. In general, limited versus general partners (GPs) will have the most to play when dealing with partnership and/or LLC structures. Both partnerships and LLCs can differ in terms of how gainlosses and responsibilities are distributed among each participating partner. Partnerships and LLCs can also be combined and structured in different ways. It is generally known that silent partners contribute to the company only through contributions capital infusion (i.e. investing money into the business entity), while a general partner is an active manager in the business operations.

Key Takeaways

Silent partners are also called limited partners.
Silent partners/limited partners provide capital to a business entity with the expectation of profits, but are not directly involved in the management of the company.
General partners are designated as managers of a business and can also contribute to the overall capital pool.
General partners and limited partners are often found in partnerships, limited partnerships, and limited liability companies.

Silent partners

Silent partners are investors. A silent partner is any person whose sole contribution is to provide financing to a company. Partnerships and LLCs can have silent partners. Silent partners are also called limited partners (LPs).

Referred to in a partnership as a limited companythe silent partner’s obligations are limited to the amount of money or property they invest. In an LLC, the partnership agreement contains details about the liabilities of limited partners. In some cases, limited partners may act as advisors through an advisory board or other setting as designated by the company.

General Partners

A general partner is usually 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 in the business or investment vehicle and his obligations are limited to his investment. However, managers in a limited partnership are fully liable for corporate debts. If the business goes bankrupt, a general partner’s personal assets can be seized liquidated to pay creditors and pay off business debts. If the general partner is itself a corporation, the company may be liable for debts beyond just the investment.

General partners can also be found in an LLC. LLCs have broader flexibility to structure the partnership details through a partnership agreement. In an LLC structure, owners/investors are typically designated as members. LLC members are not personally liable for the company’s debts.

Key Considerations: Capital Investments and Partnership Agreements

Business entities require capital to run a business. Business partnership capital can come from both limited partners and general partners. General partners are responsible for managing the business or investment portfolio. General partners typically provide some capital to the business, but also rely on capital investments from limited partners. Collectively, the investments of GPs and LPs come together to create the company’s total capital.

Partnerships with both general partners and limited/limited partners will detail all the business of the company provisions in a partnership agreement. Limited partnership business structures must meet specific legal requirements, but other types of partnerships can create their own provisions.

Real estate investment portfolios are a common type of limited partnership that includes both limited partners and general partners. These vehicles are typically set up with the support of an investment company as a managing partner. They also include limited partners, who are usually required to be so accredited investors. The partnership agreement details how much the general partner is investing and what the investment terms are for the limited partners. Limited partners will generally be required to make planned investments over a specified period of time.