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Understanding the difference between silent and general partners

On Behalf of | Jan 19, 2023 | Business Formation

When you decide to launch Massachusetts business venture, you will be able to choose between silent partners and general partners. Both of these types of partnerships offer pros and cons to your potential business.

Understanding partnerships

Before you begin the process of business formation, you should understand exactly what the purpose partnerships serve. Partnerships involve formal and legally binding agreements for the management and operation of a company. Partnerships must involve at least two people and may involve more.

General partnerships

General partnerships require all parties to share in the profits, losses and assets of the business venture.

Other important facts about a general partnership include:

  • Typically chosen as the default partnership
  • Tax structure typically involves paying on a personal level instead of corporate
  • Divisions usually split equally
  • Can allow equal participation in control and management
  • Does not contribute to the capital infusion
  • Usually actively runs the company

Silent partnerships

Some partnerships refer to silent partners as limited partners. Typically, a silent partner becomes involved with the company by investing a large amount of capital. This makes silent partnerships preferable in many start-ups. Unlike general partnerships, a silent partner does not contribute to the daily operation or management of the company.

One might choose to become a silent partner for the following reasons:

  • They lack industry knowledge.
  • They do not have time to contribute on a daily basis.
  • They do not want the duty of management or lack experience.
  • They want to limit their liability.

Liability in general vs. silent partnerships

In a general partnership, all partners can be held accountable for any debts or legal liabilities. A silent partner’s role restricts liabilities based on their contributions to the company.

Silent partnerships may provide excellent investment opportunities. But you may prefer to choose the right to contribute to the daily management of the company. You should carefully discuss your desired outcomes with other potential partners.