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Partnership is a form of business organization wherein two or more persons join together in order to carry out business. A partnership can be considered as an improvement of “sole proprietorship” wherein a single person carries out his business with his individual resources, skills and efforts.
The major disadvantage of being a sole proprietor is that since there is only a single person involved in the business, it is difficult for him to manage the huge resources and investments in the business. On the other hand, in a partnership, a number of persons are involved and they can pool their resources in order to form and manage a much larger business. Moreover, if there is a loss in the business, it can be divided amongst the partners of the partnership firm.
A partnership is an agreement between two or more persons who wish to share profits and losses for the partnership firm. However, in a partnership, all the partners do not participate in all the activities of the firm for profits and losses equally. There are various types of partnership in accordance with their extent of liability and their participation in the firm. The main purpose of this article is to discuss the various types of partners in a partnership.
Definition of Partners
According to Section 4 of the Indian Partnership Act, 1932, a partnership is defined as a relationship between two persons who mutually agreed to share the profits and losses in the business. Therefore, persons who have entered into an agreement with one another are individually known as “partners”.
Furthermore, as per Black Law dictionary, a partner is a member of a firm or co-partnership; who has united with others in order to form a partnership in business.
General Types of Partner
The following list includes the types of partners we come across on a regular basis. The following list of the partners are not exhaustive in nature, since the Partnership Act, 1932 does not restrict any type of Partnership which the partners wish to define for themselves.
An active partner mainly takes part in the day-to-day running of the business and also takes active participation in the conduct and management of the business firm. He carries the daily business activities on behalf of other partners. He may act in different capacities such as manager, advisor, organiser and controller of affairs of the firm. To be precise, he acts as an agent of all the other partners in order to run main functions pertaining to business. Furthermore, subject to the clause in the partnership deed, the active partner can withdraw remuneration from the firm
With regards to his role in the partnership, his role is of utmost importance. Therefore, if at all he wishes to retire from the partnership firm he must give a public notice about his decision. He gives a public notice in order to absolve himself from liability and acts done by the other partner. If he doesn’t issue a public notice declaring his retirement he would be held liable for the acts done by other partners post-retirement also.
A sleeping partner is also known as a “dormant partner”. This partner does not participate in the day-to-day functioning activities of the partnership firm. A person who has sufficient money or interest in the firm, but cannot devote his time to the business, can act as a sleeping partner in the firm. However, he is bound by all the acts of the other partners.
A sleeping partner like any other partner brings share capital to the firm. He also continues to share the profits and losses of the firm. If a dormant partner makes a decision to retire from the partnership firm, then it is not mandatory for him to give a public notice for the same. As a dormant partner is not participating in daily operations of the business, he is not allowed to withdraw remunerations from the firm. If at all the partnership deed is providing remuneration to dormant partners, it is not deductible under the Income Tax Act, 1961.
A nominal partner does not have any real or significant interest in the partnership firm. In simple words, he is only lending his name to the firm and does not have a voice in the management of the firm. On the strength of his name, the firm can promote its sales in the market or can get more credit from the market.
For example: A partnership is executed between the partner and the celebrity or a business tycoon for the sake of value addition to the firm and also for promoting branding by using the person’s fame and goodwill.
This partner does not share any profit and losses in the firm because he does not contribute any capital to the firm. However, it is pertinent to note that a nominal partner is liable to the outsiders and third parties for the acts done by other partners.
Partner by Estoppel
A partner by estoppel is a partner who displays by his words, actions or conduct that he is the partner of the firm. In simple words, even though he is not the partner in the firm but he has represented himself in such a manner which depicts that he has become a partner by estoppel or partner by holding out. It is pertinent to note that, though he does contribute in capital or management of the firm but on the basis of his representation in the firm he is liable for the credits and loans obtained by the firm.
There are two essential conditions of establishing a ‘holding out’:
- Firstly, the person who is held out must have made a representation of words, actions or conduct that he is a partner in the firm.
- Secondly, the other party must substantially prove that he had knowledge of such representation and he acted on it.
Partner in Profits only
This partner of a firm will only share the profits of the firm and won’t be liable for any losses of the firm. Moreover, if a partner who is in “partner in profits only” deals with any of the third parties or outsiders then he will be liable for the acts of profit only and not any of the liability. He is not allowed to take part in management of the firm. Such kinds of partners are associated with the firm for their goodwill and money.
A minor is a person who is yet to attain the age of majority in the law of the land. According to Section 3 of the Indian Majority Act, 1875 a person is deemed to have attained the age of majority when he attains 18 years of age. However, a minor can also be appointed to claim the benefits of the Partnership.
It is pertinent to note that, Section 11 of the Indian Contract Act, 1872 prohibits a minor from entering into an agreement, as the agreement entered by a minor is void ab initio. However, the Partnership Act, 1932 allows a minor to enjoy benefits of partnership when a set of rules and procedures are complied in accordance with the law. A minor will share the profits of the firm, however, his liability for losses is only limited to his share of the firm.
A minor person after attaining the age of majority (i.e. 18 years of age) needs to decide within 6 months if he is willing to become a partner for the firm. If at all a minor partner decides to continue as a partner or wishes to retire, in both the cases he needs to make such a declaration by a public notice.
In a partnership, the position of secret partner lies between the active and sleeping partner. The membership of the firm of a secret partner is kept secret from the outsiders and third parties. His liability is unlimited since he holds a share in profit and shares liabilities for losses in the business. He can even take part in working for the business.
An outgoing partner is a partner who voluntarily retires without dissolving the firm. He leaves the existing firm, therefore he is called as an outgoing or retiring partner. Such a partner is liable for all his debts and obligations incurred before his retirement. However, he can be held liable for his future obligations, if at all he fails to give a public notice stating his retirement from the partnership firm.
A limited partner is a partner whose liability is only upto the extent of his contributions for the capital of the partnership firm.
A sub-partner is a partner who associates someone else in his share of the firm. He gives a part of his share to the person. It is pertinent to note that, the relationship is not between the sub-partner and the partnership firm but is between him and the partner. Therefore, a sub-partner is a non-entity of the firm and he does not hold any liability towards the firm.
A sub-partner usually agrees to share profits which are derived from the third party. Such a partner cannot represent himself as a partner in the original firm. Furthermore, he doesn’t reserve any right in the original firm nor he is liable for acts done by partners of the firm. He can only claim his agreed share of profits from the partner who has contracted him to be a sub-partner.
Types of Partners in the Partnership Act
The types of partners under the Partnership Act, 1932 can be studied under the following heads:
- According to objectives
- According to tenure
- According to nature
- According to legality
- On the basis of Registration
According to Objectives
Partnership at Will
When a partnership is created, it’s upon the discretion of the partners to decide that till when they want the partnership to exist. Therefore, whenever a partnership is created without determination of a specific time limit, it is known as partnership at will.
Such partnership is based upon the will of the partners and it can be brought to an end whenever any of the partners serves a notice depicting intention for the same. This partnership is created to conduct a lawful business for an indefinite period.
Furthermore, the dissolution of a partnership is not pre-decided and it is taken into consideration when the need arises. It’s upon the partners to decide among themselves the requisite time period of partnership.
The main objective behind making a particular partnership is to carry out a specific undertaking. Such a partnership is created between partners for a project of a temporary contract-based work or a specific business only, this is known as a particular partnership. In particular partnerships, once the objective of the business partnership is achieved, then partishership gets dissolved. In simple words, this partnership is formed for undertaking the particular venture and it comes to an end automatically after the completion of tasks involved in the venture. Nevertheless, the partners have a choice to continue the partnership by coming to an agreement.
For example: Partnership made for production of a movie or a construction of a building.
According to Tenure
Partnership for a Fixed Term
In such a type of partnership, the partnership is for a fixed period of time say 5 years, 2 years or any specified duration of time. The partnership automatically comes to an end after the expiration of the said period.
Partnerships which are neither for a fixed duration of time nor for any particular venture are called flexible partnerships.
According to Nature
In a general partnership, each partner reserves a right to make decisions about the working and management of the firm. It is pertinent to note that, the liability of the partner in such a type of partnership is unlimited. It means that if there is any financial error or loss incurred by one partner, all the other partner’s assets would be taken into consideration in order to pay the liabilities incurred in the form of debts.
If there is absence of an agreement, the provisions of the Indian Partnership Act, 1932 are applicable for general partnerships wherein the liability of each partner is limited.
Limited Liability Partnership (LLP)
Unlike general partnership, limited liability partnership is a corporate form of business organization. In such a type of partnership, the liabilities are limited to each partner in accordance with the contribution made by them in the business. Furthermore, the personal property or assets of the partner cannot be attached to pay back the liability of the firm. It is pertinent to note that this organization is not governed under Partnership act,1932, but is governed under Limited Liability Partnership Act, 2008.
In a limited liability partnership some or all except one partner have a limited liability in accordance with the extent of capital contributed by them. It is pertinent to note that, in partnership all the partners cannot have limited liability.
According to Legality
When the partnership is formed in accordance with the provisions of the Indian Contract Act, 1872 and Indian Partnership Act, 1932, it will be termed as a legal Partnership.
The partnership can become illegal when it violates the provisions of any law of the country or when the requisite number of partners exceeds beyond the time limit or below the time limit.
On the basis of Registration
The registration of a firm is not mandatory under Partnership Act, 1932. Both Registered firm and unregistered firm are valid in the eyes of Law.
Unregistered Partnership Firm
An unregistered firm is established when there is execution of agreement between the partners. The partnership firm which is unregistered allows the partners to carry out business activities as provided in the agreement.
Registered Partnership Firm
In order to register a partnership firm, it must be registered with the Register of Firm (RoF) having the requisite jurisdiction over the place where the Firm is carrying out its business activities. The application of registration involves the payment of registration fee to RoF, which varies from state to state in accordance with the state laws. In a partnership, registration of a firm is preferred due to benefits it offers such as filing a suit in the court.
The Indian Partnership Act, 1932 talks about the general form of partnership, however, the general form of partnership has somewhere lost its charm due to the inherent disadvantages it has. One of the major disadvantages is the unlimited liability of all the partners in the partnership firm in terms of legal consequences and debts in the firm, without considering their respective holding. Moreover, the general partners are held joint and severally liable for the acts committed by the other partners.
Therefore, we can see that there is a shift towards Limited Liability Partnership, which provides more flexibility to the partners. Even the Indian government has recognised the disadvantages of General Partnership and stated that there was a need to introduce LLP in India. The government even appointed a committee headed by Mr. Naresh Chandra in order to come up with a proper framework for LLP in India.