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”.
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.
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.
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