A partnership needs different types of partners to run the business and get profits. A partnership is an improved version of a sole proprietorship. The biggest disadvantage of a sole proprietorship is that the individual has to work alone in the business. It is difficult for one person to handle all the pressure and workload alone. But in partnership, the person can add any other person to run his business as a team and can divide the profit and loss in fixed percentages. These individuals are called partners and working as a team is called partnership.
Different types of partners have been given under the Indian Partnership Act 1932. The rights and obligations of each type of partner differ from each other. In this article on Types of Partners in Partnership, we will discuss all types of Partners in detail.
Table of Contents
Who is a partner?
A partner is a member of a partnership firm who works with another partner in the partnership firm. The person who can contract can become the partner in a partnership firm by signing the partnership deed which is a written agreement between all partners to work as partners and share the profit and loss.
Who can be a partner in a partnership firm?
Any real or artificial identity who is competent to make a contract can sign the partnership deed to be the partner in the partnership firm. The person must agree to the terms and conditions of the agreement before signing the deed. The identity which can be the partner in a partnership firm is:
Individual
A person who can contract and obtain the age of majority can be the partner.
Firm
A partnership firm is not a person or identity so the firm cannot enter into a partnership with another firm.
Karta of HUF
The Karta of HUF can become the partner based on his capacity.
Company
A company can be the partner in the partnership firm if the memorandum of association of the company allows doing such type of contract.
Trustee
A person who is a trustee in a trust can only be the partner in his capacity.
How many partners in a partnership firm are allowed?
There must be a minimum of two persons required for the partnership in India. The maximum number of partners is 20. More than 20 partners in a partnership firm are illegal as per the Indian Partnership Act 1932.
Type of partners in partnership firm
The Partnership Act 1932 provides the different types of partners in the partnership firm.
Active partner
An active partner is a person who is actively working in the partnership firm. He has a major and important role in the company. The active partner is also known as the Ostensible Partner or managing partner. The active partner in a partnership firm carries on the firm business on behalf of another partner in the firm daily. He works as an agent of all other partners by doing daily work to run the business. For this, he has the right to take the salary and remuneration from the bank account of the partnership firm if written in the agreement deed.
An active partner acts in different roles for the partnership firm. He acts as manager, advisor and controller for the affairs of the partnership firm. He bears unlimited liability in the partnership firm.
Prior notice of retirement from Active partner
The active partner has to give public notice to the partners before they retire from work. This notice will remove him from his liabilities to do work for the firm. If a partner does not give prior notice and stop his work, he will be liable for the losses incurred to the firm.
The active partner can change his role to any other type of partner by giving notice to all other partners of the firm. The partners will vote to change their position.
Sleeping Partner
A sleeping partner in the partnership firm is a person who does not participate in the daily activities of the firm. He does not take part in the firm as an active partner does. He is just sharing the profit and loss of the company and also, bound by the actions of all other partners. A sleeping partner in a partnership firm is also known as a dormant partner. The liability of the sleeping partner is unlimited.
A sleeping partner is a person who has sufficient money in his account but does not have much time to participate in the firm like an active partner. So he just brings his share capital to the firm and lets active partners run the business.
A sleeping partner cannot ask for remuneration. But, if the partnership deed allows him to do so, then he can withdraw the same and that remuneration shall not be deductible under the Income Tax Act, 1961.
A sleeping partner may take retirement by giving notice to the board of the firm. It is not necessary in the case of sleeping partners to give prior public notice because he is not actively participating in the affairs of the firm. All the affairs of management are done by active partners, not by sleeping partners. He is just a partner who added his money to the firm and shared the profit and loss.
Nominal Partner
A nominal partner is a person who does not have any interest in the partnership firm. The nominal partner in the partnership neither adds his money to the company not he shares the profit and loss with other partners of the partnership. He does not even take part in the management of the firm.
The nominal partner in a firm is only for using his name to promote the business of the firm. He can be a celebrity or any other famous businessman. Partnerships add such types of partners in the firm just to use their goodwill and fame to increase sales or business. It is one of the best strategies to grow the business in the name of a person who is already successful.
Nominal partner example
You have seen many television ads or posters in which celebrities are holding the products and promoting them. These celebrities are the nominal partners of the partnership who are promoting the business of the firm.
The nominal partner is liable for the remuneration for his work. One thing which should be not in the case of a nominal partner is that he is responsible for outsiders or any third parties for the act done by other partners of the partnership.
Partner by estoppel
A person, who represents himself either orally, verbally or by acting as a partner of a partnership firm, becomes liable to a third person who invests his money in the firm by such representation. The doctrine of estoppel shall apply to a person who has represented himself as a partner in the partnership firm. This means he cannot escape the consequences of his actions earlier.
The person who represents himself as a partner of the firm does not have any interest in such a firm because he is not a real partner of that firm. Neither he has added his capital to the firm nor does he share the profit and loss of the firm with other partners.
There are two main essentials of the partner by estoppel. That:
- The person must have represented orally, in writing or by conduct that he is a partner of a particular partnership firm.
- The third party must have acted knowing that representation.
If any person can prove such representation in litigation, the person who presents himself as a partner shall be liable to pay damages caused by the third party to the representation.
For example, Mohan tells his friend that he is a partner in a firm that buys goods. Now his friend sells his goods knowing that Mohan is a partner of that firm. However, the firm is unable to pay the money for the goods. Now he has the right to take money from Mohan as he has become a partner in that firm by that representation.
Partner by holding
When a firm declares the name of a person as the partner and the person knowing this does not react or deny that partnership, he will become a partners by holding for that firm. Now, if a person invests his money by such declaration, then he will be liable to that person if he took any loss from the side of that firm.
For example, a partnership firm represents that Amit is a partner of that firm. Rohit tells about this to Amit and he does not deny the same. Now, if Rohit adds his money to the firm and takes the loss, Amit will be responsible for repaying his loss. Because now, he is the partner by holding of that firm.
Partners in profit only
The partner who just shares the profit of the firm is called a partner in profit only. He holds the place as a partner with his money and goodwill. He is not liable for any liabilities of the partnership firm. Even when dealing with the third party, he will be just liable to take the profit from that deal, not the loss.
The partner in profit is not allowed to participate in the management of the partnership firm. He does not hold the decision-making power.
Minor as a partner in the partnership firm
A person who does not attain the age of majority is known as a minor. In India, the age of the majority is 18 years old. It means a person who has not crossed the age of 18 years old yet is a minor. Minor cannot contract. Section 11 of the Indian Contract Act, 1872 stops a minor from entering into a contract. But in some circumstances, he can be the partner in the partnership firm.
The Partnership Act 1932 allows the minor to be a partner in the firm to enjoy the profit of the partnership if all the partners of the firm give their free consent to add a minor as a partner. The minor’s liability towards the firm shall be limited to his share in the partnership firm.
A minor can continue his partnership when he becomes an adult. The law provides him with a period of 6 months in which he can decide whether to work continuously or not. He will have to give his decision by giving public notice in writing whether he is going to become a partner of the firm or not.
If the minor after attaining adulthood and by notice declares that he will be a partner in the firm, he shall subsequently be liable for all acts done by the other partners.
Secret Partner
The secret partner takes the position between the active partner and the sleeping partner. The membership of a secret partner is kept secret from the outsiders of the firm and even at the time of dealing with third parties.
The secret partner adds the capital to the firm and shares the profit and loss with other partners. He can take part in the work of the firm and is also liable to take remuneration for the work. His liability towards the firm is unlimited.
Ongoing partner
A partner who is going to take retirement from the firm before the dissolution of the partnership firm is called an ongoing partner. During the process of his retirement, he is liable for the profit and losses of the firm. But, after retirement, he will not be liable for any profit or loss. His liability will become null after retirement.
The ongoing partner has to submit a notice to the board of the firm that he is leaving the firm. The approval may take up to 30 days. During such a time period, he will be liable for all profit and loss.
Limited Partner
A partner whose liability is limited up to the extent of his contribution to the company is called a limited partner. He shares the profit and loss of the firm up to his investment. The partnership deed specifies his percentage of profit and loss.
Sub partner
Sub partner is not the partner of the firm. He is a third person with whom a real partner of the partnership firm agrees to share the profit desired from the firm. There are some important points related to Sub partners:
- Sub partner is not liable for the loss of the firm as he is not associated directly with the firm.
- He does not have the right to participate in the management and working of the firm.
- A sub-partner cannot represent him as the partner of the firm.
- He is not liable personally for the actions of the other partners in the firm.
- He can only claim his share of profit from the partner who has done a written contract to be the sub-partner.
Rights of the partners
The Indian Partnership Act 1932 provides the different rights of the partners. Which are:
- The partner can take part in the management and working of the business run by the partnership firm.
- He has the right to consult and hear all the matters of the partnership firm.
- He can check all the necessary details like documents of the firm, bank details etc. without any restriction.
- Every partner has the right to take his share which is decided mutually at the time of the formation of the partnership firm.
- He is entitled to take 6% interest per annum on payment.
- He has the right of indemnity against the firm that the firm will indemnify him for the losses taken by him for the benefit of the firm.
Duties or liabilities of partners in a partnership firm
- He will work in good faith for the benefit of the firm
- The partner will not take any private advantage himself from the account of the firm
- He must provide all the necessary information related to the partnership firm to all other partners.
- To indemnify the loss caused by fraud by him or any other partner
- Not to carry any new business competing for the business of partnership firm
- To follow all the duties mentioned in the partnership deed.
- To use the firm property only for fair use
Conclusion
The Types of partners in the Partnership firm prove the different rights and liabilities to the partners so that they can enjoy their profits earned by the business of the firm. It is best practice to do business because of its features. A person working for the business will not be the only one. He can add any other type of partner who can help him to grow the business faster.
A minor can also be a partner in a partnership firm to enjoy profits from the business. A partnership firm also provides a way for the person who has money in his account but does not have time to do business. He can invest his money in a partnership firm and earn profit.
You can follow us on Instagram and Linkedin to get notifications of new articles published by Legal Study Material.