Kinds of Partnership - Section 6 & 7 and Essentials of Partnership

A partnership is a form of business organization wherein two or more persons join together 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 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, several forms 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 following regularly. The following list of the partners is not exhaustive, since the Partnership Act, 1932 does not restrict any type of Partnership that the partners wish to define for themselves.  

Active/Managing Partner

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 to run the main functions of public notice about his decision. He gives public notice 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. 

Sleeping Partner

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 decides to retire from the partnership firm, then he doesn’t need to give public notice for the same. As a dormant partner is not participating in the 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.

Nominal Partner

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 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 that depicts that he has become a partner by estoppel or partner by holding out. It is pertinent to note that, though he does contribute to capital or management of the firm based on 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 the management of the firm. Such kinds of partners are associated with the firm for their goodwill and money.

Minor Partner

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 agreeing on the, as the agreement entered by a minor is void ab initio. However, the Partnership Act, 1932 allows a minor to enjoy the benefits of partnership when a set of rules and procedures comply followingin 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 cases he needs to make such a declaration by public notice.

Secret Partner

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 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. 

Outgoing partner

An outgoing partner is a partner who voluntarily retires without dissolving the firm. He leaves the existing firm, therefore he is called 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.

Limited partner

A limited partner is a partner whose liability is only up to the extent of his contributions for the capital of the partnership firm.

Sub-Partner

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 that 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 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

Based on 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 a 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 serve a notice depicting intention for the same. This partnership is created to conduct 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 period of partnership.

Particular 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 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 the partnership 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 agreeing. 

For example, a Partnership is made for the production of a movie or the 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 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.

Flexible Partnership

Partnerships that are neither for a fixed duration of time nor any particular venture are called flexible partnerships.

According to Nature

General Partnership

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 to pay the liabilities incurred in the form of debts.

If an agreement is absent, 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 a general partnership, a limited liability partnership is a corporate form of business organization. In such a type of partnership, the liabilities are limited to each partner following 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 the Partnership act,1932 but is governed under the Limited Liability Partnership Act, 2008. 

In a limited liability partnership, some or all except one partner have limited liability following 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

Legal Partnership

When the partnership is formed following accordance with the provisions of the Indian Contract Act, 1872 and Indian Partnership Act, 1932, it will be termed as a legal Partnership.

Illegal 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.

Based on Registration

The registration of a firm is not mandatory under Partnership Act, 1932. Both Registered firms and unregistered firms are valid in the eyes of Law. 

Unregistered Partnership Firm

An unregistered firm is established when there is an execution of an agreement between the partners. The unregistered partnership firms following unregistered partnership firm following in unregistered partnership firm allow the partners to carry out business activities as provided in the agreement. 

Registered Partnership Firm

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 the following state laws. In a partnership, registration of a firm is preferred due to benefits it offers such as filing a suit in court.

Conclusion

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 a 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 to come up with a proper framework for LLP in India.

https://indiankanoon.org/doc/1280166/