Different Kinds of Partners and Benefits of Partnership Firm
A partnership firm is an association of two or more than two persons who agree to set up a business together. The individuals engaged in the partnership contribute assets as an investment to the firm. These individuals are the partners, and the enterprise together is the partnership firm. The main motto of any partnership firm is to make a profit by collaborating and producing better results than proprietors’ firms.
The partnership firm’s structure is defined as per the Partnership Act, 1932, which lays down all its provisions. A partnership deed must be prepared during the registration of the partnership, which states the terms of the partnership, such as the capital, profit and loss sharing, and business operations.
Partnership Firms in India
The following are the different partnership types in India. You can choose one structure as per your requirements:
- General Partnership
In this type, each partner gets equal rights on how to manage and run the firm. One disadvantage of this partnership type is that the partners have unlimited liability. The partners may have to use their personal assets to repay all debts and claims if any partner causes any loss or financial error.
A General Partnership can be of the following two types:
- Partnership at will
In this type of partnership, there is no closure time limit set, and the partners decide how long they want the partnership to last with mutual agreement. The split-up of partnership is also done with mutual consent. It is not pre-planned and is done when there is a need.
- Particular Partnership
The particular partnership is formed for the accomplishment of a particular work. The work can be a short-term contract or for a specific business only. The partnership is dissolved after the work is completed. But again, to continue with the partnership or not is the partners’ choice. For example, a particular partnership can be for the building of a bridge together.
- Limited Liability Partnership (LLP)
In this partnership, each partner has limited liability as per their capital contribution. There is no obligation to use the personal assets of the partners for repaying the firm’s debts. Limited Liability Partnership Act, 2008 governs this partnership and not the Partnership Act 1932.
Firms Based on Partnership Registration Status
The Partnership Act considers both registered and unregistered firms as valid and recognized. Registration of the partnership firm is not compulsory.
- Registered Partnership Firm
Partners often prefer to register their firms because a registered firm enjoys certain advantages. Registration of partnership firms is done with the Registrar of Firm (ROF) that has authority over the firm’s place of business. A registration fee is also needed for registration. The fee varies from state to state. It is better to register your business to avoid any problem in the future,
- Unregistered Partnership Firm
This type of firm is formed following an agreement made by the partners. The activities of the business are according to the agreement between the partners. In such a firm, the partners can run the business as per the terms stated in the agreement.
The Different Types of Partners
Active or Working Partner
An active partner is one who takes an active part in all the management activities of the firm. He contributes capital to the firm and also has unlimited liability on him. He decides how the firm should run under his capital contribution and his involvement. If the partner wants to retire, he has to provide public notice. Failing to do so will make him liable for the deeds of other partners even after retirement. The active partner’s actions bound the firm and its partners. The active partner is entitled to remittance from the firm, as per the partnership deed’s clause.
A nominal partner is not concerned with the firm’s running, and he is also not entitled to profits made by the firm. He has no involvement with the firm’s management or operations. Nominal partners only lend their name and reputation to the firm for its benefit. As a partner, he is, however, liable to the outsiders. For example, a partnership formed with a celebrity to take advantage of his brand value.
Sleeping or Dormant Partner
A sleeping partner does not show any concern in the management or operations of the business. Other partners may take his opinion before making any important decisions. They are not even known to outsiders, but they contribute capital to the firm. If the firm runs into any debts, the sleeping partner is obligated to clear the outstanding amount. They do not have to give any public notice before retirement. They are not entitled to get a remittance because of no participation in managing the firm. If the partner’s remuneration is provided in a partnership deed clause, it is not subject to deduction under the Income Tax Act.
Partner by Estoppel Or Holding Out
When a partner accepts that he is a partner in the firm by his own words or conduct, he becomes a partner by estoppel. Doing so makes him obligated not to back out from his words later. He is liable to third parties to clear the debts if any such situation arises.
The two conditions for the principle of holding out:
- The holding out person needs to have made his representation that he was a partner by written or spoken words or by conduct
- Evidence has to be provided by the other party that he knew of the representation and had acted upon it
Minor as A Partner
Minors are forbidden in getting a contract, but they can be added as partners and receive the benefits of the partnership. The minors can only enjoy the benefit of the profit of the firm. In the event of any loss, minors are not obligated to use their private property to repay the debts. They also do not have the rights to take legal action against other partners.
Partners in Profit Only
Under some circumstances, partners may join a firm under an agreement to share only the profits and not be liable for any losses that occur. They are, however, equally liable like the other partners. In the case of other partners being insolvent, outsiders may hold them liable since the profits-only sharing clause is unknown to outsiders.
In case a partner is ready to share his profits from the firm with another third party, that person becomes a Sub-Partner. A sub-partner cannot put himself as a partner in the original firm. The subject partner can ask for profit only from the contracting partner. He does not have any authority in the original firm and is not liable for its deeds.
A partnership firm is the most popular form of the structure since it facilitates a business’s smooth functioning. 3E Accounting has a team of highly qualified accounting professionals who provide entrepreneurs with all the support needed to register their businesses and operate it efficiently. They offer assistance to set up a partnership company and help in completing all the legal formalities efficiently.