Partnership in business means a pact or deal between two or more parties (individuals or entities) where they share profits. It is not always necessary that each partner will have an equal level of participation or an equal share of profit in the business. The share of liabilities might vary as well. This is why we have different types of partners in a business firm.
Concept of Partnership
Section 4 of the Indian Partnership Act, 1932 defines partnership as a relationship between two or more people who mutually agree to share risks, profits, losses, and other liabilities in a business. The distribution of share happens under the supervision of all partners or members included in the business firm.
Partnership firms are constituted by different types of partnerships. The agreed norms and shares between the partners are usually detailed in a contract.
The Partnership Act of 1932 does not restrict the formation of any new kind of partnership that the partners wish to indulge in.
Types of Partners in a Business
Businesses display different forms of the partnership today. Among the most popular 3 types of partnership are -
Active or Managing Partner
Dormant or Sleeping Partner
Nominal Partner
Apart from these 3 types, there are other different kinds of partnerships as well. Given below is a detailed explanation of each partner type in a business firm.
1. Active/Managing Partner
This is one among the types of general partnership where a particular individual or entity takes up the managing role. The managing partner has to have active participation in every aspect of the business. Such a partner is known as an Ostensible Partner. These types of partners in partnership look after the day to day progress of the business on behalf of other partners.
If the active partner of a business wishes to withdraw from the partnership, he has to first give public notice about it. Through the notice, he would free himself from the responsibilities and the actions taken by other partners after his exit. Such type of partners is liable for every action taken in business until retirement with a public notice.
2. Dormant/Sleeping Partner
A dormant partner in the firm does not take an active part in the daily chores of the business. Such partners are the ones who only contribute to the capital in a business and do not participate in management. Dormant or sleeping partners in the partnership form of business organization are usually bound by the actions taken by all other partners.
Dormant partners still hold their share of profits and losses of the firm. This type of partners do not need to give public notice on retirement.
3. Nominal Partner
Nominal partners are the ones who do not hold a major share of interest in the partnership. In other words, it can be said that he is only lending his name to the partnership deal. In these types of partnership business, a partner is neither liable to contribute capital to the firm, nor is he entitled to share profits. However, nominal partners are still answerable to third parties for any act done by the other business partners.
4. Partners in profits only
Such types of partners do not hold any form of liabilities in a firm. They are only entitled to share profits. Even while dealing with third parties, the partner will be liable only for the profit-related matters. He will not be answerable for any other move made by the business firm.
5. Partner by Estoppel
Partner by Estoppel means when a person declares (through action or words) to another partner that he wishes to participate as a partner in the firm. Such partners cannot later deny being a business partner. These types of partners in partnership firms are not actually partners, yet have represented themselves as such by Estoppel.
6. Minor Partner
According to the Contract Act, a minor (individual aged below 18 years) cannot be an official partner in any type of the partnership firm. However, such partners can be entitled to a partnership if other business partners give their consent. A minor can share the profits of a business, but his liability for losses faced by the firm will be limited to his share of capital.
When a minor partner turns 18, he is given a span of six months to decide whether he wishes to continue as a partner of that firm or to withdraw. In both cases, he will have to declare so through a public notice.
FAQs on Understanding the Types of Partners in Business
1. What are the main types of partners in a business as per the Indian Partnership Act, 1932?
According to the Indian Partnership Act, 1932, partners in a firm can be classified based on their role, liability, and conduct. The primary types of partners are:
- Active or Managing Partner: Actively participates in the firm's day-to-day operations and management.
- Sleeping or Dormant Partner: Contributes capital and shares profits/losses but does not take part in management.
- Nominal Partner: Lends their name and reputation to the firm but does not contribute capital or participate in management. They are still liable to third parties.
- Partner in Profits Only: Shares in the firm's profits but is not liable for its losses.
- Partner by Estoppel: An individual who, by their words or actions, represents themselves as a partner, making them liable to anyone who extended credit to the firm based on that representation.
- Minor Partner: A person below 18 years who can be admitted to the benefits of a partnership with the consent of all other partners, but with liability limited to their share in the firm.
2. What is the key difference between an active partner and a sleeping partner?
The primary difference lies in their participation in the business. An Active Partner, also known as a managing partner, contributes capital and actively engages in the daily management and operations of the firm. In contrast, a Sleeping (or Dormant) Partner contributes capital and shares in profits and losses but does not participate in the firm's management. Both are typically fully liable for the firm's debts.
3. What does it mean to be a 'partner by estoppel'?
A 'partner by estoppel' is a person who is not a true partner but becomes liable to third parties as if they were one. This situation arises when an individual, through their own words or conduct, leads others to believe they are a partner in a firm. If a third party provides credit or enters a contract with the firm based on this false representation, the 'partner by estoppel' cannot deny their liability for the debt incurred.
4. In what real-world business scenario would a 'nominal partner' be useful?
A nominal partner is highly useful when a new or lesser-known firm wants to leverage the goodwill and reputation of a well-respected individual. For example, a new tech startup might make a famous, experienced entrepreneur a nominal partner. The startup benefits from the entrepreneur's reputable name to attract investors, secure loans, and build trust with customers, even though that individual does not contribute capital or manage the business.
5. Can a minor be admitted as a partner? What are their exact rights and liabilities?
Yes, as per the Indian Partnership Act, 1932, a minor can be admitted to the benefits of an existing partnership with the consent of all other partners, but cannot become a full-fledged partner. Their status is unique:
- Liability: A minor partner's liability is limited to their share of the capital and profits in the firm. They are not personally liable for the firm's debts.
- Rights: They have the right to their agreed share of the firm's profits and property, and can inspect the firm's accounts.
- Attaining Majority: Within six months of turning 18, they must decide whether to become a full partner. If they do, their liability becomes unlimited, even for acts done while they were a minor.
6. How does the liability of a 'limited partner' in a Limited Liability Partnership (LLP) differ from a 'partner in profits only' in a traditional partnership?
While both have limited liability, their legal standing and context are different. A limited partner exists in a Limited Liability Partnership (LLP) or a Limited Partnership, and their liability is legally capped at the amount of their capital contribution. This protection is a formal part of the business structure. A partner in profits only is a feature of a traditional partnership where, by internal agreement, they are shielded from losses. However, to outside parties (creditors), they are generally still considered to have unlimited liability unless the firm is registered as an LLP.
7. Why is the distinction between different types of partners legally important for a firm and its creditors?
The distinction is legally critical for determining liability and authority. For the firm, it clarifies who has the authority to make decisions (active partners) and who does not (sleeping partners). For creditors and third parties, it is crucial for understanding who can be held responsible for the firm's debts. For instance, knowing that a nominal partner or partner by estoppel can be held liable gives creditors more security. It also defines the extent of liability—whether it is unlimited (like for a general partner) or limited (like for a minor partner).
