A Partnership forms when two or more individuals make a decision that they will jointly begin a business or a venture by contributing assets in the form of investments, and this partnership is created only with the intention of making profits. In such a scenario, the individuals contributing to jointly begin a business are called partners, and the business is collectively called a partnership firm.
The formation and operations of a partnership firm are governed by the Partnership Act of 1932. The business operations, share of profit and loss, and investments are dictated by way of the partnership deed. The Act further provides for the various types of partnership firms and their partners.
Types of Partnerships in India
The types of partnerships existing in India are as follows: –
- General Partnerships – In this type of partnership, every partner has the right to make decisions regarding the operation and management of the firm. However, the partner’s liability is unlimited, which means that under circumstances of financial loss by the partner, their personal assets can be used to make good the debts and clear the creditor’s claims.
General Partnerships are further divided into two categories –
- Partnership at will – A partnership at will is created without a specific time limit prescribed for its closure. This dissolution of the partnership is based upon the mutual consensus of the partners when and if the need arises. Hence, the dissolution of this type of partnership is not pre-decided.
- Particular Partnerships – This type of partnership is entered into with the end goal of carrying out a specific undertaking. It is for a particular project of temporary contract-based work or specific business only. Once the objective of the business has been fulfilled, the partnership is dissolved.
However, at the discretion of the partner, they may continue the partnership.
- Limited Liability Partnership (LLP) – This type of partnership is different from a general partnership in the aspect that it is a corporate form of business organization. The liabilities of the partners are limited to the extent of their contributions towards the capital.
Hence, the partners are under no obligation to redeem the debts of their business with their personal assets. LLP is governed by the Limited Liability Partnership Act, 2008.
Different Types of Partnership Firm
These types of partnership firms are governed under the Limited Liability Partnership Act, 2008. The most important aspect of these types of partnership firms is that a partner is not held personally liable to clear the debts of the firm. That is to say that the personal assets of the partner will not be utilized towards clearing the debts of the firm.
The types of partnership firm are distinguished on the basis of their registration. However, it must be noted that registration of these types of partnership firm is not mandatory. Hence, both the registered and unregistered firms will be recognized by law and be valid.
The different types of partnership firm are as follows: –
- Unregistered Partnership Firm- The unregistered partnership firm is one of the two different types of the partnership firm. It is established by the execution of an agreement between the partners. It allows the partners to carry on a business in a manner that is stated and provided for in the agreement.
- Registered Partnership Firm- This is the second one in the different types of the partnership firm. This Partnership Firm has to be registered with the Registrar of Firm having jurisdiction over the place where the business is formed and situated. The registration of the firm includes payment of the registration fees to the registrar of firms.
For the purpose of its registration, the process which varied from state to state, must be followed. Registration of a partnership firm though not mandated, is encouraged as it endows upon the firm various legal rights which would otherwise be unavailable in the case of an unregistered partnership firm.
Types of Partners
Now, based on the above-mentioned types of partnership firms, we ought to know about the different types of partners in a business. A partnership is formed with the mutual consensus of all the partners involved. However, their roles and responsibilities may vary depending upon the types of partners in a business.
Following are the different types of partners: –
- Active Partner – Also known as a working partner. They are actively involved in the management and other aspects of the partnership firm. They bare unlimited liability; however, this depends upon the types of partnerships or the types of partnership firm they are involved in. They decide how the firm operates.
In the scenario where the active partner decides to retire, he must address the issue with public notice of his retirement. In case he fails to do so, he will continue to remain liable for the acts of the remaining partners irrelevant to his retirement.
Further, any act done by the active partner will be binding on the firm and the other partners. An active partner may withdraw remuneration from the firm, subject to the provided clause in the partnership deed.
- Dormant Partner – A dormant partner is also known as a sleeping partner. They are not involved in the daily operational work of the partnership firm. They may be consulted for any major decision in the firm. The involvement of this partner may not be known to outsiders; however, they invest in the firm by contributing hefty amounts.
As opposed to the active partner, a dormant partner is not required to file a public announcement for his retirement. Since this type of partner is not involved in the daily activities of the business, he cannot withdraw remuneration from the business. However, if the deed so provides for their remuneration, it isn’t deductible under the Income Tax Act.
- Nominal Partner – An individual who doesn’t have any interest in the business nor any rights in the profits is a nominal partner. This kind of partner doesn’t have any say in the operations of the business. However, he is liable to the external stakeholders as an actual partner.
He lends his goodwill to the business by way of lending their names so that the business could use them to its advantage. It acts as a value addition to promoting the brand.
- Partner by Estoppel – A partner by estoppel is also known as a partner by holding out. This means that if an individual, by his conduct or word, portrays to another that he is a partner, he would not be able to back out from the word or conduct later on.
This partner would then be liable to third parties when their claim their debts from the business.
- Sub Partner – This kind of partner agrees to share their share of profits retrieved from the firm with a third party. They are not to represent themselves as a partner in the original firm, and they that no rights or liabilities associated with the firm.
- Minor as a Partner – Minors are not eligible to enter into contracts, and partnerships are created by mutual consensus of two or more parties to contract. Which is a partnership agreement in written form. However, as per the Indian Partnership Act, a minor can be introduced as a partner, so long as it is only to enjoy the advantages.
A minor partner is entitled to share his profits, however, he cannot have the right to file a suit against other partners. Additionally, the personal assets of a minor cannot be attached by creditors.
As we see, there are two major types of partnership firm, and they are distinguished on the basis of their registration. The type of partnership firm which is registered is known as a registered partnership firm, and the type of partnership firm which is not registered is known as an unregistered partnership firm.
These are two types of partnership firms. By way of this segregation, we also come to the conclusion that though both types of partnership firms are recognized in the eyes of the law, it is encouraged that a partnership firm is registered to enjoy the benefits that are legally granted to them by way of their registration. To know more about the types of partnership firms for your business, get online legal advice.