Management > General Management > Forms of Business Organizations > Types of Partnerships
Types of Partnership on the Basis of Duration:
On the basis of the duration of the partnership, the types of partnership are a partnership at will, a partnership for a fixed term, and a particular partnership.
Partnership at will:
If a partnership deed does not include a clause about the expiration of such a partnership, then the partnership is called a partnership at will. This type of partnership exists at the will of the partners. It can continue as long as the partners want and are terminated when any partner gives notice of withdrawal from partnership to the firm. According to Section 7 of the Indian Partnership Act 1932, there are two conditions to be fulfilled for a partnership to be a partnership at will. These are
- There is no agreement about a fixed period for the existence of a partnership.
- No provision with regards to the determination of a partnership
Partnership for a Fixed Term:
If the partners agree on the duration of the partnership during the formation of the partnership, then the partnership so created is called a partnership for a fixed duration of time. After the expiration of such a duration, the partnership ends. If a partnership was entered into a fixed term and continues to operate beyond this term it becomes a partnership at will from the expiration of the specified term.
Particular Partnership:
A partnership can be formed for carrying on continuous business, or it can be formed for one particular venture or undertaking. A partnership formed for the accomplishment of a particular project say construction of a building is called a particular partnership. It dissolves automatically when the purpose for which it was formed is fulfilled. However, the partners can come to an agreement to continue the said partnership.
Types of Partnership on the Basis of Liability:
On the basis of the duration of the liability, the types of partnership are a general partnership, limited partnership, and Limited liability partnership.
General Partnership:
When the purpose of the formation of the partnership is to carry out the business, in general, it is said to be a general partnership. In general partnership, the liability of partners is unlimited and joint. Unlike a particular partnership in a general partnership the scope of the business to be carried out is not defined. The partners enjoy the right to participate in the management of the firm and their acts are binding on each other as well as on the firm. Registration of the firm is optional. The existence of the firm is affected by the death, lunacy, insolvency or retirement of the partners.
Limited Partnership:
In a limited partnership, the liability of at least one partner (general partner) is unlimited whereas the rest may have limited liability. Such a partnership does not get terminated with the death, lunacy or insolvency of the limited partners. In many cases, the general partner manages the business and the limited partners do not participate in the day-to-day management of the business and their acts do not bind the firm or the other partners. The liability of limited partners is limited to their investment in the business. Thus the limited partners are merely investors (passive partners) who do not wish to participate in the partnership other than to provide capital and to receive a share of the profits. Limited partners can’t take partnership losses off their income tax return if they don’t have other income to offset it. Registration of such partnership is compulsory. This form of partnership was not permitted in India earlier. The permission to form partnership firms with limited liability has been granted after the introduction of New Small Enterprise Policy in 1991. The idea behind such a move has been to enable the partnership firms to attract equity capital from friends and relatives of small scale entrepreneurs who were earlier reluctant to help, due to the existence of unlimited liability clause in the partnership form of business.
Limited Liability Partnerships:
A limited liability partnership (LLP) is different from a limited partnership or a general partnership but is closer to a limited liability company (LLC). An LLP gives limited liability to every owner, which means that each partner is protected from financial and legal mistakes of the other partners. Thus Limited liability partnerships allow for a partnership structure where each partner’s liabilities are limited to the amount he puts into the business. In LLP, if the partnership fails, creditors cannot go after a partner’s personal assets or income. Any partner of LLP involved in the wrongful or negligent act is personally liable, but other partners are protected from liability for those acts. Thus, an LLP has some elements of both partnerships and corporations.
Professionals like law firms, accounting firms, and wealth managers, who use LLPs tend to rely heavily on reputation. Most LLPs are created and managed by a group of professionals who have a lot of experience and clients between them. By pooling resources, and sharing office space, employees, the partners lower the costs of doing business while increasing the capacity for growth of the LLP. Due to the sharing of resources and employee the profit margin of LLP increases.
Advantages of LLP:
- It gives the benefits of limited liability of a company and the flexibility of a partnership. Hence LLP is called a hybrid between a company and a partnership.
- It can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
- It is a separate legal entity, is liable to the full extent of its assets but the liability of the partners is limited to their agreed contribution in the LLP.
- In LLP no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
- Mutual rights and duties of the partners within an LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be.
Previous Topic: Types of Partners