Management > General Management > Forms of Business Organizations > Types of Partners
The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.” In partnership, two or more people work together and share the profits from the business or profession. Each member is called a partner. It is to be noted that it is not always that all partners participate in the work or profits or even liabilities of the firm equally. Depending on the extent of their liability, or their participation in the firm they are classified into different types. Thus a partnership firm can have different types of partners with different roles and liabilities. An understanding of these types is important for a clear understanding of their rights and responsibilities.
Types of Partners:
Active or Managing Partner:
An active partner is one who contributes capital, participates in the management of the firm, shares its profits and losses, and is liable to an unlimited extent to the creditors of the firm. These partners take actual part in carrying out the business of the firm on behalf of other partners. i.e. he acts as an agent of all the other partners on a day to day basis and with regards to all ordinary business of the firm. If the active partner wants to retire, he has to give public notice of his retirement; otherwise, he will continue to be liable for the acts of the firm even after his retirement.
Sleeping or Dormant Partner:
Partners who do not take part in the day to day activities of the business are called sleeping partners. A sleeping partner, however, contributes capital to the firm, shares its profits and losses, and has unlimited liability. He is bound by the action of all the other partners. If such a dormant partner retires he need not give public notice of the same. He will not be liable to third parties for the acts done after his retirement.
Secret Partner:
A secret partner is one whose association with the firm is unknown to the general public. Other than this distinct feature, in all other aspects, he is like the rest of the partners. He contributes to the capital of the firm, takes part in the management, shares its profits and losses, and has unlimited liability towards the creditors.
Nominal Partner:
A nominal partner is also known as Ostensible Partner. A nominal partner is one who allows the use of his/her name by a firm but does not contribute to its capital. He does not have any real or significant interest in the partnership. He does not take an active part in managing the firm, does not share its profit or losses but the nominal partner will be liable to outsiders and third parties for acts done by any other partners. A nominal partner is admitted with the purpose of taking advantage of his name or reputation.
It should be clear that a nominal partner is not the same as a sleeping partner, because a sleeping partner contributes capital and shares profits and losses, but is not known to the outsiders. Similarly, the nominal partner does not contribute capital and does not share profit and losses, but is known to outsiders.
Partner by Estoppel or Holding Out:
A person is considered a partner by estoppel if, through his/her own initiative, actions, conduct or behaviour, he/she gives an impression to others that he/she is a partner of the firm, then such a partner cannot deny that he is not a partner. Such partners are held liable for the debts of the firm because in the eyes of the third party they are considered partners, even though they do not contribute capital or take part in its management. He becomes partner by estoppel or partner by holding out.
There are two essential conditions for the principle of holding out:
- the person to be held out must have made the representation, by words written or spoken or by conduct, that he was a partner; and
- the other party must prove that he had knowledge of the representation and acted on it, for instance, gave the credit.
Partner in Profits Only:
When a partner agrees with the others that he would only share the profits of the firm and would not be liable for its losses, then he is known as a partner in profits only. Even when dealing with third parties he will be liable for all acts of profit only, he will share none of the liabilities.
Minor Partner:
A partnership is based on a legal contract between two or more persons who agree to share the profits or losses of a business carried on by them. According to the Indian Contract Act, 1872, a minor (a person who has not attained the age of 18 years) cannot be a partner of a firm. The agreement with minor is void ab initio. But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the benefits of partnership’, with the consent of all partners. He will share profits of the firm but his liability for the losses will be limited to his share in the firm. He can have access to the accounts of the firm for purposes of inspection and copy. He will not be eligible to take an active part in the management of the firm. He cannot file a suit against the partners of the firm for his share of profit and property as long as he remains with the firm. His liability in the firm will be limited to the extent of his share in the firm, and his private property cannot be attached by creditors.
On his attaining majority, he has to decide within six months whether he will become a regular partner or withdraw from the partnership. He must then declare his decision via public notice. So whether he continues as a partner or decides to retire, in both cases he will have to issue a public notice, failing which he will be treated to have decided to continue as partner, and he becomes personally liable like other partners for all the debts and obligations of the firm from the date of his admission to its benefits (and not from the date of his attaining the age of majority). He also becomes entitled to file a suit against other partners for his share of profit and property.
Outgoing Partner:
Outgoing partner is a partner who retires voluntarily without causing a dissolution of the firm. Outgoing partner has to give public notice about his voluntary retirement from the partnership. An outgoing partner is liable for all debts and obligations as are incurred before his retirement.
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