Partnership is created when two or more individuals decide to come together and start a business or a venture by contributing assets in form of investments. This said arrangement is exclusively created with an aim to make profit. These individuals are called partners and the business venture is collectively called as a partnership firm.
Partnership Act, 1932 defines the structure of a Partnership firm by providing all the necessary provisions to run the same. Further, the business operations, share of profits or loss and investments are primarily directed by the Partnership Deed entered while Partnership Firm registration or any changes thereafter. The Act provides different types of partnership firms and its partners that we are discussing here to understand how you can structure your partnership firm while its registration.
Types of Partnerships in India
The most used partnership types are listed here with their distinct features to allow you choosing the suitable type.
In this type of partnership, each partner has right to take decision about the working and management of the firm. Downside being that the partner’s liability is unlimited and in case of a financial error / loss incurred by the act of a single partner the personal assets of all the partners can be taken away to pay back the debts and creditors’ claims.
General partnership is further bifurcated into two categories:
1. Partnership at will:
Usually when a partnership is created, it is upon the partners to decide till when they want the partnership to exist. Hence, whenever a partnership is created without a specific time limit of its closure, its termed as partnership at will. The dissolution of partnership is the matter of mutual consideration when need arises and is not pre-decided. It is upon the partners to decide mutually till what period of time they want the partnership to be functioning.
2. Particular partnerships:
This is the type of partnership that is created with an aim to carry out a specific undertaking. When partnership is created for a project of a temporary contract-based work or a specific business only, they are termed as particular partnerships. Once the objective of the business is achieved or the act for which the partnership was created in fulfilled, the partnership will be dissolved. However, the partners have the discretion to come to an agreement in case they wish to continue the said partnership. But in the absence of this, the partnership ends when the task is complete. For example, a partnership for the construction of a building or partnership for producing a movie.
Limited Liability Partnership (LLP):
A limited partnership unlike general partnership is a corporate form of business organization. Here, the liabilities are limited to each partner according to their agreed contribution to the business. The personal property of a partner cannot be attached to pay back the firms debts. This hybrid organization is governed under the Limited Liability Partnership Act, 2008 and not under Partnership Act.
Based on Partnership Registration Status:
The Partnership Act does not mandate the registration of partnership firm. Both, registered and unregistered firms are valid and recognised under law.
1. Unregistered Partnership Firm:
An unregistered firm is established by execution of an agreement by the partners. The unregistered partnership firm allows the Partners to carry on the business in manner stated and provided in the agreement.
2. Registered Partnership Firm:
The Partnership Firm is to be registered with the Registrar of Firm (RoF) having jurisdiction over the place of business of the Firm. The registration application involved payment of registration fee to RoF, varied from state to state according to the State Law. The registered partnership firm is preferred in many cases due to the benefits offered by a registered partnership firm.
Based on the types of partnership discussed above, it is up to partners to decide which type of partnership is required to address their purpose and business requirements.
Types of Partners
The partnership is formed with its partners and their roles and responsibility may also be changed. Based on their participation and roles in the firm, here are the types of partners in Partnership Firm.
Active or Working Partner:
This is the partner that is actively involved in the management and other important functional aspects of the partnership firm. He bares unlimited liability in case of debts. An active partner decides how the firm operates with his active participation and contribution as a partner. In case the active partner chooses to retire, he must give a public notice of his retirement. In situations where an active partner fails to do so, he will remain liable for the acts of other partners, post his retirement. Any action taken by the active partner in ordinary course of business is binding on the firm and the partners. Subject to clause in partnership deed, the active partner can withdraw remuneration from the firm.
Dormant or Sleeping Partners:
As the name suggests a dormant partner is the one that is not interested in daily management or functional aspects of the partnership firm, but he may be consulted while taking major decisions for the firm. The partnership of this partner may not be known to the outsiders, but they invest in the firm by contributing a chunk of capital to the firm. In case of a debt he is liable to clear it out on behalf of the firm. A dormant partner is not required to file a public notice to announce his retirement. As he is not participating in the operations, he is cannot withdraw remuneration. If the partnership deed provides the clause of remuneration to sleeping partner, it is not deductible under Income Tax Act. (Read: What is allowable remuneration to partners?)
A person who does not have any real interest in the business or the working of the firm nor he has any rights in the profits is a nominal partner of the firm. He also does not usually have any say in the management and working of the business, but he is liable to outsiders as an actual partner. He just lends his name to the firm, so that it could advantage from his/her reputation and name and is treated like an actual partner. For example: a partnership is executed with a celebrity or a business tycoon for value addition or for promoting a brand with that person’s good will and fame.
Partner by estoppel or holding out:
If a person expressly declares by his words or conduct, holds out to another that he is a partner, he would not be able to back out from it later. Hence such a person would thus become liable to third parties in clearing out the debts of the firm when a situation arises.
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:
In certain situations, a partner joins the partnership firm with a clarification that he/she would share only profits as a partner and would not be liable for any losses. However, he shall be liable like all other partners since the liability of the partners is joint and several. So if the firm incurs any loss and the other partners become insolvent, the third party may hold this partner liable. As the arrangement of sharing only profits is an internal arrangement among the partners, the third partner may not be concerned about it. The said partner can then reimburse the contribution made to the third party for the arrangement.
When a partner agrees to share his profits derived from the firm with a third party, that person is known as a sub- partner. He cannot represent himself as a partner in the original firm. He does not have any rights against the original firm neither he is liable for the acts of the firm. He can claim the agreed share of profits form the contracting partner only.
Minor as a partner:
Partnerships are created by a mutual agreement between two or more parties which is a contract. Minors are incapable of entering into contracts. But under the Indian Partnership Act, a minor can be introduced as a partner as long as it is only to enjoy the benefits. A minor partner has access to the accounts of the firm and is entitled to share his profits. They do not hold the right to file suit against the partners as long as he is in the firm. Private property of the minor cannot be attached by the creditors.
As you have now learned about the types of firms and its partners, let’s know about establishment of a partnership is India. If you are yet confused to find a right kind of partnership, feel free to connect with LegalWiz.in experts at firstname.lastname@example.org. The experts will guide you through the process and other requirements of the registration.