When more than one person is involved in running a business and sharing the profits, it is called a partnership. It is more like an upgraded version of a sole proprietorship. Partners will participate in the day-to-day business activities as well as take care of the liabilities as well.
In this article, we have covered in detail the various types of partners in a business and their rights and duties.
Who can become a partner in a partnership firm?
Any real or artificial identity who can make a business contract is eligible to sign the partnership deed. Before signing the partnership deed, the identity must be aware of the terms and conditions involved in the contract. Here is the list of what identities can become a partner in the partnership firm:
Individual: Any person or individual who has attained majority and also has the capacity to contract can become a partner in the firm.
Firm: A partnership firm is not considered a legal existence by the law of India. Hence, a partnership firm cannot get into a partnership with another firm.
Karta of HUF: Depending on the individual capacity Karta of HUF have the ability to get into a partnership.
Company: A company can be a part of the partnership if the MoA of the company allows it to do so.
Types of partners
As the name refers, an Active partner is one who is currently working in the firm. He has an important role to play in the company. An active partner is also called a managing partner. The Active partner carries out the day-to-day business activities on behalf of the other partner. For performing this duty, the Active partner takes remuneration and salary from the bank account registered under the firm name.
Unlike an Active partner, the sleeping partner is not involved in a business’s daily activities. He only involves in the profit and loss of the company and is bound to actions taken by the other partners in the firm. A sleeping partner is also called a dormant partner. If a sleeping partner retires, he need not give public notice.
Nominal partner is one who does not have much interest in the partnership. He does not own the firm nor invest any capital in the firm. Also, he does not participate in the firm’s daily activities. A nominal partner only lends his name to the firm to carry out the business.
Partner by estoppel
If a person has control over the other partner either by words or actions, then he is called a Partner by Estoppel. He becomes liable for a person who invests in the business through such representation. This partner does not own the profits or losses of the firm, as he did not invest any money in the firm.
Partner by holding
When a firm declares a person as a partner, and if he does not reject or react about the same, it is called Partner by holding. When the firm invests money and gets into a loss, the partner by holding as well, has to repay the losses incurred.
Partner in profit only
A person who only shares the profits of the firm is called a partner in profit. Based on the goodwill and the money the person has, he holds a place in the company. When dealing with the third-parties or investments, this partner is only liable to take the profit but not the losses.
Any individual who does not attain the minimum age or majority is called a minor. As per the Indian Contract Act of 1872, a minor cannot be a part of the contract. But, under certain circumstances, the minor can be a partner in the firm.
If all the partners give free consent, the minor can enjoy the partnership’s profit. Also, the liability of the minor is limited according to the shares he holds in the company.
Once the minor attains a minimum age, he can decide whether to continue being a partner of the firm or not. Once attaining adulthood, if the person declares to be a partner of the firm, he is responsible for all the acts of the other partners.
Secret partner is someone who lies between a sleeping partner and an active partner. The membership of the secret partner is kept secret from all third-party dealings. The secret partner can invest in the firm and will also take liability for the profits and losses of the company. The secret partner is also liable to take remuneration for the work done in the firm.
An ongoing partner is the one who takes retirement from the firm before the partnership gets dissolved. During retirement, the ongoing partner is eligible to take the profits of the company and also bear the losses if any. However, after retirement, the liability on the ongoing partner is nil.
A limited partner is one who has a limited liability as per his investment in the company. The percentage of profit and loss of this limited partner is mentioned in the partnership deed.
A sub partner is one who does not directly invest in the firm. The partner who invests in the firm agrees to share a profit with the sub partner, as desired by the firm. The sub partner is not liable for any losses of the company. Moreover, the sub partner has no say in the firm’s management or working.
A retired partner who leaves the capital with the firm is known as a Quasi partner. He does not participate in the activities of the firm but is liable for both profits and losses of the firm.
Rights of partners
As per the Indian Partnership Act of 1932, here are the rights of the partners:
- The partner can be a part of the daily business activities and also make decisions at the managerial level.
- He has all the rights to be a part of the partnership matters.
- He does not have any restriction on checking the documents, investments, bank details, etc., of the firm.
- The partner can charge an interest of 6% per annum on the payment.
- He has a right over the share, which was mutually decided by the other partners at the time of the company formation.
Duties of partners
- He works in good faith that benefits the firm.
- The partner does not take any personal advantage from the firm’s account.
- He has accountability towards other partners in the firm.
- He has to indemnify the loss caused due to personal fraud or losses incurred by the partners.
- He cannot carry out other business that competes with the interest of the existing business.
- Can use the property of the firm only for fair purposes.
The rights and duties of partners are essential elements of a partnership. To run a successful partnership business, each partner must understand and follow these rights and duties.
We hope this article has provided you with clear insights into the types of partners and the rights they hold in the firm. To grow the business faster, a firm can have a good number of skilled partners.