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Types of Partners

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  • Last Updated : 17 Aug, 2022
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An organisation that is engaged in a business or a commercial activity, and is a separate unit of business is known as a Business Enterprise. Every business enterprise adopts some form of business organisation to perform its activities. Business enterprises can be classified into three categories, namely, Private Sector Enterprises, Public Sector Enterprises, and Joint Sector Enterprises. Different forms of Private Sector Enterprises involve five forms of business organisation; viz., Sole Proprietorship, Joint Hindu Family Business, Partnership, Co-operative Society, and Joint Stock Company.

Partnership

A form of business organisation that is suitable for small-scale and medium-scale businesses, and is an association of two or more individuals who jointly agree to continue business activities is known as a Partnership. 

Partnership may be defined as the relation between the persons who agree to carry on a business in common with a view to private gain.

– L.H. Haney

Partnership has two or more members, each of whom is responsible for the partnership. Each of the partners may bind the others for debts of the partnership.

– William R. Spriegel

Partner

A partner is an individual who jointly with other people (partners) agrees to set up a business firm and provide goods and services through it. Partners of a partnership firm can be of different types, such as an active partner, secret partner, minor partner, nominal partner, or sleeping partner. Each of these partners has different qualities and roles in the running of a partnership firm. 

 

Types of Partners

 

1. Active Partner

A partner who actively participates in the management of an organisation is known as an Active Partner. An active partner has unlimited liability, i.e., in case of insolvency, his/her personal assets can be used to pay off debts. Besides, an active partner also contributes capital in the firm and gets a share in the company’s profit or loss in return.

2. Sleeping or Dormant Partner

As the name suggests, a partner who does not participate in the management of a company is known as a Sleeping or Dormant Partner. The sleeping partners are bound by the activities performed by the active partners and have unlimited liability, i.e., in case of insolvency, his/her personal assets can be used to pay off debts. Besides, they also contribute capital in the firm and get a share in the company’s profit or loss in return. 

3. Secret Partner

A partner whose association with the firm is kept a secret or is unknown to outsiders is known as a Secret Partner. A secret partner has unlimited liability, i.e., in case of insolvency, his/her personal assets can be used to pay off debts. They also contribute capital in the firm and participate actively in the management of a company. 

4. Nominal Partners

The partners who are not real partners of a firm are known as Nominal Partners. They do not contribute capital, do not have unlimited liability, do not participate in the management of the firm, and do not get any share in the profit or loss of the company. Their role as a partner of the firm is only to lend their name and reputation to benefit the company. However, the nominal partners are liable to the outsiders for the debts they have given to the company after believing that the nominal partner is a partner of the firm. Nominal Partners are of two types, namely Nominal Partner by Estoppel and Nominal Partner by Holding Out.

i) Nominal Partner by Estoppel

An individual who by his own conduct or words accepts that he is a partner of a partnership firm is known as a Nominal Partner by Estoppel. For example, Sumit, who is not a partner of ABC Ltd. applies for a loan by telling the financier that he is a partner of that firm. Now, Sumit will be considered as a nominal partner by estoppel. However, Sukant is an active partner who has also taken a loan from the financier. Now, if the partnership firm fails to pay the loan amount taken by Sukant, he can claim this amount from Sumit. 

ii) Nominal Partner by Holding Out

An individual who is not a partner of a firm, but does not deny when other people call him/her a partner of the firm is known as a Nominal Partner by Holding Out. For example, Sayeba, an active partner of a firm, applies for a loan from a commercial bank by saying that Akanksha is also a partner of the firm, to which Akanksha shows no objection. In this case, Akanksha will be considered a nominal partner by holding out and will be liable to pay off the debt taken by the firm in her name. 

Minor Partner

 According to the Partnership Act, 1932 a minor cannot become a partner in the partnership firm and can only be admitted to the benefits of the existing firm. A minor partner do not contribute any capital in the firm and is liable to outsiders. Also, he/she does not get any share in the loss of the firm, instead gets a share in the firm’s profits. 

Once the minor has attained the age of majority, he/she within a prescribed time has to give a notice to the public stating whether or not he/she wants to remain a partner of the firm. If the partner fails to do so in the prescribed time, then he/she will have to compulsorily become an active partner of the firm. Besides, after attaining the age of majority, the partner will have unlimited liability and will get a share in both profit and loss of the firm. Also, just like any other active partner, he/she will be allowed to actively participate in the management of the firm.

The different types of partners can be summarized as follows:

Types of Partners

Type

Capital Contribution

Management

Share in Profit/Loss

Liability

Active Partner

Contributes capital

Participates in management

Gets share in profits/losses

Unlimited liability

Sleeping or Dormant Partner

Contributes capital

Does not participate in management

Gets share in profits/losses

Unlimited liability

Secret Partner

Contributes capital

Secretly participates in the management

Gets share in profits/losses

Unlimited liability

Nominal Partner
i) Nominal Partner by Estoppel
ii) Nominal Partner by Holding Out

Does not contributes capital

Does not participate in management

Does not get share in profits/losses

Liable for the amount of debt acquired by the firm by using their name.


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