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Types of Partnership

Last Updated : 06 Apr, 2023
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A partnership is a contract between two or more parties who club their resources and form a business with a common goal. The persons or parties involved in the contract are known as partners. The partners of a partnership firm agree to share the profits, risks and losses of the business. Besides, profits/losses or risks, the partners also share the responsibility of managing the company. The partners of a partnership firm are its agent as well as the owners, and any act performed by a partner affects the other partners and the business. There are different types of partnership that can be formed among the partners of a firm. 

According to Charles W. Gerstenberg, “The partnership may be defined as the relation existing between persons who agree to carry on a business as co- owners for profit.”

Types of Partnership

Partnership can be classified on two bases: Duration and Liability. 

A. On the Basis of Duration

1. Partnership at Will

Generally, the partnership deed has a clause regarding the expiration or dissolution of a partnership firm. However, such a partnership for which the said clause does not exist is called a partnership at will. As the name suggests, its fate depends upon the fate of the partners involved. It can continue its operations for as long as the partners want it to, and can be terminated as and when any one of the partners serves a notice for such termination. The two conditions of Partnership at will are: (i) There should not be a specific date on the agreement, and (ii)The agreement should not contain any information regarding the termination of the partnership. This type of partnership is suitable for businesses where the partners do not have any certainty or idea about the termination of the partnership and for businesses whose nature is non-deferring or perpetual. 

It is easy for the partners to form a partnership at will, as there is no hassle in its formation and is also convenient for the partners because of the absence of duration of the partnership. Besides, it is also easy for the partners to dissolve the partnership easily and quickly as and when any one of the partners severs the notice of termination. This advantage of Partnership at Will can sometimes be a big disadvantage for the partners. It is because if a partner serves the notice of termination, even though the other partners want to continue the business, they cannot do so. Also, the partners under Partnership at Will have unlimited liability, which means that the partners will be held responsible for any kind of embezzlement or ethical misconduct of any of the partners. 

2. Partnership for a Fixed Term

A partnership that is formed for a particular time period is known as a partnership for a fixed term. Unless the contract explicitly says otherwise, the partnership ends on the date specified in the partnership deed. If the business is continuing after the expiration date, the partnership is considered a partnership at will, and all the rights, duties, and obligations of the partners are treated as such. This type of partnership is suitable for businesses for which the partners have a clear idea about the nature of the business and its duration. 

It has an edge over a Partnership at Will since its dissolution is a unanimous decision and not one-sided. Besides, setting up a fixed-term renders, some certainty and direction to the business as opposed to a partnership at will, where it depends upon the will of the partners involved. However, there are chances of conflict regarding the duration or time period of the partnership. Some of the partners may want the term of the partnership to be short, while others may want its duration to be long. Also, the unlimited liability of partners may put a huge burden on them. 

3. Particular Partnership

A particular partnership is one that is established solely for the purpose of carrying out one business venture or completing one project. In other words, this type of partnership is formed to operate on a continuing business or to carry out a unique project or business. It is suitable for partnerships, where the parties involved agree to dissolve the business together and distribute the profits or losses arising out of it. 

Unlike, Partnership at Will, the decision taken by partners regarding the dissolution of the partnership under Particular Partnership is taken by every partner unanimously and is not a one-sided decision. The duration of the business decides the duration of the partnership. Therefore, the will of the partners does not matter in this type of partnership. Just like Partnership for a Fixed Term, the unlimited liability of partners put a huge burden on them.

B. On the Basis of Liability of Partners

1. General Partnership 

general partnership is one where the liability of partners is unlimited and joint. The partners have the right to engage in the firm’s management, and their actions are obligatory for both the partners and the firm. The firm’s registration is voluntary, and its continuation depends upon the partners’ death, insanity, insolvency, or retirement.  A partnership is a mutual agency. The partners have a say in the working and management of the firm. Registration of the firm is not mandatory, which might have an impact on any legal proceedings in case the partners choose not to get the business registered. Besides, all the partners have an unlimited liability, which means that all of them would be responsible for other partners’ embezzlement or ethical misconduct.

2. Limited Partnership

A partnership where the liability of at least one of the partners is limited, while that of the others is unlimited is called a limited partnership. Perpetual succession is the key feature of such a partnership. It means that the death, insolvency, or insanity of any partner does not affect the firm’s continuity. Each partner’s personal liability is limited to the amount of his or her business stake in the partnership. Limited partners have no management rights and their actions do not bind the firm or other partners. It is necessary to register such a type of partnership. It is suitable for businesses in which the partners do not have an equal profit sharing ratio. 

Each partner is liable to pay or compensate only up to the amount they invested in the firm. This means that their personal assets are not at stake in case of insolvency of the business. Registration of such a partnership is compulsory, which renders it an edge over general partnerships in case of legal proceedings. However, the partners whose liability is limited do not have any say in the firm’s working and management at all. The partner(s) having unlimited liability reap all the benefits of ownership and bear all the burden in case of insolvency.

3. Limited Liability Partnership

A limited liability partnership is one in which some or all of the partners have limited liability. Every owner is only liable to a certain extent. It means that each partner is protected from the other partner’s embezzlement or mistakes. There is no minimum capital or maximum number of partners required for the formation of a Limited Liability Partnership. Besides, the registration cost of forming a Limited Liability Partnership is lower than the other forms of partnership. However, equity or shareholding is not found in this type of partnership and even the tax rates are higher for Limited Liability Partnership as compared to the other forms of partnership. 

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