With the growth of a business, it became necessary for a group of people to band together and provide the required capital and expertise. Even if a person has outstanding entrepreneurial skills but lacks funds, he can find a funding partner.
A partnership business is a type of business organization where a group of two or more people who come together to run a business as co-owners. Each of these individuals is referred to as a partner. Profits and losses are shared among the partners in proportion to their respective ownership stakes, or as mutually agreed upon.
Kinds of Partners
As partnership business became popular, it also become necessary to classify the kinds of partners in a partnership business. Each types of partners are explained below.
The 12 types of partners in partnership business are:
1. Active or Working Partner
An 'Active' or 'Working' Partner is one who invests funds in the company while also participating actively in its day-to-day activities. For the work that he does, such a partner may be awarded additional remuneration in the form of 'salary.' The Active Partner is in charge of making day-to-day business decisions.
2. Dormant or Sleeping Partner
A dormant or inactive partner is one who does not participate in the business's activities. He merely contributes capital in the company and shares in its profits. He does, however, have all of the rights of a partner and is responsible for all of the firm's and other partners' actions.
3. Nominal Partner
A nominal partner is someone who offers the partnership his name and repute. He neither contributes funds to the company nor participates actively in its operations. He is not entitled to any of the firm's benefits as a partner. However, he is responsible to third parties for the firm's claims.
Sleeping vs. Nominal Partners
It should be noted that a nominal companion is distinct from a sleeping partner. Outsiders are unaware of a sleeping partner who gives capital and shares earnings and losses.
A nominal partner, on the other hand, is admitted in order to profit on his name or reputation. As a result, he is well-known to outsiders, despite the fact that he does not partake in the firm's profits or participate in its management. Regardless, both are liable to third parties for the firm's actions.
4. Partners in Profits Only
A person who becomes a partner with the express understanding that he will share in the firm's profits but will not share in the firm's losses. Even such a partner, however, is accountable for the firm's claims. Typically, such partners provide their goodwill and reputation to the company. They may or may not actively participate in the business's day-to-day activities.
5. Partnership by Estoppel
The 'Partner by Estoppel' is not a firm partner. However, through his actions, speech, and other actions, he gives the appearance to outsiders that he is a partner in the business. He is not entitled to any advantage that would otherwise be available to a firm partner. He is, nevertheless, liable to outsiders for claims against the firm, as outsiders may have granted credit to the firm on the assumption that such a person is a partner.
A, B, and C, for example, are three brothers. B and C run a modest business together. D is A's close friend, and A gives D the notion that he is a partner in B and C's firm. D makes a non-recoverable loan to the company. D is entitled to the money because he took out the loan under the impression that A was a partner. If he had known that A was not a partner, he would not have offered the loan. As a result, A is liable to 'D' and is estopped (forbidden) from denying obligation on the ground that he is not a partner.
6. Partner by Holding Out
By Holding Out, a person becomes a partner if he is portrayed as a partner of the firm and does not deny it. 'Partner by Holding Out' is also not a firm partner. He is, however, accountable for all third-party claims against the firm, as they may have provided the firm credit based on the impression that such a person is a partner.
X, Y, and Z, for example, are three brothers. X is a tremendously successful entrepreneur. Y and Z own and operate a modest business together. Y introduces X to M as his partner at a party. Although X does not explicitly indicate that he is a partner, he does not deny it. M gives a non-recoverable loan to the company. M has the ability to reclaim the loan from X. 'Partner by Holding Out' describes X.
7. Quasi Partner
A quasi partner is someone who is no longer a partner in the firm but gives the idea that he is. He no longer participates in decision-making or shares in the firm's profits since he retired. He doesn't have any money in the company. However, because he gives the idea of continuing as a partner, his liability is unlimited.
8. Secret Partner
A secret partner is a firm partner who does not want to be identified as such to outsiders. He does, however, have all of the rights of a partner and is responsible for all of the firm's claims. Outsiders extending credit to the firm without realizing he was a partner cannot be used as a defense by either the partner or the firm.
9. Limited Partner
He is a limited-liability partner whose liability is confined to his capital contributed to the business. As a result, in the event of a loss, such a partner will only lose the amount he has invested. In other words, his personal assets are safe.
10. Sub Partner
The firm's sub partner is not a partner. In truth, he has no ties to the company. Such a person does not exist in the firm. A sub partner is a person who has agreed to share profits and losses from the partnership firm with one of the partners. It's a private contract between the partner and the sub-partner.
Let's imagine A and B are business partners who split profits and losses evenly (each partner gets 50 percent ). A and his wife, Mrs. A, agree that A will split all of his profits (and losses) from the partnership in a 3:1 ratio with her. As a result, Mrs. A pays 25% of A's capital contribution to the partnership firm. The arrangement between A and his wife is unknown to neither B nor the rest of the world. Mrs. A then becomes a sub-partner.
A sub partner is not liable to the firm in any way. He or she may not even make a financial contribution or capital. The agreement with the primary partner governs the sub partner's rights and obligations.
11. Minor as a Partner
A minor is someone who hasn't reached the legal age of majority, which is 18 years old. A 'Minor' lacks the legal authority to enter into contracts on his own. A minor cannot become a partner since partnership is a contractual arrangement.
Minors are not permitted to engage into contracts, and any such contracts that have been entered into are void. With the permission of all of the firm's partners, he can be admitted to the benefits of partnership.
A minor who is a partner has the following rights and liabilities:
- According to the partnership agreement, a minor has a right to a portion of the profits and property of the partnership.
- He has access to the company's accounting records.
- A minor's liability is limited to his part of the company's capital. He is not personally accountable for the firm's wrongdoings, and his personal property will not be attached in order to satisfy the firm's liabilities.
- A minor cannot sue the other partners for the payment of his dues for his portion of the firm's profits. If he decides to leave the partnership, he has the right to sue the other partners for payment and ultimate settlement of his partnership dues.
- Within six months of reaching majority, a minor must determine whether he wants to remain a partner in the firm or quit it. He will do so by issuing a public notice of his decision. If he does not issue a public notice of his decision or does not make a decision within six months after reaching majority, he will become a partner.
- If a minor decides to become a partner, he is responsible for the firm's activities, debts, and responsibilities from the day of his admission into the benefits of partnership. If necessary, his personal assets will be used to repay the firm's liabilities.
- If he chooses not to become a partner, he will not be held accountable for the firm's actions after the date of the notification.
We recognized that a proprietary business model has a number of drawbacks. A businessman's ability to invest a certain amount of money in a company is limited. He/she has a finite amount of strategic thinking capacity. As a result, sole proprietorships are typically small. The partnership business model eliminates these constraints and allows the company to expand.
When entering into partnership business, it is important to understand the types of partners and pay attention to the partnership agreement.