Kinds of Partners

Partnership Formation

Partnership Formation

A partnership may be formed in a number of ways, e.g.:

· Two (or more) persons may decide to start a new business together;

· An existing businessman may decide to take a partner;

· Two existing businessmen may decide to combine their businesses.

The Indian Partnership Act, 1932, prescribes the conditions that must exist for a partnership but it contains no direction on how a partnership should be formed. It is therefore, possible that the partnership to be formed according to the wish and will of the partners.

Kinds of Partners

General and limited partners

General and Limited Partners

Ordinarily, each partner is equally liable for any debts or any other obligations incurred by any of the partners in the name of the business, that is, each partner is personally liable to creditors for all debts of the partnership if the fail to meet the obligations under the agreement. Such partners are known as general partners and the partnership, a general partnership. However, by the virtue of the provisions of the partnership Act, some partner or partners may have limited liability – to the extent of their respective capital contribution. Such partners are called limited partners and the firm is known as limited partnership. It goes without saying that the liability of only some of the partners can be limited. In other words, every limited partnership must have at least one general partner.

For having limited liability, the right of a limited partner are also limited. He cannot take part in the management of the business. He cannot control the books of account, but can inspect or advice the other partners. He cannot dissolve partnership. Therefore, a limited partner is an inactive partner, who only contributes capital and mainly shares profits and losses of the firm; he has no right to interfere if he dislike the way of the business is being carried on. Limited partners must be identified as such to creditors and others doing business with the partnership firm.

Active or Ordinary Partners are those who take active part in the conduct of the business.

Sleeping, Dormant or Silent Partners are those who do not take any part of the conduct of the business. They only provide money into the business as capital and shares profits and losses in the agreed ratio.

Nominal or Ostensible Partners are those who do not contribute any capital and without having any interest in the business, lend their name to the business.

Minor Partners

A partner, who has not attained the age of maturity is called a minor partner. A minor partner can be admitted only into the benefits of the partnership but is not personally liable, like other partners, or any debts of the firm.

Partner in Profits only, Sub partner, holding out

A partner, who is entitled to the profits of the business without making himself responsible for losses, is called a partner in profits only. A partner may enter into a contract with a third party (an outsider) to share his profit. In such a case, the third party is called a sub partner.

As per section 28 of the Partnership Act, anybody, who, by spoken or written words or by conduct, represent or himself or knowingly permits himself to be represented as a partner in a firm in liable as a partner in that firm to a person who has on the faith of any such represented give credit to the firm. A person, who, thus represented himself or allow himself to be represented as a partner is said to be ‘holding out’ as a partner under the principle of estoppels.

Partnership Deed

Forming a partnership requires the agreement amongst the partners. It is not compulsory that the agreement must be in written. A partnership can also be formed on the basis of oral agreement. However, when the agreement is in written, is called Partnership Deed.

It is a document prepared with the mutual consent all the partners, covering all the details of the partnership. Each partner should sign the document to indicate the acceptance of the terms. A carefully prepared partnership deed cab element many of the more common type’s problems and dispute that may arise in the future operations of the partnership. The most important points covered in the partnership deed are the following:

1. The date of formation and the duration of the partnership;

2. The name and addresses of the partner;

3. The name of the firm;

4. The nature of business to be carried on by the firm;

5. The authority of each partner and the rights and duties of each partner;

6. The amount of capital to be contributed by each partner;

7. The method by which the value of goodwill shall determine in case if admission, retirement or death of the partner;

8. The accounting period to be used;

9. Method of keeping of books of account;

10. Provision for periodic audit;

11. The plan for sharing of profits or losses;

12. Interest on loan payable to the partners;

13. Salary, Commission, Interest on Capital payable to the partners;

14. Interest on drawing to be charged on withdrawals by the partners;

15. The extent to which each partner can bind the other partner;

16. Provision for arbitration of dispute, i.e., the procedure to be followed in the dispute;

17. Mode of statement of dues of deceased or retired partner;

18. Procedure to be followed in the case of dissolution of the firm.

Importance of Partnership Deed

· Partnership deed is invaluable in setting any dispute relating to partners’ right and duties.

· On matters such as partners’ right and elements, the partnership deed can override the provision of Partnership Act.

For example: As per the provision of the Indian Partnership Act, 1932, profits/losses of the partnership should be equally distributed amongst the partners. However, if the partnership deed provides that profits and losses should be distribute amongst the partners in the ratio of 2 : 2 : 1, then that case, the partnership deed will override the provision of the Partnership Act, and profits will be distributed in the ratio of 2 : 2 : 1, but not equally.