Partnership in business means a pact or deal between two or more parties (individuals or entities) where they share profits. It is not always necessary that each partner will have an equal level of participation or an equal share of profit in the business. The share of liabilities might vary as well. This is why we have different types of partners in a business firm.
Concept of Partnership
Section 4 of the Indian Partnership Act, 1932 defines partnership as a relationship between two or more people who mutually agree to share risks, profits, losses, and other liabilities in a business. The distribution of share happens under the supervision of all partners or members included in the business firm.
Partnership firms are constituted by different types of partnerships. The agreed norms and shares between the partners are usually detailed in a contract.
The Partnership Act of 1932 does not restrict the formation of any new kind of partnership that the partners wish to indulge in.
Types of Partners in a Business
Businesses display different forms of the partnership today. Among the most popular 3 types of partnership are -
Active or Managing Partner
Dormant or Sleeping Partner
Nominal Partner
Apart from these 3 types, there are other different kinds of partnerships as well. Given below is a detailed explanation of each partner type in a business firm.
1. Active/Managing Partner
This is one among the types of general partnership where a particular individual or entity takes up the managing role. The managing partner has to have active participation in every aspect of the business. Such a partner is known as an Ostensible Partner. These types of partners in partnership look after the day to day progress of the business on behalf of other partners.
If the active partner of a business wishes to withdraw from the partnership, he has to first give public notice about it. Through the notice, he would free himself from the responsibilities and the actions taken by other partners after his exit. Such type of partners is liable for every action taken in business until retirement with a public notice.
2. Dormant/Sleeping Partner
A dormant partner in the firm does not take an active part in the daily chores of the business. Such partners are the ones who only contribute to the capital in a business and do not participate in management. Dormant or sleeping partners in the partnership form of business organization are usually bound by the actions taken by all other partners.
Dormant partners still hold their share of profits and losses of the firm. This type of partners do not need to give public notice on retirement.
3. Nominal Partner
Nominal partners are the ones who do not hold a major share of interest in the partnership. In other words, it can be said that he is only lending his name to the partnership deal. In these types of partnership business, a partner is neither liable to contribute capital to the firm, nor is he entitled to share profits. However, nominal partners are still answerable to third parties for any act done by the other business partners.
4. Partners in profits only
Such types of partners do not hold any form of liabilities in a firm. They are only entitled to share profits. Even while dealing with third parties, the partner will be liable only for the profit-related matters. He will not be answerable for any other move made by the business firm.
5. Partner by Estoppel
Partner by Estoppel means when a person declares (through action or words) to another partner that he wishes to participate as a partner in the firm. Such partners cannot later deny being a business partner. These types of partners in partnership firms are not actually partners, yet have represented themselves as such by Estoppel.
6. Minor Partner
According to the Contract Act, a minor (individual aged below 18 years) cannot be an official partner in any type of the partnership firm. However, such partners can be entitled to a partnership if other business partners give their consent. A minor can share the profits of a business, but his liability for losses faced by the firm will be limited to his share of capital.
When a minor partner turns 18, he is given a span of six months to decide whether he wishes to continue as a partner of that firm or to withdraw. In both cases, he will have to declare so through a public notice.
FAQs on Understanding the Types of Partners in Business
1. What are the different types of Partners in Business?
Ans. Different types of business partnerships have different kinds of partners. The most common types of business partners are active (or managing) partner, sleeping (or dormant) partner, nominal partner, partner only by profits, partner by Estoppel, and a minor partner.
2. Can a Minor Partner share profits in a Business?
Ans. As mentioned in the Contract Act, an individual aged below 18 years cannot become a partner in a business. However, he can entitle himself as a business partner if the other partners allow so. The liability for losses is limited to his capital share in the firm. On attaining 18 years of age, he gets a 6-month period to decide whether he wants to continue or withdraw from the partnership.
3. What is the meaning of Partner by Estoppel?
Ans. As per the declaration, there are two types of partnerships. One is a partnership by profit, and the other is a partnership by Estoppel. Partner by Estoppel is a participant who, through his words or actions, declares himself to be a partner in the firm. He cannot later deny the fact that he is a partner in the business. These individuals have opted to represent themselves as partners in a company without actually participating in the partnership.
