UILS,PU

Business Laws

Topic: Kinds of Partners

Submitted By: Siddhanth Arora

Submitted To : Ms. Amita Verma
Semester : 7th

Class : Ba Llb, Section B

Roll No. 204/17

 Acknowledgement

I am using this opportunity to express my gratitude to everyone who supported me

throughout the course of this project. I am thankful for their aspiring guidance,
invaluably constructive criticism and friendly advice during the project work. I am
sincerely grateful to them for sharing their truthful and illuminating views on a
number of issues related to the project.

We express our warm thanks to Dr. Amita Verma for her support and guidance.

Thank you!

 Introduction

Partnership is a form of business organization wherein two or

more persons join together in order to carry out business. A
partnership can be considered as an improvement of “sole
proprietorship” wherein a single person carries out his business
with his individual resources, skills and efforts.

The major disadvantage of being a sole proprietor is that since

there is only a single person involved in the business, it is
difficult for him to manage the huge resources and investments
in the business. On the other hand, in a partnership, a number
of persons are involved and they can pool their resources in
order to form and manage a much larger business. Moreover, if
there is a loss in the business, it can be divided amongst the
partners of the partnership firm.

A partnership is an agreement between two or more persons

who wish to share profits and losses for the partnership firm.
However, in a partnership, all the partners do not participate in
all the activities of the firm for profits and losses equally. There
are various types of partnership in accordance with their extent
of liability and their participation in the firm. The main purpose
of this article is to discuss the various types of partners in a
partnership.
Definition of Partners

According to Section 4 of the Indian Partnership Act, 1932, a

partnership is defined as a relationship between two persons who
mutually agreed to share the profits and losses in the business.
Therefore, persons who have entered into an agreement with one
another are individually known as “partners”.

Furthermore, as per Black Law dictionary, a partner is a member of

a firm or co-partnership; who has united with others in order to
form a partnership in business.

Essentials Of Partnership
1. Agreement

Section 5 declares that a partnership is created by contract, not by status. It

may be too clementary to say that a partnership can arise only by an
agreement between the parties concerned and in no other way, yet the point
is important. It is one of those elements which clearly display the distinction
between a partnership and the other business relations, like Joint family
carrying on business, which do not arise by agreement, but are the result of
status, operation of law, succession or inheritance.

It is, however, not necessary that there should be a very formal or written
agreement. An agreement to create a partnership may as well arise from the
conduct of the parties COncerned. Thus, for example, in K.T. Abdul Badsha
Saheb v Century Wood Industries (ASC.U.). two brothers living together
inherited certain properties on the death of their father, they did not divide the
properties. Rather they sold a garden of theirs for Rs 5000 and invested the
sum in a separate timber business. There was no formal partnership agree.
men, but it appeared that they intended to share profits. The business,
however, failed before any profit could be made and the question of payment
of liabilities arose. It was held that they must bear them as partners. The court
said, "If two or more persons put together certain amounts of money in
certain shares for the purpose of purchasing properties and selling them for
profit for common benefit, it has to be said that such a transaction amount to
a partnership concern An agreement of partnership need not be express It
can arise out of mutual understanding shown by.a.consistent-
course.of.conduct."

The Supreme Court held that the entrustment by a wife of her stridhan
(personal property) to her husband does not amount to an agreement of
partnership even if the husband was making a business use of the property.
The husband had, therefore, not become a joint owner of the property and
could be prosecuted for criminal breach of trust for not return- ing the same to
his wife when she demanded it.

Deed of partnership.-When the partnership agreement is in writing, it is

called the deed of partnership. Writing is not prescribed by the Partnership
Act not even ting the firm registered under the Act with the Registrar of Firms.
But writing, known as instrument of partnership is necessary under the
Income Tax Act, 1961 if the partners desire their firm to be assessed as such
firm. One of the chief advantages of partners firm assessed as such is that
working partners can be paid salary and thus the taxable income of the firm
can be materially reduced. The validity of a partnership agreement does not
depend upon capital contribution by partners. A person may contribute his
know-how, or intellectual property rights, or skill and experience, or even
sheer labour in consideration of becoming a partner. Contribution of tenanted
premises may also be a good enough consideration. Such use of premises
does Where a partner died and the partnership became dissolved under
operation of law because there was no contrary provision and yet the
surviving partners continued the business, the court expressed the view that
this could not be regarded as a continuation of the old firm. It was a new
partnership A provision in the partnership deed to the effect that the heirs of a
deceased partner would be entitled to become partners in the firm was held
as not making them partners automatically. They had to express their desire
to become partners. Without such desire there was to be no partnership with
them."

2. Business

A partnership can exist in business and business alone. "Business" being

essential to partnership, the question arises what does it mean? Section 2
only says that it includes every trade, occupation and profession". This
definition cannot be taken literally, because while every trade may be a
business, every occupation or profession is not. Nor is there
any judicial definition of the term. In Smith v Anderson," JAMES LJ only said
that the term ‘business" must be taken in a practical sense, that is, in a sense
in which men of business would use that term. Speaking broadly, it is taken to
refer to any activity which is successful would result in profit. Where certain
persons joined in the purchase of wheat" and e" with the intention of dividing
and paying for it equally, it was held that, they being et interested in profit or
loss, were not partners. Where, on the other hand, two persons horse a
coach with their individual horses and shared the profit, this was held to be
the idea involved is that of a joint operation for the sake of gain. Therefore, a
society for business religious or charitable purposes is not a partnership.
Similarly, voluntary associations for the purpose of carrying on temporary
functions of a social character are not partnerships. Instances of other
associations for a common object which are not partnerships, properly so
called are clubs, trade protection societies, and building and other benefit
societies. It is, however, not necessary that the business should consist of a
long and permanent under taking A partnership may exist in a single business
venture. Thus, where two persons ered to produce a film and share the profits
of hiring it out, that was held to be sufficient to constitute a partnership."

But whether temporary or permanent, the business must be in existence. An

agreement w carry on business at a future time does not result in present
partnership. Thus, in R R Sama Reuben." The plaintiff deposited a sum of
money with the Kanpur Municipal Board in the name of a Civil Engineering
Co, for obtaining a licence for producing electricity in partnership with another.
The Board refused licence and the money was refunded to the Civil
Engineering Co. The plaintiff claimed it. The other partner contended that it
would be paid after meeting partnership liabilities. But the court held that
there was no partnership as yet. An agreement to carry on business at a
future time does not result in partnership unless that time arrives and the
business is commenced.

Two persons decided to form a limited company and to carry on business in

its name. Before the company was actually formed, one of them ordered
goods from the plaintiff. It was held that there was no joint business presently
in existence. They were only preparing to carry on business as a company as
soon as they could. Hence the liability was only that of the person who
ordered the goods." An agreement to purchase property at an auction sale
also does not amount to a partnership.’ he is not agreement alone which
creates a partnership. A partnership comes into being With the
commencement of a business. A company comes into existence on
incorporation under the Companies Act, though business may be commenced
subsequently

3. Sharing of Profits

The word "partnership" is derived from the word "to part" which means "to
divide". The division of profits is an essential condition of the existence of a
partnership. There was a time when sharing of profits was considered to be
the final word in the determination of the existence of a partnership. Every
man who received any portion of the profits of a This was the state of the law
up to the year 1860 when in Cox v Hickman" the House of business had to
incur therein the liability of a partner Lords reconsidered the test of
determining the existence of a partnership The net result of this historic
decision is that no man is a partner unless he has the right to share the profits
of the business But every man who received profits is not necessarily a
partner .Thus sharing of profits is only a prima facie evidence of the existence
of a partnership The conclusive test is that of mutual agency. The section
does not insist upon sharing of loss. Thus, a provision for loss-sharing is
not essential

4. Mutual Agency

The definition of partnership in Section 4 concludes with the words that the
business may be carried on by all or any of them acting for all". This, if the
person carrying on the business acts not only for himself but for others also,
so that they stand in the position of principals and agents, they are partners.
This is the principle of Cox v Hickman sn were iron merchants in partnership.
They become financially embarrassed and, therefore made a compromise
with their creditors. Under the compromise the property of the firm was
assigned to a few creditors selected as trustees. They were empowered to
carry on the business, to divide the net income among the creditors in a
rateable proportion and after the debts had been discharged, the business
was to be returned to S and S. Cox was one among the trustees although he
never acted. The other trustees continued the business They purchased a
quantity of coke from the plaintiff, Hickman, and gave him a bill of exchange
for the price. The bill remaining unpaid. Hickman brought an action against
the trustees, including Cox, for the price It was held that they were not
partners and therefore, Cox was not liable. The creditors. instead of taking
legal proceedings, came to an agreement about the way in which their claims
should be satisfied. That did not make them partners. Lord CRANWORTH
said, "The liability of one partner for the acts of his co-partner is in truth the
liability of a principal for the acts of his agent. Where two or more persons are
engaged as partners in any ordinary trade, each of them has an implied
authority from the other to bind all by contracts entered into according to the
usual course of business in that trade. Every partner in trade is for the
ordinary purposes of the trade, the agent of his co-partners, all are, therefore,
liable for the ordinary trade contract of the other. The public have a right to
assume that every part ner has authority from his co-partners to bind the
whole firm in contracts made according to the ordinary usages of trade"

Referring to the fact that the trustees were interested in the profits, his
Lordship contin ued It was argued that as they (the trustees would be
interested in the profits, therefore they would be partners. But this is a fallacy,
It is often said that the test is whether he entitled to participate in the profits,
This is no doubt a sufficiently accurate test, for to participate in the profits
affords a good evidence that the trade in which profits have been made was
carried on on behalf of the person sharing profits. But the real ground of

General Types of Partner

The following list includes the types of partners we come across on
a regular basis. The following list of the partners are not exhaustive
in nature, since the Partnership Act, 1932 does not restrict any type
of Partnership which the partners wish to define for themselves.

1)Active/Managing Partner

An active partner mainly takes part in the day-to-day running of the

business and also takes active participation in the conduct and
management of the business firm. He carries the daily business
activities on behalf of other partners. He may act in different
capacities such as manager, advisor, organiser and controller of
affairs of the firm. To be precise, he acts as an agent of all the
other partners in order to run main functions pertaining to
business. Furthermore, subject to the clause in the partnership
deed, the active partner can withdraw remuneration from the firm.

With regards to his role in the partnership, his role is of utmost

importance. Therefore, if at all he wishes to retire from the
partnership firm he must give a public notice about his decision. He
gives a public notice in order to absolve himself from liability and
acts done by the other partner. If he doesn’t issue a public notice
declaring his retirement he would be held liable for the acts done by
other partners post-retirement also.

2)Sleeping Partner

A sleeping partner is also known as a “dormant partner”. This

partner does not participate in the day-to-day functioning activities
of the partnership firm. A person who has sufficient money or
interest in the firm, but cannot devote his time to the business, can
act as a sleeping partner in the firm. However, he is bound by all
the acts of the other partners.
A sleeping partner like any other partner brings share capital to the
firm. He also continues to share the profits and losses of the firm. If
a dormant partner makes a decision to retire from the partnership
firm, then it is not mandatory for him to give a public notice for the
same. As a dormant partner is not participating in daily operations
of the business, he is not allowed to withdraw remunerations from
the firm. If at all the partnership deed is providing remuneration to
dormant partners, it is not deductible under the Income Tax Act,
1961.

3)Nominal Partner

A nominal partner does not have any real or significant interest in

the partnership firm. In simple words, he is only lending his name
to the firm and does not have a voice in the management of the
firm. On the strength of his name, the firm can promote its sales in
the market or can get more credit from the market.
For example: A partnership is executed between the partner and
the celebrity or a business tycoon for the sake of value addition to
the firm and also for promoting branding by using the person’s
fame and goodwill.
This partner does not share any profit and losses in the firm
because he does not contribute any capital to the firm. However, it
is pertinent to note that a nominal partner is liable to the outsiders
and third parties for the acts done by other partners.

4)Partner by Estoppel
A partner by estoppel is a partner who displays by his words,
actions or conduct that he is the partner of the firm. In simple
words, even though he is not the partner in the firm but he has
represented himself in such a manner which depicts that he has
become a partner by estoppel or partner by holding out. It is
pertinent to note that, though he does contribute in capital or
management of the firm but on the basis of his representation in
the firm he is liable for the credits and loans obtained by the firm.

There are two essential conditions of establishing a ‘holding out’:

1. Firstly, the person who is held out must have made a
representation of words, actions or conduct that he is a
partner in the firm.
2. Secondly, the other party must substantially prove that he had
knowledge of such representation and he acted on it.

5)Partner in Profits only

This partner of a firm will only share the profits of the firm and
won’t be liable for any losses of the firm. Moreover, if a partner who
is in “partner in profits only” deals with any of the third parties or
outsiders then he will be liable for the acts of profit only and not
any of the liability. He is not allowed to take part in management of
the firm. Such kinds of partners are associated with the firm for
their goodwill and money.

6)Minor Partner
A minor is a person who is yet to attain the age of majority in the
law of the land. According to Section 3 of the Indian Majority Act,
1875 a person is deemed to have attained the age of majority when
he attains 18 years of age. However, a minor can also be appointed
to claim the benefits of the Partnership.

It is pertinent to note that, Section 11 of the Indian Contract Act,

1872 prohibits a minor from entering into an agreement, as the
agreement entered by a minor is void ab initio. However, the
Partnership Act, 1932 allows a minor to enjoy benefits of
partnership when a set of rules and procedures are complied in
accordance with the law. A minor will share the profits of the firm,
however, his liability for losses is only limited to his share of the
firm.
A minor person after attaining the age of majority (i.e. 18 years of
age) needs to decide within 6 months if he is willing to become a
partner for the firm. If at all a minor partner decides to continue as
a partner or wishes to retire, in both the cases he needs to make
such a declaration by a public notice.

7)Secret Partner

In a partnership, the position of secret partner lies between the

active and sleeping partner. The membership of the firm of a secret
partner is kept secret from the outsiders and third parties. His
liability is unlimited since he holds a share in profit and shares
liabilities for losses in the business. He can even take part in
working for the business.

8)Outgoing partner

An outgoing partner is a partner who voluntarily retires without

dissolving the firm. He leaves the existing firm, therefore he is
called as an outgoing or retiring partner. Such a partner is liable for
all his debts and obligations incurred before his retirement.
However, he can be held liable for his future obligations, if at all he
fails to give a public notice stating his retirement from the
partnership firm.
9)Limited partner

A limited partner is a partner whose liability is only upto the extent

of his contributions for the capital of the partnership firm.

9)Sub-Partner

A sub-partner is a partner who associates someone else in his

share of the firm. He gives a part of his share to the person. It is
pertinent to note that, the relationship is not between the sub-
partner and the partnership firm but is between him and the
partner. Therefore, a sub-partner is a non-entity of the firm and he
does not hold any liability towards the firm.
A sub-partner usually agrees to share profits which are derived
from the third party. Such a partner cannot represent himself as a
partner in the original firm. Furthermore, he doesn’t reserve any
right in the original firm nor he is liable for acts done by partners of
the firm. He can only claim his agreed share of profits from the
partner who has contracted him to be a sub-partner.