In a partnership firm, you can find different types of partners.
Some may actively participate in the business while others prefer not to keep themselves engaged actively in the business activities after contributing to the required capital.
Also, certain kinds of partners neither contribute capital nor actively participate in the day-to-day business operations.
Let us learn more about them.
The partners who actively participate in the day-to-day operations of the business are known as active or working partners.
They contribute capital and are also entitled to share the profits of the business. They are also liable for the debts of the firm.
Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners.
They only contribute capital and share the profits or bear the losses, if any.
These partners only allow the firm to use its name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital or share profits and also do not take part in the conduct of the business of the firm.
However, they remain liable to third parties for the acts of the firm.
Minor as a partner
You learned that a minor, i.e., a person under 18 years of age is not eligible to become a partner. However, in special cases, a minor can be admitted as a partner with certain conditions.
A minor can only share the profit of the business. In case of loss, his liability is limited to the extent of his capital contribution to the business.
Partner by estoppels
If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and based on this impression transacts with that firm then that person is held liable to the third party, the person who falsely represents himself as a partner is known as a partner by estoppels.
Suppose in A-firm there are two partners. One is David, and the other is Moses.
If John- an outsider represents himself as a partner of A-firm and transacts with Lut, then John will be held liable for any loss arising to Sharif. Here John is a partner by estoppels.
Partner by holding out
In the above example, if either Linus or Shadhin declares that David is a partner of their firm and knowing this declaration, David remains silent then will be liable to those parties who suffer losses by transacting with A-firm with the belief that David is a partner of that firm.
Here David is liable to those parties who suffer losses, and David will be known as a partner by holding out.
Who Can or Cannot Be a Partner in Partnership Business?
Persons who have entered into a partnership with one another are called individually “partners.”
Not all persons become partners. Who wants to become a partner require to fulfill some qualities. They are-
Under the Indian Partnership Act, a person may be a partner if he can enter into a contract. Who is a ‘person’? For the Partnership Act, the term ‘person’ does not include a partnership or a limited company. This, a Company P, can not form a partnership with a Company Q.
A woman can be a partner, married, or unmarried. Of course, a woman cannot be a partner if she is a minor or she is of unsound mind.
A minor cannot be a partner. But in an existing partnership, a minor can be admitted into a firm if all the partners of the firm agreed. Such a minor gets all the benefits of the partnership.
Status of a Minor in Partnership Business
A Minor Cannot Be a Partner, but A minor partner is a partner who is not major (not completed 18 years).
A minor cannot enter into a contract according to Section 20 of the Partnership Act. A contract with a minor is void. Since partnership is a relation resulting from contact, therefore a minor cannot be a partner in a firm.
A Minor Can Be Admitted to the Benefits of Partnership Alone
A minor can be admitted to the benefits of a partnership with the consent of all other partners for the time being. This can be done in a firm which already exists. He cannot be a full-fledged partner.
Rights of a Minor in a Firm
A minor has a right to have access and inspect and copy any of the accounts of the firm. The minors share liable for the acts of the firm, but his personal property is not liable for the debts of the firm.
The minor on severance can sue the partners for the account.
Liability of a Minor in Partnership Business
Liability of a Minor in a Firm. The share of a minor in the firm is liable for the acts of the firm. The personal property of the minor is not liable for the debts of the firm.
Position on Attaining Majority
Within 6 months of his attaining majority, he has to give notice: Whether he wishes to continue as a partner or not
- In case he does not make such an announcement, he will be treated as decided to continue as a full-fledged partner
- When he chooses to become a partner or is deemed tote partner, his liability becomes unlimited with effect from the date of his admission as such.
Person of unsound mind
A person who is of unsound mind cannot become a partner.
In a Company, the capacity to enter into a contract is determined by the Memorandum and Articles of the Association of the company.
The liability of the members of a firm under the Partnership Act, for the debts of the firm, is unlimited. But a company .cannot incur unlimited liability. Therefore a company cannot become a partner of the firm.
Can a Company Be a Partner in Partnership Business?
A Company can enter into a contract with a partnership firm because it has an artificial legal entity. Despite its legal entity, a company cannot be a partner of a firm.
The reason is that the liability of a company is limited, and the company cannot bear unlimited liability.
According to the Partnership Act, the liability of a partner is unlimited. In addition to this, only a natural human being is legally entitled to become a partner of a partnership firm.
But a company is not a natural human being; it is only an artificial person, which is created by law.
Rights and Obligations of a Partner in the Absence of a Partnership Deed
The Partnership Deed contains the mutual rights, duties, and obligations of the partners. In certain cases, the Partnership Act also makes a mandatory provision as regards the rights and obligations of partners.
When there is no Deed or the deed is silent on any point, the rights and obligations as provided in the Partnership Act shall apply.
Rights of a Partner in Partnership Business
The rights of a partner are as follows:
- Right of the partner to take part in the day-to-day management of the firm.
- The right to be consulted and heard while taking any decision regarding the business.
- Right of access to books of accounts and call for a copy of the same.
- The right to share the profits equally or as agreed upon by the partners.
- The right to get interested in capital contributed by the partners to the firm.
- Right to avail interest on advances paid by the partners for business purposes.
- The right to be indemnified in respect of payment made or liabilities incurred or for protecting the firm from losses.
- Right to the use of partnership property exclusively for partnership business only, not himself.
- Right as an agent of the firm and implied authority to bind the firm for any act done in carrying the business existing partners.
- The right to continue unless and otherwise, he ceases to become a partner.
- The right to retire with the consent of other partners and according to the terms-and-conditions of the deed.
- Right of outgoing partner/legal heirs of the deceased partner.
Duties or Obligations of a Partner:
The duties of a partner are as follows:
To carry on the business to the greatest common advantage.
Every partner is bound to carry on the business of the firm to the greatest common advantage. In other words, the partner must use his knowledge and skill in the conduct of business to secure maximum benefits for the firm.
To be just and faithful to each other.
Every partner must be just and faithful to other partners of the firm. Every partner must observe the utmost good faith and fairness towards other partners in business activity.
To render true accounts.
Every partner must render true and proper accounts of his co-partners. Every entry in the books must be supported by vouchers and explanations if demanded by other partners.
To provide full information.
Every partner must provide full information on activities affecting the firm to the other co-partners. No information should be concealed, kept secret.
To attend diligently to his duties.
Every partner is bound to attend diligently to duties in the conduct of the business of the firm.
To work without remuneration.
A partner is not entitled to receive any kind of remuneration for taking part in the conduct of the business. But in practice, the working partners are generally paid remuneration as per the agreement, so also commission in some cases.
To indemnify for loss caused by fraud or willful neglect.
If any loss is caused to the firm because of a partner’s willful neglect in the conduct of the business or fraud commit by him against a third party, then such a partner must indemnify the firm for the loss.
To hold and use partnership property exclusively for the firm.
The partners must hold and use the partnership property exclusively for the business of the firm, not for their benefit.
To account for personal profits.
If a partner derives any personal profit from partnership transactions or the use of the property of the firm or business connection, the firm, or the firm’s name, he must account for such profit and pay it to the firm.
Not to carry on any competing business.
A partner must not carry on competing for business with that of the firm. If he carries on and earns any profit, then he must account for the profit made and pay it to the firm.
To share losses
It is the duty of the partners to bear the losses of the firm.’ partners share the losses equally when there is no agreement or as per their profit share ratio.
To act within the authority.
Every partner is bound to act within the scope of authority. If he exceeds his authority and the film suffers from any loss, he shall have compensated the firm for such loss.
Duty to be liable jointly
Every partner is jointly and individually liable to the third parties for all acts of the firm done while he is a partner.
Duty not to assign his interest
A partner cannot assign or transfer his partnership interest to an outsider to make him the partner of the firm without the consent of other partners.
However, he can assign his share of the profit and his share in the assets the firm where the assignee shall not be entitled to interfere in the conduct of the business.
Liabilities of a Partner to Third Parties
The following are the liabilities of a partner to third parties:
Liability of a partner for acts of the firm
Every partner is jointly and severally liable for all acts of the firm done while he is a partner. Because of this liability, the creditor of the firm can sue all the partners jointly or individually.
Liability of the firm for the wrongful act of a partner
If any loss or injury is caused to any third party or any penalty is imposed because of the wrongful act or omission of a partner, the firm is liable to the same extent as the partner.
However, the partner must act in the ordinary course of business of the firm or with the authority of his partners.
Liability of the firm for Wrongdoing by partners
Where a partner acting within his apparent authority receives money or property from a third party and Wrongdoing it or a firm receives money or property from a third party in the course of its business and any of the partners’ Wrongdoingsuch money or property, then the firm is liable to make good the loss.
Liability of an incoming partner
An incoming partner is liable for the debts and acts of the firm from the date of his admission into the firm. However, the incoming partner may agree to be liable for debts before his admission.
Such agreeing will not empower the prior creditor to sue the incoming partner. He will be liable only to the other copartners.
Liability of a retiring partner
A retiring partner is liable for the acts of the firm done before his retirement.
But a retiring partner may not be liable for the debts incurred before his retirement if an agreement is reached between the third parties and the remaining partners of the firm discharging> the retiring partner from all liabilities.
After retirement, the’ retiring partner shall be liable unless public notice of his retirement is given. No such notice is required in case of retirement of a sleeping or dormant partner.