Know The Relation Between Partner, Firm, Partnership,And Firm Name Under Indian Partnership Act,1932
A partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting or all. In India, it is governed by the Indian Partnership Act, 1932.
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”.
Since partnership is the result of a contract, at least two people are necessary to constitute a partnership. The Indian Partnership Act, 1932 does not mention anything about the maximum no. of partners in a partnership firm but as per the Companies Act, a partnership consisting of more than 10 persons for banking business and more than 20 persons for any other business would be considered as illegal. Hence, these should be regarded as the maximum limits to the number of partners in a partnership firm.
Section 4 of the Indian Partnership Act 1932 states partnership as the ‘association between people who have consented to share the profits of an enterprise carried on by all or any of them acting for all’.
Persons who have entered into a partnership with one another are called individually ‘Partners’ and collectively ‘A firm’ and the name under which their business is carried on is called the firm name.
Types of Partners
The partnership is formed with its partners and their roles and responsibility may also be changed. Based on their participation and roles in the firm, here are the types of partners in Partnership Firm.
Active or Working Partner:
This is the partner that is actively involved in the management and other important functional aspects of the partnership firm. He bears unlimited liability in case of debts. An active partner decides how the firm operates with his active participation and contribution as a partner. In case the active partner chooses to retire, he must give public notice of his retirement. In situations where an active partner fails to do so, he will remain liable for the acts of other partners, post his retirement. Any action taken by the active partner in the ordinary course of business is binding on the firm and the partners. Subject to clause in the partnership deed, the active partner can withdraw remuneration from the firm.
Dormant or Sleeping Partners:
As the name suggests a dormant partner is the one that is not interested in daily management or functional aspects of the partnership firm, but he may be consulted while taking major decisions for the firm. The partnership of this partner may not be known to the outsiders, but they invest in the firm by contributing a chunk of capital to the firm. In case of debt, he is liable to clear it out on behalf of the firm. A dormant partner is not required to file a public notice to announce his retirement. As he is not participating in the operations, he is cannot withdraw remuneration. If the partnership deed provides the clause of remuneration to the sleeping partner, it is not deductible under Income Tax Act.
A person who does not have any real interest in the business or the working of the firm nor he has any rights in the profits is a nominal partner of the firm. He also does not usually have any say in the management and working of the business, but he is liable to outsiders as an actual partner. He just lends his name to the firm, so that it could advantage from his/her reputation and name and is treated as an actual partner. For example, a partnership is executed with a celebrity or a business tycoon for value addition or for promoting a brand with that person’s goodwill and fame.
Partner by estoppel or holding out:
If a person expressly declares by his words or conduct, holds out to another that he is a partner, he would not be able to back out from it later. Hence such a person would thus become liable to third parties in clearing out the debts of the firm when a situation arises.
There are two essential conditions for the principle of holding out:
the person to be held out must have made the representation, by words written or spoken or by conduct, that he was a partner; and
the other party must prove that he had knowledge of the representation and acted on it, for instance, gave the credit.
Partner in profits only:
In certain situations, a partner joins the partnership firm with a clarification that he/she would share only profits as a partner and would not be liable for any losses. However, he shall be liable like all other partners since the liability of the partners is joint and several. So if the firm incurs any loss and the other partners become insolvent, the third party may hold this partner liable. As the arrangement of sharing only profits is an internal arrangement among the partners, the third partner may not be concerned about it. The said partner can then reimburse the contribution made to the third party for the arrangement.
When a partner agrees to share his profits derived from the firm with a third party, that person is known as a sub- partner. He cannot represent himself as a partner in the original firm. He does not have any rights against the original firm neither he is liable for the acts of the firm. He can claim the agreed share of profits from the contracting partner only.
Minor as a partner:
Partnerships are created by a mutual agreement between two or more parties which is a contract. Minors are incapable of entering into contracts. But under the Indian Partnership Act, a minor can be introduced as a partner as long as it is only to enjoy the benefits. A minor partner has access to the accounts of the firm and is entitled to share his profits. They do not hold the right to file suit against the partners as long as he is in the firm. The private property of the minor cannot be attached by the creditors.
Types of Partnerships
A partnership is divided into different types depending on the state and where the business operates. Here are some general aspects of the three most common types of partnerships.
A general partnership comprises two or more owners to run a business. In this partnership, each partner represents the firm with equal rights. All partners can participate in management activities, decision making, and have the right to control the business. Similarly, profits, debts, and liabilities are equally shared and divided equally.
In other words, the general partnership definition can be stated as those partnerships where rights and responsibilities are shared equally in terms of management and decision making. Each partner should take full responsibility for the debts and liability incurred by the other partner. If one partner is sued, all the other partners are considered accountable. The creditor or court will hold the partner’s personal assets. Therefore, most of the partners do not opt for this partnership.
This partnership includes both the general and limited partners. The general partner has unlimited liability, manages the business and the other limited partners. Limited partners have limited control over the business (limited to his investment). They are not associated with the everyday operations of the firm.
In most cases, the limited partners only invest and take a profit share. They do not have any interest in participating in management or decision making. This non-involvement means they do not have the right to compensate the partnership losses from their income tax return.
Limited Liability Partnership
In the Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is guarded against the other partner's legal and financial mistakes. A limited liability partnership is almost similar to a Limited Liability Company (LLC) but different from a limited partnership or a general partnership.
Partnership at Will
Partnership at Will can be defined as when there is no clause mentioned about the expiration of a partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions that have to be fulfilled by a firm to become a Partnership at Will are:
The partnership agreement should have not any fixed expiration date.
No particular determination of the partnership should be mentioned.
Therefore, if the duration and determination are mentioned in the agreement, then it is not a partnership at will. Also, initially, if the firm had a fixed expiration date, but the operation of the firm continues beyond the mentioned date that it will be considered as a partnership at will.
The name of the partnership firm shall not be identical or similar to existing firms in the same business.
The name of the partnership firm may include the names of the members included in the register of members.
The name of the partnership firm shall be of consonance with the provisions of The Names and Emblems (Prevention of Improper Use) Act, 1950.
The name of the partnership firm may end with suffixes such as “and Company”, “and Co.” or “and Associates”.
The firms are restricted from using words that suggest, support, or patronization the firm.
The name of the partnership firm may use “and/&” to differentiate the principal name/center name/surname of the accomplice of the business.
It is mandatory to use “and/&” either in the middle of the full first names and full center names, full surnames of the partners, or before the last full first name or full center name or full surname of the accomplices.
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