Types of Partners | Indian Partnership Act, 1932

Partnerships are integral to the fabric of business in India, governed by the Indian Partnership Act, 1932. This legislation provides a comprehensive framework for various types of partnerships, each with its own set of rights, duties, and liabilities. Understanding the different classifications of partners is essential for establishing and operating partnerships effectively within the Indian legal system.

Introduction

The concept of partnership is defined under Section 4 of the Indian Partnership Act, 1932 which states that a partnership is a relation between two or more parties who mutually agree to share profits and losses of a business. In a way, the partnership can be considered a modified version of sole proprietorship, as the involvement of multiple partners minimizes the burden on a specific individual. Moreover, various partners may be skilled in different sectors, be it sales, finance, or staff recruitment, which allows a partnership firm to work more efficiently when compared to a sole proprietorship.

Partnerships can have various types of partners, with distinguished roles, as some partners may take active participation in the management of the business. At the same time, some might only be concerned with incurring the profits from the business.  In this article, we shall be discussing the types of partners under the Indian Partnership Act, of 1932, while touching base with relevant case laws and illustrations better to understand the nature of each type of partner.

Types of Partners

1) Managing Partner

A managing partner is also known as an active partner. Such a partner takes active participation in the management of the business. They may oversee finance, sales, the recruitment process of staff, and other relevant areas of the business, and may act as agents of the other partners in a limited and appropriate capacity. The managing partner is directly involved in everyday business activities of the business and has the right to act as a decision-maker when needed.

It is important to note that the role of the managing partner is that of utmost significance, that being said, if such a partner ever decides to leave or retire from the firm, then they shall provide a public notice about such a decision. Therefore, we can deduce that the managing partner has a significant interest in running the business, and they also have a significant command over everyday business operations and logistics of the firm.

Illustration: A is a managing partner at a law firm. Here, the approval of A will be required for every major decision, which might consist of a merger, demerger, acquisition, or even what case to undertake and what case to omit (if such a case tends to hamper the reputation of the firm).

2) Dormant Partner 

A dormant partner is also known as a sleeping partner. A dormant partner has no real participation in the everyday operations of the business and other relevant activities being undertaken. However, such a partner may tend to invest capital and continue to incur profits/losses from the business. A dormant partner typically has limited liability.

In case a dormant partner wishes to leave/retire from the firm, they would not be required to provide a public notice for such a decision, unlike in the case of a managing partner.

Illustration: Mr. X has a lot of capital which he wishes to invest. However, he does not have the time to manage a business venture since he is a busy man. In such a situation, he decides to invest the capital into a firm and becomes a dormant partner, so that he may enjoy the profits despite not being able to make time for everyday business undertakings.

3) Nominal Partner

A nominal partner has no involvement in the everyday business endeavours of a firm, nor do they have any interest in the operations of the firm. A nominal partner only provides his name value and goodwill to a firm. Such goodwill helps the firm to attract potential investors and also helps in creating a healthy amount of trust among the public on an aggregate level by brand building. Nominal partners may indeed incur liabilities for the actions of the other partners, but they can still be entitled to a share of the profits or may bear losses, depending on the agreement among the partners.

However, a nominal partner would still be held liable for the actions of the other partners in the firm. We shall also note that a nominal partner may not be associated with a firm for long, as implied in the case of Minck v. Roshan Lal Shorey, 1931 Lah HC, where it was held that a business does not need to be of a long and permanent undertaking, therefore, it may be short term in nature. This implies how a nominal partner can become associated with a firm for a temporary period.

Illustration: Mrs Y is a popular actress who agrees with an online learning platform, to provide the business with her name value and goodwill. Here, Mrs. Y is not interested or involved in the business operations of the online learning platform, nor has she invested any capital, however, the business enjoys an increase in its brand value, as well as trust building, because of Mrs Y's name value.

4) Minor Partner

In law, a person who is yet to attain the age of majority (18 years) is to be considered a minor. Section 11 of the Indian Contract Act states that a minor cannot enter into a contract, and a contract entered by a minor shall be deemed void. However, under the Indian Partnership Act, a minor cannot become a partner but enjoys the benefits of a partner if all the members of the firm give their consent for the same. The Act also states that a minor will be sharing the profits from the business.

Referring to the case of CIT v. Dwarkadas Kheten & Co., AIR 1961 SC 680, 

 "Partner" includes any person who being a minor has been admitted to the benefits of partnership and observed that in view of this definition and the fact that a minor could be admitted to the benefits of partnership under s. 30"

5) Secret Partner 

As the name suggests, a secret partner's identity is always maintained a secret, meaning, their identity is never revealed to third parties or the public. A secret partner may take part in the everyday business operations of the company along with incurring profits from the business.

Illustration: Mr. C is a partner at an IT manufacturing company, and he oversees the sales department. Mr C has maintained secrecy about his role as a partner in the company because he prefers to work discreetly. As a result of this, he does not make any public appearances as a partner. However, he continues to oversee his department by his speciality.

6) Partner by Estoppel

A partner by estoppel is a person who is not a partner in actuality. However, they act as a representative of the firm as their words and actions imply so. Such representation makes a person a partner by estoppel, even though they are not a partner in reality. A partner by estoppel may arise even without entering into a formal agreement, according to Section 5 of the Indian Partnership Act, 1932.

Such was further implied in the case of Abdul v. Century Woods Industries, AIR 1954 Kant 33, where it was held that a partnership agreement need not be expressed and can be implied from the conduct of the parties. Furthermore, a partner by estoppel may even invest capital while taking part in the everyday operations of the business. 

Illustration: Mr. X and Mr. Z are good friends. During a business deal, it was implied by words that, Mr. X is a partner in the company where Mr. Z works. Here, Mr. X became a partner by estoppel.

7) Sub-Partner

Sub partner is a partner in a firm who shares their profits with an outsider. Such partners are not actual part of the firm, plus, they are not liable for any debt or firm’s actions either. A sub-partner typically agrees to share profits derived from third-party sources. However, they cannot represent themselves as partners in the original firm.

We may understand this better with the help of the case of Cox v. Hickman, (1860) 8 H.L.C. 268, where it was held that no man is a partner unless he has a right to share the profits of a business, however, not every person who receives profit is a partner. Considering this, even though a sub-partner may earn profit from the firm, they are not necessarily an actual partner.

8) Partner in Profits only

As the name suggests, partners in profits only share profits in the firm, and they are not liable to incur or share any losses. In a scenario where such a partner makes any deals with a third party outside the firm, then they will only be liable to incur profits out of such deals. 

9) Partnership at Will

Where no fixed duration for the partnership is specified, it is considered a partnership at will. Any partner can dissolve the partnership at any time without giving any prior notice.

Conclusion

Overall, the Indian Partnership Act, of 1932 governs the partnership ventures in India. Furthermore, from the above discussion, and elaborate explanations of various types of partners along with relevant case laws and illustrations, we can deduce that each partner has a unique nature associated with their role in a firm.

The partners may be involved in undertaking different business activities and operations of the firm by their expertise. Moreover, the thing that remains constant is the sharing of profits in the firm. 

References

[1] Indian Partnership Act, 1932, Available Here

[2] Types of Partners in Partnership Act, Available Here

[3] Types of Partners in a Partnership Firm, Available Here

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