Kinds of Partnership and its advantages and disadvantages

ADVERTISEMENTS:

There are four kinds of partnership

1. General partnership:

In a general partnership, the liability of each partner is unlimited. It means that the firm’s creditors can realise their dues in full from any of the partners by attaching their personal property if the firm’s assets are found to be inadequate to pay off its debts.

ADVERTISEMENTS:

An exception is made in the case of a minor partner whose liability is limited to the amount of his share in the capital and profits of the firm. In India all partnership firms are general partnerships.

Each partner of a general partnership is entitled to take active part in the management of the firm, unless otherwise decided by the other partners.

2. Limited partnership:

A limited partnership is a partnership consisting of some partners whose liability is limited to the amount of capital contributed by each. The personal property of a limited partner is not liable for the firm’s debts.

ADVERTISEMENTS:

He cannot take part in the management of the firm. His retirement, insolvency, lunacy or death does not cause dissolution of the firm. There is at least one partner having unlimited liability. A limited partnership must be registered.

Limited partnership is now allowed in India under the Limited Liability Partnership Act. In England limited partnership can be formed under the Limited Partnership Act, 1907 and in the USA under the Partnership Act, 1890

The chief characteristics of a limited partnership are as follows:

1. There must be at least one partner with unlimited liability. The liability of the remaining partners is limited to their capitals in the firm. Thus, a limited partnership consists of two types of partners, general partner and limited partner.

ADVERTISEMENTS:

2. The limited partner cannot take part in the management of the firm. He has no implied authority to represent and bind the firm. However, he is allowed to inspect the books of accounts of the firm.

3. The limited or special partner cannot assign his share to an outsider without the consent of the general partner.

4. The limited partner cannot withdraw any part of his capital.

5. A limited partnership must be registered.

ADVERTISEMENTS:

Advantages

Limited partnership offers the following benefits:

i. It enables people to invest in a business without assuming unlimited risk and without devoting much time and attention in management of business.

ii. It permits the mobilisation of larger financial resources from cautious and conservative investors.

ADVERTISEMENTS:

iii. It provides an opportunity to able and experienced persons to manage the business without any interference from other partners. Complete control and personal supervision help to ensure prompt decisions and uniform actions.

iv. It is more stable than general partnership because it is not dissolved by the insolvency, retirement, incapacity or death of limited partner.

Disadvantages

Limited partnership suffers from the following drawbacks:

(i) The limited partners are deprived of the right to manage. They remain at the mercy of the general partner.

(ii) The general partner may misuse his power to exploit the limited partners.

(iii) A limited partnership enjoys little credit standing as the liability of some partners is limited. It has to be registered.

3. Partnership at will:

It is a partnership formed for an indefinite period. The time period or the purpose of the firm is not mentioned at the time of its formation. It can continue for any length of time depending upon the will of the partners. It can be dissolved by any partner by giving a notice to the other partners of his desire to quit the firm.

4. Particular partnership:

It is a partnership formed for a specific time period or to achieve a specified objective. It is automatically dissolved on the expiry of the specified period or on the completion of the specific purpose for which it was formed.

Types of Partners

There can be the following types of partners:

1. Active or working partner:

Such a partner contributes capital and also takes active part in the management of the firm. He bears an unlimited liability for the firm’s debts. He is known to outsiders. He shares profits of the firm. He is a full-fledged partner.

2. Sleeping or dormant partner:

A sleeping or inactive partner simply contributes capital. He does not take active part in the management of the firm. He shares in the profits or losses of the firm. His liability for the firm’s debts is unlimited. He is not known to the outside world.

3. Secret partner:

This type of partner contributes capital and takes active part in the management of the firm’s business. He shares in the profits and losses of firm and his liability is unlimited. However, his connection with the firm is not known to the outside world.

4. Limited partner:

The liability of such a partner is limited to the extent of his share in the capital and profits of the firm. He is not entitled to take active part in the management of the firm’s business. The firm is not dissolved in the event of his death, lunacy or bankruptcy.

5. Partner in profits only:

He shares in the profits of the firm but not in the losses. But his liability for the firm’s debts is unlimited. He is not allowed to take part in the management of the firm. Such a partner is associated for his money and goodwill.

6. Nominal or ostensible or quasi partner:

Such a partner neither contributes capital nor takes part in the management of business. He does not share in the profits or losses of the firm. He only lends his name and reputation for the benefit of the firm.

He represents himself or knowingly allows himself to be represented as a partner. He becomes liable to outsiders for the debts of the firm. A nominal partner can be of two types:

(a) Partner by estoppels:

A person who by his words (spoken or written) or conduct repre­sents himself as a partner becomes liable to those who advance money to the firm on the basis of such representation.

He cannot avoid the consequences of his previous act. Suppose a rich man, Mohan, is not a partner but he tells Sohan that he is a partner in a firm called Shipra Enterprises.

On this impression, Sohan sells good worth Rs. 20,000 to the firm. Later on the firm is unable to pay the amount. Sohan can recover the amount from Mohan. Here, Mohan is a partner by estoppels.

(b) Partner by holding out:

When a person is declared as a partner and he does not deny this even after becoming aware of it, he becomes liable to third parties who lent money or credit to the firm on the basis of such a declaration.

Suppose, Shipra tells Sohan in the presence of Mohan that Mohan is a partner in the firm of Shipra Enterprises.

Mohan does not deny it. Later on Sohan gives a loan of Rs. 20,000 to Shipra Enterprises on the basis of the impression that Mohan is a partner in the firm. The firm fails to repay the loan to Sohan. Mohan is liable to pay Rs. 20,000 to Sohan. Here, Mohan is a partner by holding out.

7. Minor as a partner:

A minor is a person who has not completed 18 years of age. A minor cannot become a partner because he is not qualified to enter into a contract. But he may be admitted to the benefits of partnership with the mutual consent of all the partners.

On being so admitted, a minor becomes entitled to a share in the profits of the firm. He can inspect and copy the books of account of the firm but he cannot take active part in the firm’s management.

His liability is limited to the extent of his share in the capital and profits of the firm. He cannot file a suit against the firm or its partners to get his share except when he wants to disassociate himself from the firm.

After becoming a major, the minor must give a public notice within six months if he wants to break off his connections with the partnership firm.

If he does not give such a notice within six months or if he decides to remain in the firm, he becomes liable to an unlimited extent for the debts of the firm from the date he was admitted to the benefits of partnership. He also becomes entitled to take active part in the management of the firm’s business.

8. Sub partner:

He is a third person with whom a partner agrees to share his profits desired from the firm. He does not take part in the management of the firm. He is not liable for the firm’s debts.

Rights and Obligations of Partners

The rights and obligations of partners are generally laid down in the partnership deed. In case the partnership deed does not specify them, then the partners will have rights and obligations prescribed in the Partnership Act. These are given below:

Rights of Partners

1. Every partner has a right to take part in the conduct and management of the firm’s business.

2. Every partner has a right to be consulted and express his opinion on any matter related to the firm. In case of difference of opinion, the decision has ordinarily to be taken by a majority.

But vital issues like admission of a new partner, change in the firm’s business, alteration of profit- sharing ratio, etc., must be decided by unanimous consent of all the partners.

3. Every partner has a right to have access to, inspect and copy any books of accounts and records of the firm.

4. Every partner has the right to an equal share in the profits of the firm, unless otherwise agreed by the partners.

5. Every partner has the right to receive interest on loans and advances made by him to the firm. The rate of interest should be 6 per cent unless otherwise agreed by the partners.

6. Every partner has the right to be indemnified for the expenses incurred and losses sus­tained by him in the ordinary conduct of the firm’s business.

7. Every partner has a right to continue in the firm unless expelled in accordance with the terms of the partnership agreement.

8. Every partner has a right to retire in accordance with the terms of the partnership agree­ment or with the consent of other partners.

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