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Business Studies

Types of Partners in Business Partnership

When two or more people come together to form a business or company, they are called business partners. Partners can contribute capital or take part in the management of the organisation resulting in the various kinds of partners. All business partners do not necessarily participate in the work and share in the profits or liabilities of an organisation equally. The popular types of partners in business include active, dormant and limited partners.

Active Partners

Active partners are the types of partners that are involved in the management or running of the organisation. They can also be called working partners or ostensible partners. Business partners of this type are involved in the day to day running of an organisation on behalf of all other partners. Since they act as an agent of the business, active partners are required to give a public notice when they decide to retire. If a public notice is not given the active partner will be held liable for all the acts of the remaining partners.

Dormant or Sleeping Partners

These types of partners simply contribute capital to the organisation and do not take part in the running of the business. Dormant partners are however, bound by the actions of all other partners in the organisation. They share in the profits and losses of the business based on the profit-sharing ratios. If a dormant partner retires, s/he also needs to give a public notice the same way an active partner should.

Limited Partners

Partners whose liability is limited are called limited or special partners. This means that the partner is legally responsible for the debts of a company only to the extent of his/her shares. Limited partners may be permitted in some countries such as the UK, but in other countries like India, limited partners can only be minors below the age of 18 years.

Partners by Estoppel

A partnership by estoppel is created when a person indicates either by words, actions or conduct that they are a partner in a company when in actual fact that person is not. When a person represents a business in order to secure loans for example, s/he may create an impression that s/he is a partner in the firm to the third-party. That means s/he becomes liable to the third parties involved and cannot deny later in the future that s/he is not a partner in the firm unless s/he gives a public notice.

Partners by Holding out

There are instances when a company uses the name of a person in its activities creating an impression that s/he is a partner in the firm. That person can give a public notice that s/he is not a partner in the company. That type of partner is known as a partner by holding out.

Nominal Partner

A nominal partner may not have any significant interest in the partnership. S/he doesn’t make any capital contributions to the company either. This type of partner only lends his/her name to a firm and doesn’t share in the profits or losses. However, a nominal partner is held liable for any acts done by the rest of the partners in the organisation.

Sub-Partner

When a partner associates his/her share in the firm with a stranger a sub partnership is created between the stranger and the partner (the stranger becomes the sub partner). This relationship cannot be between the stranger and the firm but between the stranger and the partner. The sub partner shares in the profits derived by him/her from the organisation but s/he is not liable for the liabilities of the organisation. This type of partner may not even have direct contact with the firm.

Partners in Profits

This type of partner only shares in the profits of a company and not the losses or liabilities. When dealing with third parties this type of partner is liable for all acts of profit and doesn’t share in the losses.

Incoming Partner

An incoming partner is a new partner who brings in his/her own capital and goodwill to an already established organisation.

Outgoing Partner

An outgoing partner is a partner who is retiring from the firm with the consent of other partners. S/he must inform the public through serving a notice that s/he has retired from the organisation otherwise s/he will still be liable to third parties for debt payments even after retirement.

Secret Partner

A secret partner is a type of partner who has unlimited liability but does not disclose to the public that s/he is a partner in the organisation. Like every other partner of the firm his/her liability is unlimited. A secret partner can be engaged in the business and its operations but keeps the public unaware of his/her association with the business.

Minor Partner

Minor partners are types of business partners who are below the age of 18 years and are admitted to the benefits of a partnership. They cannot become a partner according to a contract because they are below the legal age to enter into one. A minor partner can share in the profits of the firm however, his/her liability is limited to his/her partnership share in the organisation. Minor partners cannot take part in management and have shares in the profits of the firm. After turning 18 years, the minor partner can decide to remain a partner in the firm or not within six months and has to issue a public notice of his/her decision.

When partnerships are created the partners take on different roles. Some are active within the organisation; some are silent in the day to day operations whilst others take on more liability. The roles, responsibilities and the amount of liability each partner takes on is what normally differentiates partnerships. Also, the amount of capital that is contributed by each partner may influence their role and responsibilities within the organisation. The rights, profit sharing ratios as well as the duties of each partner are agreed upon in the partnership agreements. Some of the advantages of partnerships are shared start-up costs, shared responsibilities as well as risks and liabilities. On the downside there is the potential for differences and conflict among partners. Disagreements and disputes may harm the business and damage relationships.

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