Indian Partnership Act
Types of Partners: A Complete Note
The Act uses one word, 'partner', but business uses many: active, sleeping, nominal, secret, partner in profits only, sub-partner, partner by holding out. Some of these are legal categories with sections attached; others are descriptions the courts have accepted. The practical question is always the same: what is this person entitled to, and what is he liable for? This note sets out each type, together with the partners who join and leave: incoming, retiring, expelled, insolvent, deceased, and the minor admitted to the benefits of a firm.
Every type of partner compared on capital, share, participation, liability and exit, with the partners who come and go
1. By Participation and Disclosure
Type | Who he is | Position |
|---|---|---|
Active or working partner | Takes part in the conduct of the business | Full rights and full liability; may bind the firm; entitled to remuneration if the deed so provides; must give public notice on retirement |
Sleeping or dormant partner | Contributes capital and shares profits but does not take part in the business | Full liability to third parties; entitled to inspect accounts; need not give public notice on retirement, because those dealing with the firm did not know him as a partner |
Nominal partner | Lends only his name and reputation, without capital or a share | Not entitled to profits, but fully liable to third parties who deal with the firm on the faith of his name |
Partner in profits only | Shares the profits but, as between the partners, not the losses | Liable in full to third parties under Section 25; the indemnity operates only between the partners |
Secret partner | A real partner whose position is concealed from outsiders | Full rights and liability; on retirement he must give notice to those who knew of his position |
2. Persons Who Are Not Partners, but Are Involved
§ Sub-partner and partner by holding out Sub-partner, Section 29. A partner may transfer his interest, wholly or in part, to an outsider. The transferee is not a partner: he cannot interfere in the conduct of the business, require accounts, or inspect the books. He is entitled to receive the share of profits agreed, and must accept the account of profits agreed to by the partners. On dissolution, or if the transferring partner ceases to be a partner, he is entitled to the share of the assets and to an account from the date of dissolution. Partner by holding out, Section 28. A person who by words spoken or written or by conduct represents himself, or knowingly permits himself to be represented, as a partner in a firm is liable as a partner to anyone who, on the faith of that representation, has given credit to the firm. He gets no rights against the firm; he only incurs liability. The estate of a deceased partner is not made liable merely because the firm's name or his name is continued after his death. Also called partner by estoppel, because the person is estopped from denying what he represented. |
3. The Minor: Section 30
Stage | The position |
|---|---|
Admission | A minor cannot be a partner, but with the consent of all the partners for the time being, he may be admitted to the BENEFITS of an existing firm |
Rights | A share of the property and profits of the firm as agreed; access to, inspection of and copies of the accounts of the firm |
Liability | His share is liable for the acts of the firm; he is NOT personally liable |
Suits | He cannot sue the partners for accounts or his share except when severing his connection with the firm |
On attaining majority | Within six months of attaining majority, or of obtaining knowledge that he had been admitted to the benefits, whichever date is later, he must elect by PUBLIC NOTICE whether to become a partner |
If he elects to become a partner | He becomes personally liable to third parties for all acts of the firm since he was admitted to the benefits; his share remains as before unless altered |
If he elects not to | His rights and liabilities continue up to the date of the notice; his share is not liable for acts after that date, and he may sue for his share |
If he fails to elect | On the expiry of the six months he becomes a partner in the firm |
4. Partners Who Come and Go
Type | Provision | Key point |
|---|---|---|
Incoming partner | s. 31 | Introduced only with the consent of all the partners, subject to contract; not liable for acts of the firm before he became a partner |
Outgoing or retiring partner | s. 32 | May retire with the consent of all, by an express agreement, or, where the firm is at will, by notice in writing; liable for acts before retirement, and for later acts until public notice |
Expelled partner | s. 33 | May be expelled only in exercise of a power conferred by contract, by a majority, and in good faith; otherwise the expulsion is invalid |
Insolvent partner | s. 34 | Ceases to be a partner on adjudication; his estate is not liable for acts of the firm after that date, and the firm is dissolved unless the contract provides otherwise |
Deceased partner | s. 35 | The estate is not liable for acts of the firm after his death; the firm is dissolved subject to contract under s. 42(c) |
- Public notice. Section 72 prescribes how public notice is given. It is not required where a dormant partner retires, or on the death or insolvency of a partner: Section 32(3) and its proviso.
5. Three Distinctions Often Asked
§ Getting them straight • Working and sleeping. Both are real partners with full liability. The difference lies in participation and, usually, remuneration, and in the need for public notice on retirement. • Nominal partner and partner by holding out. A nominal partner is a partner by agreement, though without capital or profits; a person held out is not a partner at all, but is liable to those who gave credit on the faith of the representation. • Sub-partner and partner. A partner has rights against the firm; a sub-partner has rights only against the partner who shared his profits, and no privity with the firm. |
6. Frequently Asked Questions
Is a sleeping partner liable to third parties?
Yes, fully. He is a partner in law; only his participation differs. On retirement, however, he need not give public notice.
Can a partner in profits only escape losses?
Only as between the partners. To third parties he is liable in full under Section 25, and must then claim indemnity from his co-partners.
Is a sub-partner a partner in the firm?
No. Under Section 29 a transferee is entitled to the agreed share of profits but cannot interfere in the business, inspect books or demand accounts while the firm continues.
What happens if a minor does not elect on attaining majority?
On the expiry of six months he becomes a partner in the firm, with the liability that follows.