Section 4 of the Partnership Act, of 1932 states that a “partnership is an agreement between two or more persons who agree to share the profit as well as the losses”. Section 2 further defines the term action in the context of a partnership firm as follows:
- Active Partner|
- Sleeping Partner
- Nominal Partner
- Nominal Partner
- Incoming Partners
- Partner by Holding Out
Any act or omission by all the partners or by any partner or agent of the firm which gives rise to a right enforceable by or against him. Since the partners are allowed to carry any business, profession, or occupation, the partnership can carry any business, profession, or occupation which shall be undertaken through the acts of the partners or their agents which shall be enforceable by law.
Table of Contents
Types of Partners
Various types of partners exist in a partnership concept as mentioned below:
Active Partner
An active partner is one who is elected as a partner in the partnership firm and who takes active participation in the functioning of the firm. He acts as an agent for the other partners and is responsible for the performance of all the functions in the ordinary course of business.
Sleeping Partner
A sleeping partner is one who is elected as a partner in the partnership firm and who does not take active participation in the functioning of the firm. He does not act as an agent for the other partners and is not responsible for the performance of all the functions in the ordinary course of business.
Nominal Partner
A person who provides his name to the firm, but does not have any interest in the firm, is known as a nominal partner of the firm. The nominal partner is not entitled to profit sharing of the business. In addition, he does not invest his capital in the functioning of the business.
Nominal Partner
A person who provides his name to the firm, but does not have any interest in the firm, is known as a nominal partner of the firm. The nominal partner is not entitled to profit sharing of the business. In addition, he does not invest his capital in the functioning of the business.
Incoming Partners
A person who is entering into a partnership firm that is already in existence is known as an incoming partner. The rights and duties of the incoming partners are defined in the partnership deed when it was prepared.
Partner by Holding Out
This is also known as partnership by estoppel. When a partner who represents himself as a partner to the firm or who knowingly permits any other person to act himself as a partner in the firm is known as a partner by holding out. If the person himself or by his conduct induces others to believe that he is a partner, then such a partner is known as a partner by holding out or a partner by estoppel.
A partner in the partnership firm is an agent for the firm and for the other partners. As you may recall the agent can make agreements or enter into the contracts on the behalf of the principal, just as a partner can act as an agent for the partnership firm and enter into a contract or an agreement on behalf of the partnership firm.
The general rule of a partnership is that a partnership firm is bound by the acts or actions of the partners, who execute the work of the partnership in the ordinary course of the business.
The authority and responsibility of a partner can be expressed or implied.
Expressed authority is defined in the partnership deed itself. Every partner’s liability and rights which are expressed are written into the agreement or the deed.
Every partner has an implied authority to act upon and to bind the firm. Implied authority can be defined as:
- Making sales and purchases on behalf of the firm
- Raising loans on the assets of the firm and the partners
- Receiving payment and debts of the companies from the third parties
- Accepting cheques, bills of exchange, and other promissory notes for the firm
- Taking on rent or lease the land or building for the firm
- Appointing servants and other people for the firm
However, a partner has no implied authority in the following cases:
- Opening a bank account on behalf of the firm in his personal name or in the name of the firm.
- Selling or transferring the immovable properties of the firm.
- Entering into the partnership with other firms on behalf of the partnership firm.
Scope of Implied Authority
The scope of implied authority is discussed in the previous section. You can refer to the section for the same
Rights and Liabilities of Partner Against Third Party
The followings are the rights and liabilities of a partner:
- Right to Take Part in the Working of the Firm
- Right to Be Informed
- Right to Remunerate
- Right to Share Profit
- Right to Retire
Right to Take Part in the Working of the Firm
Every partner has a right to enter the firm to inspect and to see the day-to-day working of the firm in the ordinary course of the business. He can take part in the administration of the firm and can take part in the decision-making of the firm.
Right to Be Informed
Every partner of the partnership firm is authorized to be informed by the other partners about the working of the firm. When there is a conflict in the decision-making of the firm, all the partners have a right to be informed.
Right to Remunerate
No partner has a right to get remuneration except for the share of profit from the firm and the interest on capital. It is a common practice for the partners to get the remuneration without any contract with the partnership firm.
The partner has a right to take a share of the profit from the firm as per the agreement laid down by all the partners. The partners cannot take more than what is specified in the deed.
Right to Retire
Every partner of the firm has a right to retire at any time during the course of a partnership. There is no compulsion on it. However, in the case of wills, a prior period notice has to be given to all the partners.
Rights of Newly Admitted Partners
The following are the rights of newly admitted partners:
- To inspect the books of accounts of the firm before entering into the partnership firm
- To take his share of the profit and to establish a true and fair relationship with the other partners
- Right to get the interest on capital on the amount invested by him in the firm
- Right to use the property of the firm for the business
- Right to act as an agent for the other partners and for the partnership firm
- To take the share of the retiring partner as decided by the common understanding
Duties of Newly Admitted Partners
The following are the duties of newly admitted partners:
- To carry out the operations and acts of the business to the utmost advantage of the partnership firm
- To be good and justifiable to the firm and to the other partners in the firm.
- To provide a true and fair view of books of accounts to other partners in the partnership firm.
- The incoming partner should not make his own profits in the firm and should maintain true business connections for the firm and not for himself.
Changes in Firm
There are certain changes that occur in a firm when a partner retires, gets dismissed, becomes insolvent, or dies.
- Retirement of Partner
- Expulsion of Partner
- Insolvency of Partner
- Insolvency of Partner
- Death of Partner
Retirement of Partner
Every partner of the firm has a full right to retire at any time during the course of the partnership. There is no compulsion on it. However, in the case of wills, a prior period notice has to be given to all the partners.
Expulsion of Partner
In certain situations when any of the partners is found guilty of any misconduct, the other partners, with mutual consent, can expel the person from the partnership. The most common example of the expulsion of a partner is the unlawful practice or any other activity which is against the Partnership Act or against the partnership
In the old act of 1890 of Indian Partnership Act, the provision of expulsion is not allowed. However, in the current act, the provision is allowed. However, expulsion does not mean the dissolution of the firm.
Insolvency of Partner
When a partner is no more able to pay off the liabilities that are due to him, then in that case he is said to be insolvent. It can lead to legal proceedings against the partner.
Insolvency of Partner
When a partner is no more able to pay off the liabilities that are due to him, then in that case he is said to be insolvent. It can lead to legal proceedings against the partner.
Death of Partner
When there are only two partners in a partnership firm and there happens the death of a partner, then the partnership is said to be dissolved. However in case there are more than two partners and any of the partners dies, in that case, the firm will not be dissolved.
A partnership deed can also specify the provisions in case of the death of any partner.
