With the development of a business, it became vital for a gathering to unite as one and give the necessary capital and skill. Whether an individual has exceptional pioneering abilities yet needs reserves, he can observe a subsidizing accomplice.
Association business is a sort of business association where a gathering of at least two individuals meets up to maintain a business as co-proprietors. Every one of these people is alluded to as an accomplice. Benefits and misfortunes are divided between the accomplices with their particular proprietorship stakes or commonly settled upon.
12 Types of Partners in a Business Partnership
As the partnership business model gained popularity, it became necessary to categorize and define the different types of partners involved in a partnership. These categories help provide clarity on the roles, responsibilities, and legal standing of each partner.
Here are the 12 types of partners commonly recognized in partnership businesses:
1. Dynamic or Working Partner:
A dynamic or working partner is actively involved in the daily operations of the business. In addition to contributing capital to the company, this partner plays a crucial role in decision-making and the execution of business strategies. Their involvement extends beyond financial investments, as they actively contribute their skills, knowledge, and time to the organization. In recognition of their efforts, a working partner may be entitled to additional compensation, commonly referred to as ‘pay.’ Ultimately, the dynamic partner bears the responsibility of making crucial business decisions that steer the company towards its goals.
2. Dormant or Sleeping Partner:
Contrasting the active partner, a dormant or sleeping partner takes a more passive role in the business. These partners contribute capital to the company but do not actively participate in day-to-day operations. While they have the same rights and liabilities as other partners, their involvement is limited to financial contributions. A dormant partner shares in the company’s profits and losses according to their ownership stake, but their primary role is that of an investor. Despite their lack of active engagement, dormant partners remain accountable for the actions of the business and other partners.
3. Nominal Partner:
An nominal partner is an individual who lends their name and reputation to the company but does not contribute capital or participate actively in its operations. This type of partner does not have any entitlement to the company’s profits or assets. However, they bear liability for the company’s debts and obligations in dealings with third parties. The primary purpose of a nominal partner is to lend credibility and prestige to the business through their association, even though they have no direct involvement in its day-to-day affairs.
4. Resting versus Ostensible Partners:
When it comes to partnerships, it’s important to understand the distinction between resting partners and ostensible partners.
A resting partner is essentially a dormant or sleeping partner. This means that they provide capital to the business and share in its profits and losses, but they do not actively participate in the management or day-to-day operations. Resting partners remain unknown to external parties as they do not have a visible role in the business.
On the other hand, an ostensible partner is granted the benefit of using their name or reputation to lend credibility to the business. Although they do not contribute capital or engage in the management of the company, they are liable to external parties for any actions taken by the business. Ostensible partners are recognized by outsiders as being associated with the company, even though they do not partake in its profits or have an active role in its operations.
Both resting and ostensible partners share liability for the actions of the partnership, making them responsible to third parties for any obligations or debts incurred.
5. Partners in Profits Only:
There are individuals who choose to become partners with the specific agreement that they will only share in the profits of the company and not bear any losses. These partners may bring goodwill and reputation to the business but typically do not actively participate in the day-to-day activities.
It’s important to note that even though these partners may not be liable for losses, they are still responsible for any claims made against the company. Their contribution to the partnership is primarily through their reputation and may lend credibility to the business.
6. Partnership by Estoppel:
Partnership by estoppel is a unique situation where someone is considered a partner, not because they actually are, but due to their actions, statements, or behavior. This occurs when an individual leads others to believe that they are a partner in the business through their words or conduct.
For example, let’s say there are three siblings: A, B, and C. B and C run a small business together. A has a close friend, D, who mistakenly believes that A is a partner in B and C’s firm based on A’s representations. D provides a non-recoverable loan to the company under the impression that A is a partner. In reality, A is not a partner, but D was led to believe otherwise.
In this scenario, A is legally obligated to fulfill the loan to D and cannot deny responsibility because A’s actions created the perception of a partnership. This is known as estoppel, where A is prevented from denying his involvement as a partner due to the understanding created by his own behavior.
7. Accomplice by Holding Out:
An individual can become an accomplice through the concept of “holding out.” If someone is presented or portrayed as a partner of a firm and does not deny it, they are considered an accomplice by holding out. It’s important to note that this type of partner is not an official partner of the firm but is still legally bound by all third-party claims against the business. If outsiders provided credit to the firm based on the belief that this individual is a partner, they can hold them responsible for any claims.
For example, let’s consider three siblings: X, Y, and Z. X is a highly successful entrepreneur, while Y and Z own and operate a small business together. During a social event, Y introduces X to M as his partner. Although X doesn’t explicitly confirm that he is a partner, he doesn’t deny it either. M then provides a non-recoverable loan to the company, assuming X’s partnership. In this case, M can recover the loan from X because X’s actions, or lack thereof, created the perception of a partnership. X is referred to as an “accomplice by holding out.”
8. Semi Partner:
A semi partner is someone who was previously a partner in a firm but is no longer actively involved. Despite not participating in the business’s operations or sharing in its profits anymore, this individual presents themselves as a partner. They may have retired from the partnership but continue to give the impression of being associated with the business. Although they have no capital investment in the company, their liability remains unlimited due to their claim of being a partner.
9. Secret Partner:
A secret partner is an actual partner in a firm who prefers not to be publicly recognized as such by outsiders. While they enjoy all the rights and privileges of a partner and share in the company’s profits and losses, they intentionally maintain their identity as a partner concealed from external parties. However, they are still fully responsible for the firm’s liabilities and claims. Outsiders who extend credit to the firm without knowledge of this secret partner cannot use their lack of knowledge as a defense against either the partner or the firm.
10: Limited Partner:
A limited partner is an individual who enters into a partnership with limited liability. Their liability is restricted to the amount of capital they have invested in the business. In the event of a loss, the limited partner will only lose the amount they have contributed, and their personal assets are safeguarded. Unlike general partners who have unlimited liability, limited partners enjoy a degree of financial protection within the partnership.
11. Sub Partner:
A sub partner is a unique concept in partnership where an individual agrees to share the profits and losses of a partnership with one of the existing partners, but they are not officially recognized as a partner in the firm. Essentially, the sub partner does not have any direct relationship with the partnership itself. The arrangement between the partner and the sub partner is a private agreement and does not involve the partnership as a whole.
Let’s consider a scenario where A and B are business partners who share profits and losses equally (each partner receives 50%). A and his spouse, Mrs. A, make a separate arrangement where A agrees to divide all of his profits (and losses) from the partnership in a 3:1 ratio with her. As a result, Mrs. A contributes 25% of A’s capital contribution to the partnership.
It’s important to note that this arrangement between A and his spouse is unknown to B and the rest of the world. Mrs. A then becomes a sub partner based on their private agreement.
A sub partner does not have any financial obligation or capital contribution to the partnership. Their rights and obligations are governed solely by the agreement made with the primary partner. They do not have any direct liability to the partnership itself.
12: Minor as a Partner:
A minor is an individual who has not reached the legal age of majority, typically 18 years old. Minors lack the legal capacity to enter into contracts independently. Therefore, a minor cannot become a partner in a partnership since a partnership is a contractual arrangement.
Minors are not permitted to engage in contracts, and any agreements they enter into are considered void. However, with the consent of all the partners in the partnership, a minor can be admitted to the benefits of the partnership according to the partnership agreement.
Here are some key points to understand about minors as partners:
- A minor has a right to a share of the partnership’s profits and property as outlined in the partnership agreement.
- They have access to the partnership’s accounting records to stay informed about the financial matters of the business.
- A minor’s liability is limited to their share of the partnership’s capital. They are not personally responsible for the partnership’s debts, and their personal assets cannot be used to satisfy the partnership’s liabilities.
- A minor cannot sue other partners for the payment of their capital contribution or their share of the partnership’s profits. However, if a minor decides to dissociate from the partnership, they have the right to sue the other partners for the settlement of their capital contribution and any outstanding dues.
- Within six months of reaching the legal age of majority, a minor must decide whether they want to continue as a partner in the firm or dissociate from it. This decision is made by giving public notice of their choice. If they fail to provide public notice or do not make a decision within six months of reaching the legal age of majority, they automatically become a partner.
- If a minor chooses to become a partner, they assume responsibility for the partnership’s activities, debts, and obligations from the day they enter into the benefits of the partnership. Their assets may be used to repay the partnership’s liabilities if necessary.
- If a minor decides not to become a partner, they will not be held accountable for the partnership’s actions after the date of the notice.
Conclusion
understanding the different types of partners in a partnership is crucial for establishing clear roles, responsibilities, and legal obligations within the business. Each type of partner brings a unique contribution to the partnership, whether it’s active involvement in daily operations, lending their name and reputation, or sharing in profits without assuming losses.
The various types of partners include active partners who actively participate in decision-making and operations, sleeping partners who contribute capital but have a passive role, nominal partners who provide their name and reputation, and partners who are only interested in sharing profits. Additionally, partners by estoppel and partners by holding out can be held liable based on their actions or representations.
Other categories include semi partners who were previously active but no longer participate fully, secret partners who prefer to remain unidentified, limited partners with restricted liability, and sub-partners who have separate profit-sharing agreements with primary partners. Furthermore, minor partners have specific legal considerations, while sub partners by estoppel are represented as partners by another partner.