A partnership incorporates an agreement between two or more people to share the profits and liabilities of a business. It is an association between two or more people who agree to become business co-owners and distribute responsibilities.
As per the Indian Partnership Act, 1932 Section 4, “Partnership” is the relation between persons agreeing to share the business” profits carried on by all or any of them acting for all.
A nominal partner is a type of partner in a business having no actual interest in the trade or obtaining profits from the business.
Table of Contents
Types of partners in a partnership business
A partnership business can have six types of partners:
- Active partner
- Dormant or sleeping partner
- Nominal partner
- Partner by estoppel
- Partner in profits
- Minor partner
Elements of a partnership
A partnership has five elements:
A partnership is a contract by nature. A partnership results from a contract or an agreement between two or more persons. A partnership cannot be inherited, and it does not arise from the operation of law.
A mutual understanding makes a partnership agreement of partners. A partnership agreement can be either written or oral and should be enforceable by law with a legal objective.
Association of persons
A partnership results in an association of two or more persons. The partnership is between individuals and companies legally recognised as persons.
A banking firm may have a maximum of 10 partners, and 20 partners in firms other than a bank.
A minor cannot be a partner but can receive the benefits of a partnership according to the Indian Partnership Act, 1932, Section 30.
A business must be in existence, and partners should have active participation in the working of that business.
The objective of a partnership business is to earn profits.Therefore, a firm working for charitable purposes is not a partnership.
Sharing of Profits
A partnership firm is established to share profits. Therefore, a firm not satisfying this purpose is not a partnership.
A single partner of a firm is not entitled to all the profits of a firm. All partners must share the gains or profits of a partnership business.
The sharing of loss among the partners is not a requisite. Partners can mutually decide on a loss-sharing ratio.
The partnership is a contract and it is a contract of mutual agency.
Mutual agency is a business in which each one of the partners is acting for all. Each partner acts as both principal and an agent for all the other partners in a partnership.
An act by one partner is binding on all other partners. Therefore, in the course of the partnership, the act of one partner is binding on all partners.
Who is a Nominal Partner?
A nominal partner is a limited partner or an ostensible partner who does not have any interest in the business or the way it makes profits.
Nominal partners are only concerned with the fees they receive for adding their name as a partner in the business.
A nominal partner neither owns the firm in any way nor does he make any decisions related to the company”s affairs.
These nominal partners are mostly well-known individuals, businessmen, and celebrities, who allow their names to be added to the company to increase its goodwill.
The liability of a nominal partner is the same as other partners based on the type of company he is associated with.
The property of a firm is called a partnership property, and it is a property that is an asset, joint-stock, common stock, the joint estate of a firm.
Partnership property is defined in Section 14 of the Indian Partnership Act, 1932. It includes any property, rights and interest in the property.
As per Section 14, a partnership property includes the following:
- All property and rights and interest in property that the partners purchase in the common stock as their contribution to the common business.
- All property and rights and interest in property that the firm purchases either for the firm or for the purpose and in the course of the business of the firm
- Goodwill of the business.
As per Section 15 of the act, the partnership property of the firm should be used by the partners only for the firm.
Each partner can check the use of the property for the partnership”s objective.
Relation of partners to one another
The relationship of partners is governed according to the contract called partnership deed.
The same partnership deed defines the rights and duties of partners towards each other.
As per Section 11 of the partnership act, the rights and duties of the partners are defined by a contract either explicitly or due to a course of dealing that cannot get altered.
Each partner in a partnership firm acts as an agent of all other partners. The contract entered into by one of the partners is also binding on all the other partners. Let us discuss the rights and duties of partners inter-se (i.e., with one another).
For example:- A nominal partner may not be an active partner in a business. However, a contract entered into by another partner is binding on him, and he is liable for the enforcement of the contract.
Rights of Partners Inter-se
The partners in a partnership firm can exercise the following rights unless the partnership deed states otherwise:
- The partners have a right to participate actively in the business of the firm.
- All types of firm partners have an equal right to inspect the accounts books of the firm.
- The firm”s partners are entitled to express their opinions to each other.
- The firm partners are entitled to share profits as per the partnership deed. The partners can share the firm”s profits equally without the same.
- The partnership firm”s partners have a right to be indemnified against any payments made or any liabilities caused by any of them in the course of business.
Duties of Partners Inter-se
- The firm partners have some duties that they are obliged to perform unless the deed is contrary.
- The firm partners have to perform their duties in good faith towards each other in business.
- The partners should render true accounts and disclose all information to other partners. The partners should not conceal any information concerning the business of the firm.
- Every partner of the firm must act diligently towards other partners.
- A firm partner must indemnify the other partners for the losses caused to them in the course of business by fraud or wrongful actions committed by him.
- The partners must not make any profits by undertaking any competing business. The firm must account for any such profits made by them.
- The partners of the firm have to use the partnership property in a shared manner for business purposes.
Relation of partners to third parties
Partners as an agent of the firm
The partners in a firm are the agents of the firm and make all the decisions on its behalf.
Section 18 of the partnership act of 1932 states partners are agents of the firm.
The firm”s partners have some responsibilities towards the third parties to achieve particular goals. Therefore, they act as the principal in this interest.
All the partners in a partnership act both as a principal and an agent.
A partner, when acting on his own or in his interest to achieve the common goal of a firm, is acting as a “principal”. However, when a partner acts as per the interest of any co-partner, then he is acting as an “agent”.
A partner”s relationship with a third party requires him to play the role of an agent on behalf of the firm or other co-partner.
When a partner of a firm makes decisions in the course of the business, he binds the firm with his decisions, this authority of making decisions is the implied authority of the partner.
This authority of a partner ceases to exist in the case of a contract agreement.
This implied authority of a partner manages the relation of partners with third parties. The partners in a firm exercises their implied authority in a business subject to their relationships with third parties.
This implied authority of a partner is defined under Section 19 of the Indian partnership act 1932.
Sub-section (2) of Section 19 states the conditions when a partner cannot exercise his implied authority.
According to Section 20 of the act, partners in a business can enter into a contract to extend or dissolve the implied authority of a partner. This act of partners can affect the relationship with a third party.
Partner”s authority in an emergency
As per Section 21 of the act, a partner can make decisions or take action to prevent the firm from suffering losses. This decision-making can be regarding payments and clearing liabilities.
In the case of emergency, partner dealings with third parties and their liabilities are under observation.
Partners cannot exceed their authority in an emergency as this can affect their relationships with third parties.
A partnership can be formed to achieve any purpose, either a business or a project. In the case of a partnership firm, a partner is both the principal and agent of the firm.
In a partnership, many types of partners, such as an active partner, a dormant partner, a nominal partner, a partner by estoppel, a partner for profits only, and a minor partner, exist.
A most significant element of a firm is a trustworthy partner acting in the firm”s interest with utmost faith.
In a partnership, information should not be concealed from other partners. Partners should be transparent about their conduct in the course of business.
Official documents such as books of accounts can be freely inspected by any partners unless stated to the contrary in the deed.
Is an agreement in restraint of trade void in a partnership?
An agreement in restraint of trade is not void as per Section 11(2) of the act as it states that a partner cannot perform any other business other than that of the firm while he is a partner in that firm.
This section is covered by EXCEPTION 1 of section 27 of the Indian contract act 1872.
What is a Nominal Partner?
A nominal partner does not have any real interest in the conduct of the firm’s business nor has any interest in the firm’s profit-sharing model. He just becomes the partner of the firm to increase the firm’s goodwill.
However, a nominal partner is liable to answer to the third parties for acts of other partners.
Which section states that a partner must indemnify the firm for losses caused by him by committing fraud in the course of business?
Section 10 pertains to this law.
What are the consequences if a partner runs a business of the same nature competing with that of the firm in which he is a partner?
According to Section 16(b) of the Indian partnership act 1932, if a partner runs a competing business of the same nature as of the firm in which he is a partner, then he will be liable to pay the affected firm all profits made by him in that business.