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, distribute responsibilities, etc.
As per the Indian Partnership Act, 1932 Section 4, “Partnership” is the relation between persons who agreed to share the business’ profits carried on by all or any of them acting for all.
When it comes to partnership, a nominal partner is a type of partner in a business having no actual interest in the trade or obtaining profits from the business.
Types of partners In a Partnership Business
There are six types of partners in a partnership business:-
- Active Partner
- Dormant or Sleeping partner
- Nominal Partner
- Partner by Estoppel
- Partner in Profits
- Minor Partner
Elements of a partnership
There are five elements of a partnership:-
A partnership is a contract by nature—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 the 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 made between individuals and companies which are also legally recognised as persons.
There can be only a maximum of 10 partners in a banking firm 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.
There must be a business in existence, and the partners should have active participation in the working of that business.
The main aim of a partnership business is to earn profits so, a firm working for charitable purposes is not a partnership. A firm running not to make profits or gains is not a partnership.
Sharing of Profits
A partnership firm gets established to share profits, so a firm not satisfying this purpose is not a partnership.
A single partner of a firm is not entitled to all the firm’s profits. All the partners must share all the gains or profits of a partnership business.
The sharing of loss among the partners is not a requisite. Partners can mutually decide upon sharing the loss, or the loss will get shared in the same ratio as the profits.
As we know, the partnership is a contract; it is a contract of mutual agency.
It 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 done by one partner is binding on all the other partners. So, in the course of the partnership, the act of one partner bind all the partners.
Who is a Nominal Partner?
A nominal partner is a limited partner or ostensible partner who doesn’t have any interest in the business or the way it makes profits.
They are only concerned with the fees they get towards 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 the most well-known individuals, businessmen, celebrities, etc., 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. It is a property that is an asset, joint-stock, common stock, the joint estate of a firm.
Partnership property gets 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:-
- 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 get 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 gets governed according to the contract they signed 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 get defined by a contract either expressly or due to a course of dealing which cannot get altered.
Each partner in a partnership firm acts as an agent of all the other partners. The contract entered into by one of the partners is also binding on all the other partners in dealing. 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. Still, a contract entered into by another partner is also binding on him, and he is also 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 firm’s partners have a right to participate actively in the firm’s business.
- All types of firm partners have an equal right to inspect the firm’s books of accounts.
- The firm’s partners are entitled to express their opinions to each other.
- The firm partners are entitled to share the 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 get indemnified against any payments made or any liabilities caused by any of them in the course of business.
Duties of the Partners Inter-se
- The firm partners have some duties that they are obliged to do 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 the information to the other partners. The partners must 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 firm partners 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 that the role of partners as agents of the firm.
The firm’s partners have some responsibilities towards the third parties to achieve particular goals, so they act as a principal in this interest.
So, 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 partner’s implied authority.
This authority of a partner ceases to exist in the existence of a contract agreement.
This implied authority of a partner manages the relation of partners with third parties. The partners in a firm exercise their implied authority in a business subject to their relationships with third parties.
This implied authority of a partner gets defined under section 19 of the Indian partnership act 1932.
Sub-section (2) of section 19 states the conditions when a partner can’t 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 has the authority to make decisions or take action to prevent the firm from suffering losses. This decision making can be regarding making payments and clearing liabilities.
In a case of emergency, the dealing of partners with third parties and the liabilities are under observation.
Partners cannot exceed their authority in an emergency, affecting their relationships with third parties.
A partnership can get formed to achieve any purpose, either a business, project or anything else. In the case of a partnership firm, A partner is both the principal and agent of the firm.
There are many partners in a partnership firm like an active partner, a dormant partner, a nominal partner, a partner by estoppel, a partner for profits only, and a minor partner.
A most significant element of a firm is a trustworthy partner acting in the firm’s interest with utmost good faith.
There is no place for concealing information from other partners. There should be proper transparency on the partner’s conduct in due course of business.
The documents like books of accounts are free to be inspected by any partners unless the contrary gets stated 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 carry on 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 doesn’t have any real interest in the conduct of the firm’s business nor has any interest in the firm’s profit-sharing. He just becomes the partner of the firm to increase the firm’s goodwill.
A nominal partner will be liable to the third parties for the 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?
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 the profits made by him in that business.