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Different types of Partnerships

August 7, 2009

Depending on the reason behind which a particular partnership is made, partners may be of different types. To understand this better, consider the following

Active partners:

* The partners who actively participate in the day-to-day operations of the business are known as active partners.

* They contribute capital and are also entitled to share the profits of the business.

* They also share the losses that the business faces.

Dormant partners:

* Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or “sleeping partners”.

* They only contribute capital and share the profits or bear the losses, if any.

Nominal partners:

* These partners “only” allow the firm to use their “name” as a partner. They “do not” have any real interest in the business of the firm.

* They do not invest any capital, or share profits and also do not take part in the business of the firm.

* However, they do remain liable to third parties for the acts of the firm.

Minor as a partner:

* In special cases a minor can be admitted as partner with certain conditions.

* A minor can only share the profit of the business.

* In case of loss his liability is limited to the extent of his capital contribution for the business.

Advantage of Partnership:

Easy to form:

i. Like sole proprietorships, partnership businesses can be formed easily without any compulsory legal formalities.

ii. It is not necessary to get the firm registered.

iii. A simple agreement or partnership deed, either oral or in writing, is sufficient to create a partnership.

Registration of the partnership is voluntary in most states. In states like Maharashtra, registration is almost compulsory.

Availability of large resources:

* Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship.

* The partners can contribute more capital, more effort and more time for the business.

Better decisions:

* The partners are the owners of the business. Each of them has equal right to participate in the management of the business.

* In case of any conflict, they can sit together to solve the problem.

* All partners participate in the decision-making process, there is less scope for reckless and hasty decisions.

Flexibility in operations:

* A partnership firm is a flexible organization. At any time, the partners can decide to change the size or nature of the business or area of its operation.

* There is no need to follow any legal procedure.

* Only the consent of all the partners is required.

Sharing risks:

* In a partnership firm all the partners “share” the business risks. For example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all partners may share it and the individual burden will be Rs.4000 only.

* Because of this, the partners may be encouraged to take up more risk and hence expand their business more.

Protection of interest of each partner:

* In a partnership firm, every partner has an equal say in decision making and the management of the business.

* If any decision goes against the interest of any partner, he can prevent the decision from being taken.

* In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it.

* In such extreme cases the “partnership deed”  is required.

* In absence of the partnership deed, no legal protection is given to the partners.

Disadvantages of Partnership:

Unlimited liability:

All the partners are jointly liable for the debt of the firm. They can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties depending on the arrangement made between the partners.

Uncertain life:

* The partnership firm has no legal existence separate from it’s partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner.

* Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership.

Lack of harmony:

* In a partnership firm every partner has an equal right to participate in the management.

* Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this, sometimes there is a possibility of friction and discontent among the partners.

* Difference of opinion may lead to the end of the partnership and the business.

Limited capital:

Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.

No transferability of share:

If you are a partner in any firm, you cannot transfer your share or part of the company to outsiders, without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.

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