According to the Tax Foundation, there are 8% of businesses in the US based on partnerships. A partnership is a kind of business where a minimum of two people start or a single person adds another owner to an existing business for any of the partnership benefits it’s looking for.
One of the most important characteristics is the different kinds and flexible number of partners in such a business.
Active Partner (Managing or Working Partner)
A person who takes an active part, in the affairs and management of the business is called an
He is not
The person who receives a share of the profit from one of the regular partners is called the Sub-Partner. He is not liable to pay the debt of the firm. He has no rights and privileges against the firm.
Silent Partner (Silent form managing point of view)
He is the kind of partner who does not participate in the affairs of the business but is known to outsiders as a partner of the firm. He is liable to pay the debts of the firm like another partner.
Secret Partner (Secret from the
public point of view)
He is active in the running life of the firm but the
Sleeping Partner or Dormant Partner
It is Sleeping from both Points of View i.e., public and managing
A person who
- does not conduct the management of the firm personally
- and is not known to outsiders as a partner of the firm is called a sleeping partner. But he invests his amount in the business and is liable to clear the debts of the firm. He is also called a dormant partner.
There is no restriction to join the minor in the partnership by law. Although he may become a
In this case, he can be admitted to the profits of the firm only but not losses.
He is not personally liable for the obligations of the firm. But the minor has the right to inspect and copy the accounts of the firm. Within six months of his attaining maturity, he has to give public notice of whether he wants to remain a partner or not. After his decision, he will be deemed a full-fledged partner.
A person who has retired from the running management life of the firm but he does not withdraw his capital from the business is known as a quasi-partner.
So his capital is considered a loan and he receives interest at a rate varying with the profit. Really he is not a partner but he is a Deferred Creditor.
A person who brings a large portion of capital into the business is called a senior partner. He has a prominent position in the firm due to his experience, skill, energy, age, and other abilities.
He invests a minor portion of capital in the business and so he has a small share in the profits. He is junior to another partner in the firm due to his age, experience, and other factors.
Holding Out Partner (Estoppels Partner)
A person who declares by word of mouth as a partner of the firm is called a holding-out partner. In reality, he is not a regular partner so he is not entitled to receive a
An individual who does not bring anything i.e. amount or goods to the firm but has the right to receive a salary or share in the profit or both are named as a salaried partner. He is known to the outside world as a partner and is liable for all the acts of the firm like other partners.
A person who is newly admitted to the firm with the consent of all the parties is called an incoming partner. He is not liable for any act of the firm done before he became a partner unless he agrees;
Retired Partner (Outgoing Partner)
A person who goes out of a firm due to a certain event or reason is known as a retired or outgoing partner. In this situation, the remaining partners continue to carry on the business. The retiring partner is liable for all the obligations and debts incurred before retirement. But he will also be liable to third parties even for a future transaction if he does not give public notice of his retirement.
Partners in Profit Only
He is an individual who gets a share of the profits only without being liable for the losses. He does not participate in the management of the business. He will be liable to outsiders for all acts of the firm.
A person who has not paid any obligation more than the share he holds in the firm is called a limited partner. He can not take part in the management of the firm. This kind of partner exists in a limited partnership. But this type of organizational structure is rare in our country.
Admission of a New Partner in an Existing Partnership
- A new partner can be admitted into the partnership firm at any time with the consent of all existing partners.
- A new partner to be admitted to a firm must not. be insolvent or lunatic.
- The newly admitted partner is liable for all acts of the firm done after he becomes a partner.
- A new incoming partner will not incur any obligation of the firm before he becomes a partner unless otherwise agreed.
- Other terms and conditions will be determined under the terms of the partnership agreement.
Withdrawal or Retirement of any Partner
- Every partner has a right to retire from the partnership firm by giving notice of fourteen days to all partners in case the partnership is at will.
- If a partnership is formed for a definite period of time, a partner may retire or withdraw from the firm before the expiry of that period. But in case of loss borne by other partners due to his retirement, he will be responsible for the loss.
- A partner may withdraw his share with the consent of existing partners.
- An outgoing partner can start competing for business but he cannot use the firm’s name or trademark or other special privileges.
- A retired partner will not be liable for any act of the firm after his retirement. But the withdrawing partner will be liable to third parties for all acts of the firm until he serves public notice of his retirement as withdrawal from the firm.
- A withdrawing partner has the right to receive all his benefits i.e., share an interest, etc from other partners under the provisions of an agreement.
Difference between Co-Ownership and Partnership
|It is generally arisen by the operation of law or status. The agreement is not essential for the formation of co-ownership
|It must be created by the agreement or contract. No contract no Partnership. The agreement may be expressed or implied
|There is no concept of community sharing of profit or loss in co-ownership
|Sharing of profits is the basic object of the formation of the partnership
|Under this form of organization “business” may or may not be conducted
|Various kinds of partners are united to carry on any type of “business”
|As one co-owner is not an agent of another co-owner, he cannot bind another by his act
|One partner is an agent of another partner and he can bind all persons by this act
|A co-owner can transfer his share, right, and interest to other people without the consent of the existing co-owner
|A partner cannot transfer his share or right to a stranger without the consent of other partners
|There is no restriction for the maximum number of co-owner in the co-ownership business
|There is a restriction for minors to become regular partners according to the Partnership Act. 1992
|A Minor can become a regular co-owner in the co-ownership business
|There is a restriction for the maximum number of partnership firms (i.e. not more than 20 in ordinary business and 10 in banking business)
|A co-owner can demand a division of property for his own interest
|A partner has no right to partition the property but he can demand a share of the profit out of the properties
|A co-owner not being an agent of the other co-owner so he has no lien on the co-ownership property
|As one partner is an agent of another partner, he has a lien on the business property
|The business of the co-ownership cannot be dissolved by the death or retirement of any co-owner
|The life of the partnership is affected by the death, retirement, or insolvency of any partner
Reference : https://taxfoundation.org/overview-pass-through-businesses-united-states/
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