Everything you need to know about the types of partnership. Partnership is the second form of organisation that came into existence.
A partnership is an association of two or more persons, who agree to combine their financial resources and managerial abilities to run a business and share profits in an agreed ratio.
“Partnership is the relation existing between persons competent to make contracts, who agree to carry on a lawful business in common, with a view to private gain.” -PROF. HANEY
The types of partnership can be studied under the following heads:-
ADVERTISEMENTS:
1. According to Objectives 2. According to Tenure 3. According to Nature 4. According to Legality 5. Classification on the Basis of Duration 6. Classification on the Basis of Liability.
Some of the types of partnership are:-
1. Partnership at Will 2. Particular Partnership 3. Partnership for Fixed Term 4. Flexible Partnership 5. General Partnership 6. Limited Partnership
7. Legal Partnership 8. Illegal Partnership 9. Limited Liability Partnership 10. Partnership for a Certain Venture or Purpose 11. Public Private Partnership.
Top 11 Types of Partnership: Partnership at Will, Particular Partnership, Flexible Partnership, General Partnership and a Few Others
Types of Partnership – According to Objectives, Tenure, Nature and Legality
According to the nature of agreement among partners, the different types of partnership are discussed below:
(A) According to Objectives:
ADVERTISEMENTS:
1. Partnership at Will:
Such partnership exists on the will of the partners, i.e., it can be brought to an end whenever any of the partners gives notice of his intention to do so. This kind of partnership is formed to conduct the lawful business for an indefinite period.
2. Particular Partnership:
ADVERTISEMENTS:
A particular partnership is formed for undertaking a particular venture. It comes to an end automatically with the completion of the venture.
(B) According to Tenure:
1. Partnership for Fixed Term:
Such a partnership is for a fixed period of time say 2 years, 5 years or any other duration. The partnership comes to an end automatically at the expiry of the period.
2. Flexible Partnership:
Partnerships which are formed neither for a fixed period nor for any particular venture are called flexible partnerships.
(C) According to Nature:
1. General Partnership:
In the absence of agreement, the provisions of the Indian Partnership Act 1932 are applicable for general partnerships in which the liability of each partner is unlimited.
2. Limited Partnership:
In limited partnership some or all except one partner have a limited liability to the extent of capital contributed by them. All the partners in partnership cannot have limited liability.
ADVERTISEMENTS:
Features of Limited Partnership:
(i) A limited partnership consists of two partners, namely, general partners with unlimited liability and special or limited partners with their liability limited to their capital contribution. It must have one or more general partners and also one or more special partners.
(ii) A limited or special partner simply invests his money in the firm. He is not entitled to take part in the management of the business. His acts do not bind the firm but he is allowed to inspect the books of the firm for his information and may advise the general partners.
(iii) The bankruptcy, death or lunacy of a special partner does not dissolve the firm. It is thus, more stable than an ordinary partnership firm.
ADVERTISEMENTS:
(iv) A special partner cannot assign his share to an outsider without the consent of the general partners.
(v) A special partner cannot withdraw any part of capital contributed by him. If he does so, his liability on the portion so withdrawn becomes unlimited. He will have to undertake separate liability for such an amount.
(vi) A limited partnership must be registered under the law. This is necessary to provide information to the public about the capital contribution of the limited partners and the extent of their liability. Non-registration makes the firm liable to be treated as a general partnership.
Merits of Limited Partnership:
ADVERTISEMENTS:
(i) It is more stable than an ordinary partnership firm, because the bankruptcy, death or lunacy of a special partner does not dissolve the firm.
(ii) It enables mobilisation of capital from persons who don’t want to take unlimited risks.
(iii) It facilitates independent control over the business, by the general partner.
Demerits of Limited Partnership:
(i) Special partners have no role in the management of the firm.
(ii) Limited liability of special partners reduces the credit worthiness of the firm.
ADVERTISEMENTS:
(iii) The general partner may take undue advantage of his position.
Distinction between Limited and General Partnership:
Limited Partnership:
1. Only the general partner has unlimited liability.
2. Special partner cannot take active part in the management of firm.
3. More stable.
ADVERTISEMENTS:
4. Not allowed in India.
General Partnership:
1. All partners have unlimited liability.
2. Each partner can take part.
3. Less stable.
(D) According to Legality:
ADVERTISEMENTS:
1. Legal Partnership- When the partnership is formed in accordance with the Partnership Act of 1932 and the Indian Contract Act, it is known as Legal Partnership.
2. Illegal Partnership- Partnership becomes illegal when it violates the provisions of any law of the country or when the requisite number of partners goes below the minimum limit or beyond the maximum limit.
Types of Partnership – On the Basis of Duration and Liability
A. Classification on the Basis of Duration:
i. Partnership at Will:
1. This type of partnership exists at the will of the partners.
2. It can continue as long as the partners’ want. It is terminated when any partner give a notice of dissolution.
ii. Particular Partnership:
ADVERTISEMENTS:
1. This type of partnership is formed for a specified time period to accomplish a particular project (e.g., construction of a building).
2. It dissolves automatically when the purpose for which it was formed is fulfilled or when the time duration expires.
B. Classification on the Basis of Liability:
i. General Partnership:
1. In general partnership, the liability of partners is limited and joint.
2. The partner enjoys the right to participate in the management of the firm.
3. Their acts are binding on each other as well as on the firm.
4. Registration of the firm is optional.
5. The existence of the firm is affected by the death, lunacy, insolvency or retirement of the partners.
ii. Limited Partnership:
1. In limited partnership, the liability of at least one partner is unlimited whereas the other partners may have limited liability.
2. The limited partners do not enjoy the right to participate in the management of the firm.
3. Their acts do not bind the firm or the other parties.
4. Registration of firm is compulsory.
5. Such partnership does not get terminated with the death, lunacy or insolvency of any partner with limited liability.
iii. Limited Liability Partnership:
A Limited Liability Partnership (LLP) is a partnership in which some or all partners have limited liabilities.
Limited Liability Partnership is a business organization that allows the limited partners to enjoy limited personal liability while general partners have unlimited personal liability.
It is similar to a general partnership except that it has two classes of partners. The general partner(s) have full management control over the business and also accept full management control for partnership liabilities. Limited partners have no personal liability beyond their investment in the partnership interest. Limited partners cannot participate in the general management and daily operations of the partnership business.
Types of Partnership – Partnership-at-Will, Partnership for Stipulated Period/Particular Partnership and Partnership for a Certain Venture or Purpose
India being a developing country has all general or unlimited firms in which all partners have unlimited liability.
The general or unlimited partnership firms may be of three types:
1. Partnership-at-Will:
This type of partnership is formed to carry on business without specifying any period of time and the partnership continues as long as the partners are willing to continue. It is not decided as to when and how the firm will come to an end. Partnership-at-will can be dissolved by any partner, giving a notice to that effect.
2. Partnership for Stipulated Period/Particular Partnership:
When a partnership firm is established for a specified or stipulated period it automatically comes to an end after completion of the specified or stipulated period.
3. Partnership for a Certain Venture or Purpose:
A partnership established for completing a specific tasks or venture or purpose during a specified period comes to an end automatically on the completion of the venture or purpose.
In India there is no provision for the formation of Limited partnership.
In UK, USA and some of the European countries “Limited Partnership” firms can be formed. Under limited type of partnership firm the liability of the partners is limited except that of one or more partners. There must be at least one partner with unlimited liability in case of limited firm.
Such partner is not entitled to take part in the management of the business and is not allowed to act as an agent of the firm or of the other partners, but he can transfer his interest in the firm to another person with the consent of other partners with unlimited liability. The liability of the partners is limited means to the extent of capital contributed by them and such partners are called limited partners or special partners.
Types of Partnership – General Partnership, Limited Partnership, Limited Liability Partnership and Public Private Partnership
There are three relatively common partnership types: general partnership, limited partnership (LP) and limited liability partnership.
1. General Partnership:
General partnership is a simple partnership and many times referred as Partnership Firm. A general partnership is a business entity that is made up of two or more entities to carry on a trade or business. Each partner contributes money, property, labor, or special skills and each partner shares in the profits and losses from the business.
The law also allows the partners of a general partnership firm to sue or to be sued in the name of firm (only applicable for registered firms), though registration is optional.
2. Limited Partnership:
A limited partnership includes both general partners and limited partners. A limited partner does not participate in the day-to-day management of the partnership and his/her liability is limited. In many cases, the limited partners are merely investors who do not wish to participate in the partnership other than to provide an investment and to receive a share of the profits.
3. Limited Liability Partnership:
A limited liability partnership (LLP) is a form of partnership in which, Individual partners are not personally responsible for the wrongful acts of other partners, or for the debts or obligations of the business. Specifically, a limited liability partnership can only be sued for the total amount of assets in the business.
Owing to flexibility in its structure and operation, it would be useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular. Internationally, LLPs are the preferred vehicle of business, particularly for service industry or for activities involving professionals. LLP is a separate legal entity; means LLP and Partners are distinct from each other. Minimum two partners are required for starting LLP but there is no limit for maximum numbers of partners.
Example:
If a customer slipped on a pickle in your grocery store and is suing for their injuries, they cannot receive more than the total value of your grocery store. This partnership is a popular choice for law firms and medical practices to ensure that customers cannot sue for assets such as the practitioner’s home.
Advantages of Limited Liability Partnership:
i. Low cost of Formation and Easy to establish.
ii. Easy to manage and run.
iii. No restrictions as to maximum number of partners.
iv. LLP and its partners are distinct from each other.
v. Partners are not liable for Act of partners.
vi. Less Government Intervention and Easy to dissolve or wind-up.
vii. Audit requirement only in case of contributions exceeding Rs 25 lakh or turnover exceeding Rs 40 lakh.
Disadvantages of Limited Liability Partnership:
i. Any act of the partner without the other partner, may bind the LLP.
ii. Under some cases, liability may extend to personal assets of partners.
iii. Cannot raise money from Public.
4. Public Private Partnership:
Public Private Partnership means an arrangement between a government/statutory entity/government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative. These schemes are sometimes referred to as PPP, P3 or P3.
“Public Private Partnership (PPP) is a partnership between the public and private sector for the purpose of delivering a project or service traditionally provided by the public sector. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility”.
“Public Private Partnerships (PPPs) are arrangements between government and private sector entities for the purpose of providing public infrastructure, community facilities and related services. Such partnerships are characterized by the sharing of investment, risk, responsibility and reward between the partners. The reasons for establishing such partnerships vary but generally involve the financing, design, construction, operation and maintenance of public infrastructure and services.”
Example:
Gurgaon is a good example of large scale public-private participation in urban development in India, The Uttaranchal Mobile Hospital and Research Center (UMHRC) (Technology Information, Forecasting and Assessment Council (TIFAC), the Government of Uttaranchal and the Birla Institute of Scientific Research (BISR)) and HPCL-Mittal Energy partnership.
Types of Partnership – Classified in 2 Ways: On the Basis of Duration and Liability
Partnership firms can be classified in two ways:
1. On the basis of Duration, i.e. on the basis of length or period of existence of partnership.
2. On the basis of Liability, i.e. on the basis of extent of liability of Partners.
1. Classification on the Basis of Duration:
(i) Partnership at Will:
The life of this type of partnership depends upon the will of partners. The partnership can be dissolved at the desire of any partner on giving a notice. This type of partnership is not for a fixed period or for during a particular fixed venture.
(ii) Particular Partnership:
Particular partnership is one which is formed to accomplish a particular project or to carry out an activity for a specified period of time. It dissolves automatically at the expiry of fixed period or completion of project. For example, partnership done for construction of a dam or a road.
2. Classification on the Basis of Liability:
(i) General Partnership:
General partnership is one in which liability of every partner is unlimited and every partner is entitled to take active part in management of the business. Acts of each partner are binding on each other as well as on the firm. Registration of the firm is optional and existence of the firm is affected by death, insanity, insolvency or retirement of the partners.
(ii) Limited Partnership:
Limited partnership is one in which liability of at least one partner is unlimited, whereas, rest of the partners may have limited liability. Such a partnership does not get terminated with the death, lunacy or insolvency of partners with limited liability. The limited partners do not enjoy the right of management and their acts do not bind the firm or the other partners. Registration of such partnership is compulsory.
Types of Partnership
There are different types of partnership which are classified on the basis of their duration and liability.
Types of Partnership on the Basis of Duration:
Classification of partnership on the basis of duration takes into account the time duration for which a partnership firm has been formed.
Based on duration, there may be two types of partnership:
1. Partnership at will and
2. Particular partnership.
1. Partnership at Will:
When a partnership firm is formed to carry on business without specifying any period of time, it is known as partnership at will. Such a firm may be dissolved if any partner serves a notice to the firm terminating his partnership.
2. Particular Partnership:
This type of partnership firm is constituted to undertake a specific project or venture. When this is over, the partnership comes to an end. For example, two or more persons may form a partnership firm to construct a building for the government. When the work of constructing the building is over, the partnership comes to an end.
Types of Partnership on the Basis of Liability:
Classification of partnership on the basis of liability takes into account nature of liability of partners concerned, unlimited or limited. Based on liability, partnership may be either general or limited partnership.
1. General Partnership:
In general partnership, liability of all partners is unlimited. The partners have the right to participate in management of the firm and their acts are binding on each other. Registration of partnership is optional. In case of death, insolvency or insanity of any partner, the partnership comes to an end.
2. Limited Partnership:
In the case of limited, partnership, there are two categories of partners: general partners and limited partners, also known as limited liability partners.
The main features of limited partnership are as follows:
(i) There must be at least one partner whose liability is unlimited while liability of other partners may be unlimited to the extent of the capital invested by them in the firm.
(ii) The partners with limited liability are called as special partners or limited partners.
(iii) The limited partners are not entitled to participate in the management of the firm.
(iv) Any limited partner can withdraw himself from the firm.
(v) The withdrawal, death, insolvency or insanity of any limited partner does not affect the existence of the firm.
Types of Partnership – With Examples
The categorisation of partnership is done on the basis of two factors that is duration and liability:
1. On the basis of duration, partnership can be divided into two categories namely; Partnership at will and Particular Partnership.
2. On the basis of liability partnership is divided into two types namely; General Partnership and Limited Partnership.
The various types of partnerships are described below:
1. Classification of Partnership on the Basis of Duration:
As the name suggests, this type of partnership exist on the will of the partners. Consequently it comes to an end as and when one or more partners express their desire to dissolve it by giving a notice.
For example, Reena and Leena friends and they share many common interests. But at the same time, Reena does not have a very high opinion about Leena’s temperament. Therefore, when Leena extends a partnership business proposal to her, Reena is little apprehensive. So they mutually decide to start the business with the condition, that it can be terminated whenever either of the partner wishes to do so.
ii. Particular Partnership:
In certain cases, a partnership is formed for a fixed duration of time say two years, five years and so on. Also, individuals or firms get into partnership agreement for pursuing a specific project(s). In both the above cases, the partnership gets automatically terminated either on the completion of the stipulated time period or completion of the project as the case may be.
For example, Sara and Aryan wish to start a law firm jointly. However, Sara shares with Aryan that she has plans to go abroad after three years to peruse a masters course in law. Therefore, their partnership can exist only for three years. Aryan agrees with Sara’s decision.
2. Classification of Partnership on the Basis of Liability:
i. General Partnership:
The liability of partners is unlimited and joint. All partners enjoy the right to participate in the management of the firm and their acts are binding on each other as well as on the firm. The registration of the partnership firm is not compulsory. The partnership comes to an end on the death, retirement, lunacy or insolvency of the partners.
ii. Limited Partnership:
The liability of all the partners is limited, except one of them whose liability is unlimited. The partners whose liability is limited do not have the rights to manage and control the business. Also their acts are not binding on other partners or the firm. The registration of the partnership firm is compulsory. The partnership does not get terminated on the death, lunacy, retirement or death of the partners.
Types of Partnership
1. Classification on the Basis of Duration:
Partnership at Will:
1. Nature – This partnership exists at the will of the partners.
2. Dissolution – This partnership continues as long as the partners want. It is terminated when any partner gives a notice of dissolution.
Particular Partnership (A Joint Venture):
1. Nature – This partnership is formed for a specific period or to complete a particular project like construction of a flyover.
2. Dissolution – It is dissolved automatically when the purpose for which it was formed is fulfilled or when the period, for which it was formed, is over.
2. Classification on the Basis of Liability:
General Partnership:
1. Liability – In this partnership the liability of all partners is unlimited jointly and individually.
2. Right to participate – All partners have the right to participate in the management of the firm.
3. Partners’ Acts – Their acts are binding on each other as well as on the firm.
4. Registration – Registration of the firm is not compulsory.
5. Dissolution – The partnership ends with the death, lunacy, insolvency or retirement of the partner.
Limited Partnership:
1. Liability – In this partnership, the liability of at least one partner is unlimited whereas the other partners may have a limited liability.
2. Right to participate – The partners with limited liability do not enjoy the right to participate in the management of the firm.
3. Partners’ Acts – Their acts do not bind the firm or other partners.
4. Registration – Registration of firm is compulsory.
5. Dissolution – The partnership is not terminated with death, lunacy or insolvency of any partner.
Types of Partnership – 5 Types: General Partnership, Limited Partnership, Limited Liability Partnership, Partnership at Will and Particular Partnership
Partnership is of five kinds:
1. General Partnership:
In a general partnership, the liability of each partner is unlimited. It means that the firm’s creditors can realise their dues in full from any of the partners by attaching their personal property if the firm’s assets are found to be inadequate to pay off its debts.
An exception is made in the case of a minor partner whose liability is limited to the amount of his share in the capital and profits of the firm. In India all partnership firms are general partnerships.
Each partner of a general partnership is entitled to take active part in the management of the firm, unless otherwise decided by the other partners.
2. Limited Partnership:
In general partnership, the liabilities of all partners are unlimited. But in limited partnership, the liability of at least one partner should be limited. It is mandatory to register such partnership. This form of partnership did not exist in India earlier. It only came into practice in India after the introduction of New Small Enterprise Policy in 1991.
3. Limited Liability Partnership (L.L.P):
LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
Further, no partner is liable on account of the independent or unauthorized actions of other partners; thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.
Advantages of LLP:
LLP is a form of business model which:
(i) Is organized and operates on the basis of an agreement.
(ii) Provides flexibility without imposing detailed legal and procedural requirements.
(iii) Enables professional / technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner.
4. Partnership at Will:
It is a partnership formed for an indefinite period. The time period or the purpose of the firm is not mentioned at the time of its formation. It can continue for any length of time depending upon the will of the partners. It can be dissolved by any partner by giving a notice to the other partners of his desire to quit the firm.
5. Particular Partnership:
It is a partnership formed for a specific time period or to achieve a specified objective. It is automatically dissolved on the expiry of the specified period or on the completion of the specific purpose for which it was formed.
Types of Partnership – On the Basis of the Nature of Agreement among Partners
On the basis of the nature of agreement among its partners, we can distinguish among the following three kinds of partnerships:
1. Partnership at will – A partnership-at-will is one for which no fixed term has been agreed. Any partnership may end at any time provided that notice of the intention to do so is given to all the other partners in time.
2. Partnership for a fixed period – Such a partnership is formed for a certain fixed time period such as 2 to 5 years. It may terminate immediately after the expiry of the specified period, if not renewed for another period.
3. Particular partnership – A particular partnership is established for the completion of a specific project or a certain venture such as construction of a multistoried building. It comes to an end automatically as soon as project is completed.
General vs. Limited Partnership:
The greatest disadvantage of partnership, like that of the one-person business is the fact that the liability of the partners is unlimited and they are all fully liable for the acts of the other partners. There are, however, some limited partnerships which have to be registered with the Registrar of Companies. In such firms some partners (e.g., sleeping partners) may have their liability limited to some specified sum. However, at least one of the partners must have unlimited liability.
In short, while general partners are fully liable for the debts of their companies, limited partners are liable only to the extent of their investment. The latter are not allowed to participate in management of the firm. A special partner can withdraw from the partnership any time he likes without facing any hindrance. And, death, insolvency or incapacity of a special partner does not lead to the end of a partnership firm.
Limited Liability Partnership (LLP):
A limited liability partnership (LLP) is a firm which consisting of both general and limited partners and some categories of business partnership can claim limited liability in a similar fashion to that enjoyed by limited companies. This type of business organisation is intended to combine the flexibility of a traditional partnership with the corporate notion of limited liability. This comparatively new form of organisation originated in India after the passing of the Limited Liability Partnership Act (2008). And it seeks to combine the benefits of limited liability and the flexibility of internal structure of partnership on the basis of agreement.
LLP also combines the traditional partnership with unlimited personal liability, and governance structure of the limited liability joint stock company, based on the Companies Act (1956). Through this refined and modified form of business it becomes possible to ensure that professional expertise and entrepreneurial zeal, ability and initiative to join hands and carry on business operate in an efficient and flexible manner.
The notable features of an LLP are the following:
a. Separate legal status – An LLP is a body corporate and a legal entity separate from its partners (owners). Being an artificial person it exists only under the law.
b. Perpetual existence – An LLP has an infinite life. Thus the existence of the LLP is not threatened even if a partner dies or quits.
c. Number of partners – An LLP must have at least two partners. But there is no upper limit to the number of partners it can have. Suppose firm X has only two parts (A and B). If B quits and A carries on business for more than six months, then A will be personally liable for the obligations of the LLP incurred during this transitional period (i.e., before any new partner is taken.)
d. Designated partners – Every LLP must have at least two individuals as designated partners. One of them has to be a resident of India. But in case of an LLP, in which all the partners are body corporates, there is a restrictive clause – at least two individuals who are nominees of other body corporates are under the legal obligation to act as designated partners.
e. Limited liability – A partner is not personally liable, directly or indirectly, for any of the debts or other liabilities of the LLP or any other partner for the latter’s fraudulent act.
f. Mandatory electronic identification number for designated partners – In India quite recently Designated Partner Identification Number (DPIN) has been made mandatory. Such number is allotted to both existing and future partners. An individual is required to have single number DPIN even if he has several such partnerships.
The issue of such number after verification of the credentials of Designated Partners is essentially a precautionary measure. It serves a twofold purpose. First, it helps the government to keep track of those who operate (manage) the LLPs. It also helps to prevent a defaulting Designated Partner from joining another LLP, by hiding his past record (such as any wrong, or unlawful act).
g. Irrelevance of the Indian Partnership Act (1932) – The provisions of the Indian Partnership Act, (1932) do not apply to an LLP. The reason is that two main characteristics of the corporate form of business, viz. separate legal status and perpetual succession are conspicuous by their absence in partnerships.
h. Selective application of the Companies Act – The provisions of the Companies Act relating to National Company Law Tribunal, DIN and Registrar of Companies are all applicable to LLPs. In addition, the Central Government has been empowered to notify the provisions of the Companies Act which are applicable to any LLP, with or without modification.