National University of Modern Languages

Subject: Business Law

Class: MBA-4
Submitted by: Syeda Mehak Fatima Kazmi
Roll No: L-21214
Submitted to: Brig. (R) Muhammad Saleem
Topic: Types of partners and its implications

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 PARTNERSHIP ACT 1932
DEFINITIONS:
In this Act, unless there is anything repugnant in the subject or context
 An "act of a firm" means any act or omission by all the partners or by any partner or
 Agent of the firm which gives rise to a right enforceable by or against the firm,
 "Business" includes every trade, occupation and profession;
 "Prescribed" means prescribed by rules made under this Act;
 "Third party" used in relation to a firm or to a partner therein means any person who
is not a partner in the firm; and
 Expressions used but not defined in this Act and defined in the Contract Act (IX of
1872) shall have the meanings assigned to them in that Act.

Partnership, Partner, Firm and Firm name:

“Partnership" is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all. Persons who have entered into
partnership with one another are called individually “partners" and collectively "a firm" and
the name under which their business is carried on is called the "firm name".

Types of Partners:
The partners of a firm are broadly divided into three main categories.
(1) General Partners.
(2) Special Partners.
(3) Other Partners.

(1) General Partners: Basically, all the partners of a firm are general partners. General
partners we those whose liability is unlimited in the General partners are of two types
(a) Active partner, and (b)Sleeping partner.
(a) Active Partner: A partner who takes active part in the day to day management of the
business is cared an active partner. An active partner (also called working partner) may work
in different capacities such as manager, organizer, adviser, controller of all the affairs of the
firm. The active partner is rewarded as per agreement between the partners.
(b) Sleeping Partner: A sleeping partner is one who contributes capital, shares profits and
losses of the firm but takes no part in the day to day management of the affairs of the firm. A
person, who has money to invest but cannot spare time for the business, may become
sleeping partner. A sleeping partner is liable for the liabilities of the business-like other
partners.

(2) Special Partners: Special partners are partners whose liability is limited to the extent
of their capital contributed in the firm. They are only found in limited partnership. The
special partners cannot take part in the management of the business of the firm. In Pakistan
limited partnership is not recognized.

(3) Other Partners: The other types of partners sometimes found in a firm are as follows.
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(a) Secret Partner: A partner who takes active part in the affairs of a business but is
not known to the public as a partner is called Secret partner”. He, like other partners, is liable
to the creditors of the firm to an unlimited extent He shares profits according to the
agreement signed.
(b) Nominal Partner: nominal partner lends his name for the goodwill and credit worthiness
to the firm. He neither contributes capital nor takes active part in the management of
business. Such partners are called nominal partners. Nominal partners are liable for the debts
of the firm.
(c) Minor Partner: Partnership is a contract and a contract with minor is void. Under Section
30 of Partnership Act, a minor is not able to enter into a contract and so he cannot become
a partner of a firm. He can, however be admitted to the benefits of a firm with the consent of
other members and that too n a business which is already operating. His liability remains
limited to the extent of his share in the capital. On attaining majority, he has to choose
whether he has to continue as a partner or not.
(d) Partner at Will: type of partner will continue so long the partners have mutual faith, trust
and confidence among them.
(e) Partners in Profit: Only If a partner is entitled to receive certain share of profit and is not
held liable for the losses, he is known as partner in profit only. He is not allowed to take part
in the management of the business.
(f) Partner by Estoppel: There is another minor type of partner which is called partner by
estoppel. If person styles the character of a partner in a business before a third party
(outsiders) by words or in writing or by his act, he is called a partner by estoppel. The third
party mistaking him as a partner in the business advances loans on his creditability, that
person would be personally responsible for the liability attaching to the position of a
partner the partner by estoppel would, however, not be entitled to any right like other partners
in the business. For example, Mr. Hamid is a rich man and is not a partner in a firm named
Three Star Carpets. Mr. Hamid makes a false statement to Mr. Rauf, that he is a partner of the
firm Three Star Carpets. On this impression Mr. Rauf sells carpets worth One million to
“Three Star Carpets” on credit. The firm is not able to pay the amount of one million. Mr.
Rauf can recover the amount of one million from Mr. Hamid, Mr. Hamid here is a partner by
Estoppel.
(g) Partner by Holding Out: Though a Partner by Holding Out is not a partner, he
knowingly permits himself to be a partner of the firm by his activities.

Rights of a Partner:
The rights of a partner are as follows:
 Right of the partner to take part in the day-to-day management of the firm.
 Right to be consulted and heard while taking any decision regarding the business.
 Right of access to books of accounts and call for the copy of the same.
 Right to share the profits equally or as agreed upon by the partners.

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 Right to get interest on capital contributed by the partners to the firm.
 Right to avail interest on advances paid by the partners for business purpose.
 Right to be indemnified in respect of payment made or liabilities incurred or for
protecting the firm from losses.
 Right to the use of partnership property exclusively for partnership business only not
himself.
 Right as agent of the firm and implied authority to bind the firm for any act done in
carrying the business.
 Right to prevent admission of new partners/expulsion of existing partners.
 Right to continue unless and otherwise he himself cease to become partner.
 Right to retire with the consent of other partners and according to the terms-and
conditions of deed.
 Right of outgoing partner/legal heirs of deceased partner.

Duties of a Partner:
The duties of a partner are as follows:

 To carry on the business to the greatest common advantage:

Every partner is bound to carry on the business of the firm to the greatest
common advantage. In other words, the partner must use his knowledge and
skill in the conduct of business to secure maximum benefits for the firm.

 To be just and faithful to each other:

Every partner must be just and faithful to other partners of the firm. Every
partner must observe utmost good faith and fairness towards other partners in
business activity.

 To render true accounts:

Every partner must render true and proper accounts I his co-partners. Each and
every entry in the books must be supported by vouchers and di explanations if
demanded by other partners.

 To provide full information:

Every partner must provide full information of £ activities affecting the firm to
the other co-partners. No information should be concealed, kept secret.

 To attend diligently to his duties:

Every partner is bound to attend diligently to duties in the conduct of the
business of the firm.

 To work without remuneration:

A partner is not entitled to receive any kind remuneration for taking part in the
conduct of the business. But in practice, the working partners are generally
paid remuneration as per agreement, so also commission in some case.

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 To indemnify for loss caused by fraud or wilful neglect:
If any loss is caused to the firm because of a partner’s wilful neglect in the
conduct of the business or fraud commit by him against a third party then such
partner must indemnify the firm for the loss.

 To hold and use partnership property exclusively for the firm:

The partners must hold and use the partnership property exclusively for the
purpose of business of the firm not for their personal benefit.

 To account for personal profits:

If a partner derives any personal profit from partnership transactions or from
the use of the property of the firm or business connection the firm or the firm’s
name, he must account for such profit and pay it to the firm.

 Not to carry on any competing business:

A partner must not carry on competing business to that of the firm. If he
carries on and earns any profit then he must account for the profit made and
pay it to the firm.

 To share losses:
It is the duty of the partners to bear the losses of the firm. ‘partners share the
losses equally when there is no agreement or as per their profit share ratio.

 To act within authority:

Every partner is bound to act within the scope of authority. If he exceeds his
authority and the firm suffers from any loss, he shall have compensated the
firm for such loss.

 Duty to be liable jointly and severally:

Every partner is jointly and individual liable to the third parties for all acts of
the firm done while he is a partner.

 Duty not to assign his interest:

A partner cannot assign or transfer his partner interest to an outsider so as to
make him the partner of the firm without the consent of other partners.
However, he can assign his share of the profit and his share in the assets the
firm where the assignee shall not be entitled to interfere in the conduct of the
business.

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 Liabilities of a Partner to Third Parties:

The following are the liabilities of a partner to third parties:

i. Liability of a partner for acts of the firm:

Every partner is jointly and severally liable for all acts of the firm done while he is a partner.
Because of this liability, the creditor of the firm can sue all the partners jointly or
individually.

ii. Liability of the firm for wrongful act of a partner:

If any loss or injury is caused to any third party or any penalty is imposed because of
wrongful act or omission of a partner, the firm is liable to the same extent as the partner.
However, the partner must act in the ordinary course of business of the firm or with authority
of his partners.

iii. Liability of the firm for misutilisation by partners:

Where a partner acting within his apparent authority receives money or property from a third
party and mis utilises it or a firm receives money or property from a third party in the course
of its business and any of the partners mis utilises such money or property, then the firm is
liable to make good the loss.

iv. Liability of an incoming partner:

An incoming partner is liable for the debts and acts of the firm from the date of his admission
into the firm. However, the incoming partner may agree to be liable for debts prior to his
admission. Such agreeing will not empower the prior creditor to sue the incoming partner. He
will be liable only to the other co-partners.

v. Liability of a retiring partner:

A retiring partner is liable for the acts of the firm done before his retirement. But a retiring
partner may not be liable for the debts incurred before his retirement if an agreement is
reached between the third parties and the remaining partners of the firm discharging the
retiring partner from all liabilities. After retirement the retiring partner shall be liable unless a
public notice of his retirement is given. No such notice is required in case of retirement of a
sleeping or dormant partner.

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