A partnership firm is a type of business entity in which two or more persons join each other to do business and make profits. There are different types of partnership firms based on duration, liability, purpose registration, etc and each type reflects its own characteristics. Therefore, it is important to understand the unique features of each one of them so that you can select the correct one for your business. In this blog, we will have a look at the features of different types of partnership firms.
What are the Different Types of Partnership Firms?
In general, there are different types of partnership firms. However, they can be classified into the following four categories for better understanding.
Based on Duration
Partnership firms can be further classified into the following two types, based on the duration for which they are formed.
- Partnership at Will
Section 7 of the Partnership Act, 1932 contains provisions regarding Partnership-at-Will. Accordingly, where the contract between the partners of a firm does not contain any provision regarding –
- Duration for which partnership is formed; or
- Determination of partnership
such a partnership is a “Partnership-at-Will”.
In simple words, when the contract between the partners does not specify the time limit, the partnership is at the will of the partners and continues to operate for an indefinite period. However, the partners can dissolve such a partnership by way of mutual agreement or by operation of law.
This type of partnership firm is suitable for businesses that are perpetual in nature and in which partners do not have certainty about the termination of the partnership.
For example, Mr. A, a Chartered Accountant by profession, and Mr. B, a Company Secretary by profession decide to provide consultancy services together under the firm name ‘AB Consultancy’. This is a partnership at will.
- Partnership for a Fixed Term
When the duration of the partnership is mentioned in the contract between the partners, it is known as Partnership for a Fixed Term. It means that the partners have agreed by the contract as to the duration for which the firm will continue. In addition, the firm dissolves on the completion of such term or the date mentioned in the contract.
Therefore, in this type of partnership also, it is not at the will of the partners to decide the duration of the partnership once a specific time limit is already mentioned in the contract. However, after the completion of such a term, the partners can mutually agree to continue the partnership.
This type of partnership firm is suitable in cases where the accurate duration of a project or a venture can be determined in advance.
For example, A and B enter into a partnership for 6 months. It is a partnership for a fixed term.
Based on Liability
Partnership firms can be further classified into the following two types, based on the liability of partners.
- Limited Partnership
Limited Partnership is a type of partnership firm in which there are two types of partners – General Partners and Limited Partners. General partners have unlimited liability and manage the day-to-day operations of the firm. Therefore, general partners enjoy control over the activities of the firm while bearing the risk of losses.
On the other hand, limited partners invest their money into the firm only with the motive of earning a return. They do not actively participate in the decision-making and routine operations of the firm. Moreover, in the event of losses, the limited partners are liable only up to the extent of their contribution to the firm.
For example, A, B, C, and D enter into a partnership and decide to share the profits in the ratio of 3:3:3:1 respectively. A, B, and C are general partners and D is a limited partner. A, B, and C manage the operations of the business while D is associated with the firm only for the motive of earning profit.
- Limited Liability Partnership
Limited Liability Partnership, commonly known as LLP, is a type of partnership firm in which all the partners have limited liability. It means that in the event of losses, all the partners are liable only up to the extent of their capital contribution.
LLP is a combination of a partnership firm and a company. Just like a company, an LLP is considered separate from its partners. However, similar to a partnership firm, the cost of forming and running an LLP is low. Further, minimum 2 individuals shall be designated partners in an LLP. Also, they shall have Designated Partner Identification Number (DPIN).
The Limited Liability Partnership Act, of 2008 governs LLPs in India.
Also Read: LLP Annual Compliance and Due Dates
Based on Purpose
Partnership firms can be further classified into the following two types, based on the purpose for which they are formed.
- General Partnership
General Partnership is a type of partnership firm that is formed to generally carry out business activities. It means the scope of business is not defined in a general partnership.
The rights and duties of the partners are governed by the contract between them, known as a partnership deed. In addition, there is an implied contract of mutual agency between the partners i.e., they are liable for the acts of each other.
For example, A, B, and C enter into a partnership and decide to share the profits equally. All of them are liable for the acts of each other as well as the firm.
- Particular Partnership
Section 8 of the Partnership Act, 1932 contains provisions regarding Particular Partnerships. Accordingly, two or more persons can enter into a partnership for carrying out a particular adventure or undertaking.
Such partnership firms are temporary in nature and are formed for the achievement of a particular purpose. The partnership is dissolved, once the purpose is achieved or a project is complete.
However, the partners can mutually agree between themselves to further carry on the partnership after the completion of the project as well.
For example, two contractors enter into a partnership for the construction of a road. Once the construction of the road is complete, the partnership will be dissolved.
Based on Registration
Registration of a partnership firm is not mandatory. Therefore, partnership firms can be further classified into the following two types based on their registration status.
- Registered Partnership
Registered Partnerships are partnership firms that are registered with the Registrar of Firms. For obtaining a Certificate of Registration, an application shall be made under Section 58 of the Partnership Act, 1932.
A registered partnership enjoys several benefits such as legal recognition, the right to file a suit against a third party, higher credibility, etc.
Read More: Procedure of Registration of Partnership Firm
Want to register your partnership firm? Connect with our experts for guidance!
- Unregistered Partnership
Unregistered Partnerships are partnership firms that are not registered with the Registrar of Firms. Although registration of a partnership firm is not mandatory, a firm that is not registered suffers from several limitations for example, it cannot file a suit against a third party for breach of contract.
Conclusion
There are different types of partnership firms based on liability, duration, registration, etc. Every type has its unique features, advantages, and disadvantages. However, it is important to understand that a partnership firm always falls into more than 1 category out of all the categories mentioned above. For instance, a partnership firm can be registered and be Particular Partnership simultaneously.
At Registration Arena, we are having a team of experts like CA, CS, and other professionals who can help you with the registration of your partnership firm. Our team can also assist you in obtaining different registrations like GST, Trademark, etc., and filing tax returns.
Call us now at +918600544422 or drop an email at support@registrationarena.com for more information.
